Your Last Minute Payrolls Preview: What Wall Street Expects

In less than an hour, the BLS will report the latest, May, non-farm payrolls and unemployment data. Here is what consensus expects:

  • US Change in Nonfarm Payrolls (May) M/M Exp. 160K (Low 90K, High 215K, Prey. 160K, March. 208K)
  • US Unemployment Rate (May) M/M Exp. 4.9% (Low 4.9%, High 5.1%, Prey. 5.0%, March. 5.0%)
  • US Average Hourly Earnings (May) M/M Exp. 0.2% (Low 0.1%, High 0.4%, Prey. 0.3%, March. 0.2%)

The NFP breakdown by bank is as follows:

  • BNP 110K
  • Deutsche Bank 135K
  • Citigroup 140K
  • SocGen 140K
  • Morgan Stanley 140K
  • Jefferies 155K
  • Nomura 160K
  • Goldman Sachs 165K
  • Deutsche Bank 170K
  • Raymond James 175K
  • Scotiabank 185K
  • Lloyds 195K

As RanSquawk notes, the NFP report at 8:30 am will be under intense scrutiny as it is the final jobs report before the June rate decision by the FOMC. The market has increased the probability of a hike at the June meeting significantly in recent weeks and a strong labour market has always been a key pillar on which Fed members say they would begin normalization. Of note, FFR futures currently price in a 22% chance of a hike in June.

Expectations are for a reading of 160K and although this is below the speculative benchmark of 200k, as we approach full employment the number of jobs the economy is able to create per month is diminished. That represents a marked slowdown from last year’s average monthly growth of 229,000 jobs.

One also has to consider that this reading will be reduced by 35,000 as a result of striking Verizon workers, who will be classified by the Bureau of Labor Statistics as unemployed for the month of May.

Indeed, as reporeted earlier this week, a strike involving workers at Verizon Communications Inc. workers probably depressed payrolls last month. Economists and policy makers alike will nonetheless try to dissect the data for signs that underlying labor-market momentum remains in place.

“Overall the U.S. economy has regained some momentum at the beginning of the second quarter and that should also be visible in the labor-market data — the reason we don’t see it in the payroll data is the Verizon strike” said Harm Bandholz, chief U.S. economist at UniCredit Bank AG in New York. “Net of the Verizon strike, payroll gains would have accelerated in May.” Bandholz forecasts a 160,000 increase in hiring.

Another factor that may have held back last month’s figures is “supply problems stemming from the recent Japanese earthquake,” which “will hit auto-sector employment too,” Paul Ashworth, chief U.S. economist at Capital Economics NA Ltd., wrote in a May 26 note to clients. Ashworth’s 120,000 forecast for payrolls is among the lowest in the Bloomberg survey.

All in all, many expect this to be a somewhat disconsolate reading, especially against a back drop of such strong labour gains, with the average reading for last year at 240k.

The labor force participation rate likely declined to 62.8 percent that month, down from a two-year high of 63 percent in March. “The key thing going forward is going to be the labor force participation rate,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “If we don’t get an increase in that just a little bit here and there, we’re going to bump up into labor-supply constraints much more quickly than some economists are anticipating. If there’s a lack of labor supply, job growth will weaken more quickly.”

Just as important as the headline number will be data on average wages. The impact of the Verizon strike may also extend to figures on average hourly earnings and average weekly hours. Within the affected sectors — electrical contractors and wired telecommunications carriers,  estimates would be affected “only if the hours or earnings of the people on strike or layoff differ considerably from the industry’s average,” according to the Labor Department.  Average hourly earnings are expected to have climbed 0.2 percent in May from the month before and 2.5 percent from a year earlier.

Economists remain optimistic that wage growth, the missing link of the recovery so far, will pick up as the labor market continues to tighten. As the economy approaches full employment, “you tend to get a little bit of wage pressure with a slowdown in hours worked,” said James Sweeney, chief economist at Credit Suisse Securities USA LLC in New York.

* * *

This is the final NFP report before the Fed meet on June 15th and expectations for a hike, although somewhat diminished the last week or so, peaked at 34% last Tuesday/Wednesday. This is the first meeting this year where there has been a material chance of a hike and given the reports proximity to the meeting, there is in many respects, a greater chance for volatility in markets surrounding the report, given the potential wider repercussions.

* * *

Here is Goldman’s full preview:

We forecast that nonfarm payroll employment increased by 165,000 in May, roughly in line with the gain of 160,000 in April. Payroll growth should be held back by a strike at Verizon Communications, which BLS figures suggest idled 35,100 workers. Excluding the effect of the Verizon strike our forecast implies a gain of 200,000—equal to the average increase over the preceding three months.

Arguing for a stronger report:

  • Weather: In April, employment in the three sectors that we find are most sensitive to weather-related swings—construction, retail, and leisure and hospitality—increased by just 20,000 combined, a deceleration of 88,000 compared to the average monthly growth rate over the prior three months. Similarly, our model-based estimates suggest changes in the weather (specifically, a return to seasonal norms after unusually warm winter months) subtracted about 70,000 from employment growth last month; the estimates from economist Jonathan Wright point to a weather-related drag of about 80,000 in April (Exhibit 1). A smaller drag from weather-related changes should therefore boost payroll growth in May compared to April.
  • Job cuts: According to the Challenger, Gray & Christmas report, announced job cuts fell to a five-month low in May. Layoffs in the energy and retail sectors both fell from elevated levels in April.


Arguing for a weaker report:

  • Verizon strike: According to the BLS Strike Report, the ongoing strike at Verizon Communications idled 35,100 workers during the payroll survey reference week (the BLS notes that this estimate could differ from the final total). The strike will affect two line items in the payroll report: specialty trade contractors (a component of the broader construction category) and telecommunications (a component of the information services category). Based on the Verizon strike in August 2011—which also affected employment in these industry groups (as well as others)—most of the impact should show up in the information services category. The strike could lift employment in temporary help services, but our equity analysts expect these offsetting effects to be relatively small.
  • Online job ads: The Conference Board’s Help Wanted Online (HWOL) report showed a sharp contraction in online job posting in May, and this measure has now declined in three of the last four months. Adjusting for technical factors that reportedly affected this data series around the turn of the year, the HWOL index has now declined by about 9% since its January peak.
  • Job availability: The Conference Board’s labor differential—the difference between the share of consumers saying jobs are plentiful vs. hard to get—declined to -0.1 in May from +1.4 in April. The index has remained about unchanged for the last nine months.
  • ADP: The payroll processing firm ADP reported a 173,000 gain in private employment in May, up from a revised 166,000 gain in April. The May employment figure was not affected by the Verizon strike. Thus, taken at face value, the ADP figures imply private employment growth of about 140,000 once idled Verizon workers are taken into account.

Neutral factors:

  • Jobless claims: Initial claims for unemployment insurance benefits increased sharply in early May, and remained somewhat elevated into the payroll survey week. However, the increase this month can be pinned on a few special factors. In particular, initial claims in New York State often increase each spring due to faulty seasonal adjustment, and temporary plant shutdowns in the auto sector appear to have lifted claims in a handful manufacturing states (Exhibit 2). Besides these swings, initial claims have looked reasonably steady in recent months.
  • Manufacturing surveys: The employment components of the manufacturing surveys were mixed in May. The employment measure in the national ISM survey was unchanged at 49.2, indicating a mild contraction in manufacturing jobs. The alternative Markit PMI employment index edged up by 0.8pt to 48.3, but also remained below the 50 breakeven level. Among the regional surveys, the Empire State and Philadelphia Fed indexes both improved but remained at low levels (+2.1 and -3.3, respectively). The remaining three Fed District manufacturing surveys (Dallas, Kansas City, and Richmond) showed a deterioration in hiring activity month-over-month.
  • Service sector surveys: The ISM nonmanufacturing survey will not be released until after tomorrow’s employment report. The other service sector surveys available for May suggest the rebound in the ISM’s employment component last month could prove short-lived. The employment indexes from Markit, the New York Fed, and the Dallas Fed each declined on the month. Only the Richmond Fed survey showed accelerating employment growth last month.

We expect the unemployment rate to decline to 4.9% from an unrounded 4.98% in April, but see the risks as tilted slightly to the upside. The headline U3 rate was unchanged in April, and the broader U6 underemployment declined 0.1pp to 9.7%. The household survey was soft last month, showing a 316k decline in employment. Because the jobs decline was matched by a similar drop in the labor force, the unemployment rate was unchanged. We are looking for a rebound in the household measure of employment, which we anticipate will modestly lower the unemployment rate. If the labor force participation rate rebounds, however, the unemployment rate could hold steady. More broadly, while the labor force participation rate is probably still slightly below its structural rate, cyclical weakness has diminished substantially over time. The participation rate may well rise a bit further, but the room for further non-inflationary gains is probably limited.

Average hourly earnings for all workers are likely to rise 0.2% (mom) in May, following a 0.3% gain in April. We have found that calendar effects are important for month-to-month changes in average hourly earnings, and these effects point to a trend-like increase for last month. A 0.2% increase would result in a 0.1pp decline in the year-on-year rate to 2.4%. Looking further ahead, we expect wages to continue to accelerate as the labor market tightens and state minimum wage hikes provide an added boost.

Market Reaction:

Given the somewhat downbeat expectations for the headline reading, anything well below the expected will cause the usual Algo/fast money moves. However, it would have to be a seriously weak reading in order to take June completely off the table, especially as the Fed have made such an effort in recent weeks of informing the market that June is most definitely a ‘live’ meeting. Ergo, the potential downside may not be enough to slow the USD index’s steady grind higher as we head towards June 15th. As ever a beat on the headline reading would cause an initial bout of USD strength and play into the overall backdrop, where USD bulls are still at the fore.

via http://ift.tt/1TN6nQE Tyler Durden

Frontrunning: June 3

  • World stocks edge toward one-month high; U.S. jobs data eyed for Fed clues (Reuters)
  • Commodities Stand on Brink of Bull Market After Oil’s Recovery (BBG)
  • Brent crude oil holds above $50 on signs of rebalance (Reuters)
  • Clinton attacks Trump’s foreign policy as a threat to U.S. safety (Reuters)
  • Trump strikes back at Clinton’s ‘phony’ speech (Hill)
  • “We want food!’, Venezuelans cry at protest near presidency (Reuters)
  • Employers in U.S. Moderating the Pace of Hiring (BBG)
  • Falluja is a ‘tough nut to crack’: Iraqi finance minister (Reuters)
  • Germany is investigating 180 suspects with Syrian militant links (Reuters)
  • Why Finding a New Subaru May Take Some Time (WSJ)
  • U.S.-based stock funds post fifth straight week of withdrawals (Reuters)
  • JPMorgan CEO Dimon May Have to Cut U.K. Jobs in Event of Brexit (BBG)
  • China central bank issues rules on calculating bank reserve requirement (Reuters)
  • Clinton Embraces ‘Woman Card’ But Needs More to Beat Trump (BBG)
  • France says upheaval means Mideast peace needs global push (Reuters)
  • Mystifying Bond Buybacks in Russia Could Be an Edge Against Fed (BBG)
  • Cybercrime isn’t the only reason cash remains king (Reuters)

 

Overnight Media Digest

WSJ

– United Continental Holdings Inc and Delta Air Lines Inc are among suitors considering bids for Avianca Holdings SA, according to people familiar with the matter, as airlines around the world seek combinations to help them withstand fierce competition and bulk up internationally. (http://on.wsj.com/1Uz8pWG)

– Wal Mart Stores Inc will test a grocery delivery service with Uber Technologies Inc and Lyft Inc, part of the retailer’s growing efforts to compete head on with Amazon.com Inc. (http://on.wsj.com/1Uz8sSz)

– A doctor for media mogul Sumner Redstone said the ailing 93-year-old “retains the legal mental capacity to make the decisions” he has made in recent weeks regarding oversight of his controlling interests in Viacom Inc and CBS Corp . (http://on.wsj.com/1Uz8idW)

– Warren Resources Inc, an oil and gas producer that operates in California, Pennsylvania and southwestern Wyoming, filed for bankruptcy protection Thursday after reaching a deal on the terms of a debt-for-equity swap with Blackstone Group’s GSO Capital Partners. (http://on.wsj.com/1Uz8OZc)

 

FT

Tata Steel Ltd is nearing a deal with the UK government to keep its Port Talbot steel plant open after the Indian company was offered a multimillion-pound state loan.

British department stores group BHS is to be wound down after administrators failed to find a buyer for the 88-year-old chain, threatening over 10,000 jobs and creating huge vacant sites in town centres struggling to cope with changing shopping habits.

The European Central Bank deferred giving Greece access to its cheap money on Thursday, hours before Athens rushed through parliament a batch of bailout reforms that could have qualified the country for the lifeline cut off a year ago.

Germany’s Bilfinger has agreed to sell its real estate services unit to private equity group EQT for 1.2 billion euros ($1.3 billion), leaving the former major German construction group focused solely on industrial plant services.

 

NYT

– Michael Ferro, who took the helm of Tribune Publishing as chairman four months ago, has installed his close associates on the company’s board, making it less likely that Gannett would continue to pursue its unsolicited takeover offer. He is also changing the company’s name to tronc, which stands for Tribune online content.(http://nyti.ms/25DY8RW)

– Saudi Arabia’s oil minister Khalid al-Falih had a message for the global market: Don’t expect us to influence the price of crude oil by adjusting supplies. “I think managing in the traditional way that we tried in the past may never come again,” the minister said on Thursday. (http://nyti.ms/1TSnKEQ)

– The Justice Department announced criminal charges on Thursday against two former Deutsche Bank traders accused of manipulating interest rates. The former traders, Matthew Connolly and Gavin Campbell Black, were indicted on charges that they manipulated the London interbank offered rate, or Libor, a benchmark rate that underpins trillions of dollars in mortgages, student loans and other debt. (http://nyti.ms/1P95fVy)

– Walmart, the U.S.’s largest retailer, is testing the use of flying drones to handle inventory at its large warehouses, which supply the thousands of Walmart stores throughout the nation. In six to nine months, the company said, the machines may be used in one or more of its distribution centers. (http://nyti.ms/25AC1bz)

 

Canada

THE GLOBE AND MAIL

** China’s Foreign Minister, in Ottawa to meet with his Canadian counterpart, demanded and received a meeting with Prime Minister Justin Trudeau – an unusual diplomatic move that underscores China’s increasingly assertive posture on the world stage. (http://bit.ly/1Ujbwj3)

** The Liberal government is sending further signals it plans a strict regime for recreational marijuana by hiring former public safety minister Anne McLellan to develop plans to legalize the drug. (http://bit.ly/1XnMAhe)

** The founder of once high-flying children’s animation company Cinar Corp, Ronald Weinberg, and two investment executives he dealt with have been found guilty of fraud and other charges, bringing an end to what is believed to be Canada’s longest-running jury trial. (http://bit.ly/1PqjCKv)

NATIONAL POST

** Canada would have been better off, and more competitive, with no milk supply management said the CEO of Montreal-based Saputo Inc shortly after the dairy giant delivered its fourth-quarter earnings Thursday, which were in line with analyst expectations. (http://bit.ly/1RT2vLF)

** The National Energy Board is giving Imperial Oil until the end of 2022 to start building the long-delayed Mackenzie Gas Project, a pipeline that would ship natural gas from the Northwest Territories to northern Alberta. (http://bit.ly/1sRFLXK)

 

Britain

The Times

– Tata Steel is close to reaching a deal to keep its Port Talbot plant open after being offered a sweetener by the government. (http://bit.ly/1UytHDT)

– Glencore is in talks with the Iranian government about establishing a copper industry as the country emerges from economic sanctions. (http://bit.ly/1UytosU)

The Guardian

– BHS department stores are to disappear from British high streets after almost 90 years, with 11,000 workers losing their jobs. (http://bit.ly/1UytEYR)

– The European commission has thrown its weight behind the so-called sharing economy typified by firms such as Uber and Airbnb, saying countries should only ban them as a last resort. (http://bit.ly/1Uyteli)

The Telegraph

– Challenger gas and electricity supplier Extra Energy has received the highest level of complaints of any energy company on record, new figures show. (http://bit.ly/1TS6IGW)

– Junior miner Hummingbird Resources has hailed a 45.8 million pounds ($65.96 million) fundraising that will allow it to build a gold mine in Mali as a “seminal moment” in its history. (http://bit.ly/1TS5Vpt)

Sky News

– The design of Britain’s first plastic banknote has been unveiled with the promise it will “stand the test of time”. The five-pound note, which will be released into circulation in September, features former prime minister Sir Winston Churchill. (http://bit.ly/1TS5CLy)

– Ryanair is intensifying its barrage of communications supporting a ‘Remain’ vote in the EU referendum by urging millions customers to register ahead of next week’s deadline. (http://bit.ly/1TS66kP)

The Independent

– Bankers working for Credit Suisse will now be able to leave the office at 7 p.m. on Friday as the bank attempts to improve its staff’s work-life balance. (http://ind.pn/1TS5USA)

 

via http://ift.tt/1TSG9l7 Tyler Durden

Historic Milestone: Negative Yielding Debt Surpasses $10 Trillion For The First Time

The world passed a historic milestone in the past week when according to Fitch negative-yielding government debt rose above $10 trillion for the first time, which as the FT adds envelops an increasingly large part of the financial markets “after being fuelled by central bank stimulus and a voracious investor appetite for sovereign paper.” It also means that almost a third of all global government debt now has a negative yield. The amount of sovereign debt trading with a sub-zero yield climbed 5% in May from a month earlier to $10.4 trillion, pushed higher – or lower in yield as the case may be – by rising bond prices in Italy, Japan, Germany and France.

Japan and Italy fuelled the increase in negative-yielding debt in May, with three-year bonds issued by the latter sliding below the zero mark.

The ascent of the negative yield, which first affected only the shortest maturing notes from highly rated sovereigns, has encompassed seven-year German Bunds and 10-year Japanese government bonds as both the European Central Bank and Bank of Japan have cut benchmark interest rates and launched bond-buying programmes.

The source of this historical capital misallocation is clear: global central banks who are desperate to push all yield-seeking investors, and key among them pension funds, into risky assets in hope of preserving asset price inflation. “Central bank actions are certainly a part of it, but the global search for yield, the desire to find high-quality securities is part of what is going on here,” said Robert Grossman, an analyst with Fitch.” He added that regulations requiring banks to increase capital buffers were intensifying the flight into these securities. Portfolio managers, pension funds and insurers have struggled with negative-yielding notes, which when held to maturity will lose an investor money. Fund managers have nonetheless dived in, as central bank buying increases prices on the debt.

Ironically, while yields of government debt may be negative, the capital appreciation means that total return keeps rising and is in fact outperforming equities as an asset class. German government debt, which on average yields minus 0.1% has returned 4.2% since the beginning of the year mainly because of rising prices, Barclays data show. Japanese government debt, which yields minus 0.06% , has returned 5.2% over the same period.

It’s not just government bond though: Corporate bonds with a negative yield have climbed to $380 billion, according to Tradeweb. “You have central banks which have gone through the looking glass and gone through . . . zero that many people thought was unbreakable,” said Sameer Samana, a strategist with Wells Fargo Investment Institute. “Both [the ECB and BoJ] are telling you there are limits to what they can do in taking short-term rates into negative territory. The spread [of negative rates] further out on the curve is probably behind us.”

Perhaps: that is precisely the basis behind Bill Gross’ assessment that the 30 year bond market in bonds is over – there is no longer space for yields to drop. On the other hand, the convexity from long bond duration is now so high that even modest incremental drops in yields result in substantial pick up in bond prices, with absolute return offsetting negative yields. Ultimately it will all be up to central banks.

Meanwhile, putting the global NIRP glut in context, recall that as we reported two weeks ago, according to Citi calculations, the US now accounts for almost 60% of all positive yielding debt and 89% of the positive yielding debt which has a tenor less than 1YR (Figure 4). Also, US debt accounts for 74% of the positive yielding G10 debt in the 1 – 5YR sector.

What this means it that even as the Fed hikes, other central banks will be forced to offset the Fed’s tightening of monetary conditions, lower rates even more and push even more investors into the only “safe” asset class that provides some return  – US paper. As such, it will be ironic if the divergence in rate policy between the US and the rest of the world is what causes the yield curve to invert, because as of this moment it will only take about three rate hikes for the short end to hit ~1% while the long end continues to grind ever lower, and as we reported yesterday, the 2s30s is now the flattest it has been in 9 years.

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Futures Flat Ahead Of Strike-Impacted Jobs Report; Commodities Approach Bull Market

After yesterday’s two key events, the ECB and OPEC meetings, ended up being major duds, the market is looking at the week’s final and perhaps most important event of the week: the May payrolls report to generate some upward volatility and help stocks finally break out of the range they have been caught in for over a year. However, even today’s jobs number will likely be skewed as reported previously as a result of the Verizon strike which is said to trim some 35,000 jobs from the headline print, casting anything the BLS reports today in doubt. On the other hand, the Verizon strike is precisely why the consensus expectations going into today is 160,000 not 200,000; however if even that number is missed, economists will promptly forget that they had already factored the Verizon strike in their calculations.

That said, if futures are expecting a miss, they don’t show it and most asset classes, from stocks to commodities, are heading toward the monthly U.S. payrolls report with a relative sense of optimism hoping it will bring some clarity to a Fed rate hike, when in reality the message from the recent trend is all too clear.

 

The sentiment heading into today’s jobs print was best summarized by Mitsuo Shimizu, an equity strategist at Japan Asia Securities Group in Tokyo, who said that “the level of attention on tonight’s employment data is very high. The market may rise a bit but it could be a tug of war after that as investors scrutinize what impact the data may have on the possibility of higher interest rates.”

 

So as we await the latest seasonally adjusted, politically motivated random number from the BLS, a quick look at markets shows that shares rose in Europe and Asia after the S&P 500 Index closed at a seven-month high on Thursday. The Stoxx Europe 600 Index added 0.5 percent at 10:15 a.m. in London, trimming its first weekly decline in four to 1 percent.  Futures on the S&P 500 were little changed.  The MSCI Emerging Markets Index of shares rose for a second, advancing 0.4 percent to a one-month high. The Shanghai Composite Index climbed 0.5 percent, taking its weekly gain to 4 percent, the first increase in the period for almost two months on speculation MSCI Inc. will include yuan-denominated shares in its global indexes.

Commodities neared a bull market as Brent crude exceeded $50 a barrel, copper advanced and soybeans led crops higher. The Aussie, New Zealand’s dollar and Indonesia’s rupiah led gains among 31 major currencies. The Bloomberg Commodity Index rose 0.3% to 86.99, a seven-month high. The gauge bottomed this year at a closing low of 72.88 in January, and a finish above 87.45 points would mark a 20% advance, meeting the common definition of entry into a bull market.

Some, however, remain skeptical: “Commodities have had a lot of false breakouts before, so although a bounce-back certainly helps stocks, I’d take it with a pinch of salt,” said Chirin Gill, a London-based fund manager at Daiwa SB Investments. “The market is otherwise being completely driven by macro news right now. Traders are looking out for any trends in economic data for clues on how monetary policy will play out.”

As Bloomberg writes, “financial markets have become emboldened that the economy is strong enough to withstand a hike this month or next.” It is worth nothing that it was writing virtually the same thing in December. Fed Governor Lael Brainard will be the first U.S. central bank official to discuss policy after the report Friday, which is forecast to show employers added 160,000 jobs in May, the same as in April. Fed Governor Daniel Tarullo said Britain’s vote on European Union membership June 23 was a “factor I would consider” at the central bank’s meeting this month.

Aside from just the job number, market watchers will be hoping it reveals some more about the Fed’s “imminent rate hike plans: “The environment is not bad for risk assets and I expect it to continue, but all the attention is now on the Fed rate hike, including what impact a stronger dollar could have on emerging-market economies,” said Yusuke Kuwayama, a portfolio manager at Tokio Marine & Nichido Fire Insurance Co. in Tokyo. “If the payrolls tonight are strong, we’ll see markets further price in a rate hike by pushing short-term yields higher and giving the dollar a bit of a boost.”

Market Wrap

  • S&P 500 futures unchanged at 2104
  • Stoxx 600 up 0.5% to 346
  • FTSE 100 up 0.8% to 6237
  • DAX up 0.6% to 10265
  • S&P GSCI Index up 0.2% to 375.3
  • MSCI Asia Pacific up 0.3% to 128
  • Nikkei 225 up 0.5% to 16642
  • Hang Seng up 0.4% to 20947
  • Shanghai Composite up 0.5% to 2939
  • S&P/ASX 200 up 0.8% to 5319
  • US 10-yr yield up less than 1bp to 1.8%
  • German 10Yr yield down less than 1bp to 0.11%
  • Italian 10Yr yield down 1bp to 1.36%
  • Spanish 10Yr yield down less than 1bp to 1.48%
  • Dollar Index up 0.02% to 95.59
  • WTI Crude futures up less than 0.1% to $49.18
  • Brent Futures up 0.1% to $50.11
  • Gold spot up less than 0.1% to $1,211
  • Silver spot up 0.5% to $16.08

Top Global News

  • Delta, United Continental Said to Be Studying Bids for Avianca, as Latin American airline exploring strategic options including a full or partial sale, according to people familiar with the matter
  • Bayer Said to Secure $63 Billion in Financing for Monsanto Bid: Bank of America, Credit Suisse, Goldman, HSBC, JPM are lenders; bridge loan may be increased should Bayer bump offer
  • Colony Capital Said to Near Deal For NorthStar Asset Management: Colony Capital and NorthStar Realty Finance close to agreeing to a takeover of commercial real estate manager NorthStar Asset Management, according to people familiar
  • U.S. Yield at 16-Year High Versus U.K. Before Jobs, Brexit Vote: U.S. two-year notes yielded 51 basis points more than same-maturity government debt in the U.K., the biggest difference in 16 years; U.S. payrolls report today, economy added 160,000 jobs in May, same as April, survey shows
  • Bain, PAG Asia Said to Join KKR in Studying Bids for Takata: Bain and PAG Asia are evaluating bids for Takata, joining KKR among private equity firms with an interest; Lazard advising Takata steering committee to seek investors
  • Falcone’s HC2 Willing to Raise Its $1.04 Billion Andersons Offer: In a letter to Andersons Chairman, Falcone reiterated its earlier $37-a-share offer and “its willingness to increase its bid, if appropriate, after formal engagement,” HC2 said
  • Twitter Said to Have Met With Yahoo on Possible Merger: NYP: Twitter met with Yahoo’s mgmt several weeks ago to discuss possible merger; bowed out of bidding process soon after: NYP
  • Redstone Doctor Says Mogul ‘No Longer Trusts’ Viacom CEO: Sumner Redstone had the legal mental capacity to remove CEO Philippe Dauman from the trust that will oversee the co., according to a psychiatrist who examined him last month
  • Noble Group Plans China-Backed Issue as Elman to Step Down: Rights shares to be issued at 63% discount to latest close
  • BP to Pay $175 Million to Settle Claims It Hid Spill Size: Investor settlement averts trial set for next month in Texas
  • Pfizer CEO Read Is Open to Mega-Merger; Inversion? Not So Much: Govt. opposition makes tax move near impossible, CEO says
  • Wal-Mart to Start Testing Grocery Delivery Through Uber, Lyft: Retailer will start trying out Uber in Denver and Lyft in Phoenix within the next two weeks
  • Seven & i Buys CST Stores in U.S. Push, Not Keen on Takeover Bid: Japanese owner of 7-Eleven will buy 79 gas stations and convenience stores in California and Wyoming from CST Brands Inc., but won’t bid for the entire company
  • Saudi Arabia Says Oil at $50 Won’t Hinder Market Recovery: Saudi oil minister speaks in briefing after OPEC meeting

Looking at regional markets, Asia equity markets traded mostly higher following a positive US close where markets recovered from ECB and OPEC events, alongside a rebound in energy post-DoE drawdown. Nikkei 225 (+0.5%) was led higher by index giant Fast Retailing following strong Uniqlo sales, although the index pulled off its best levels as a resilient JPY capped gains. Elsewhere, ASX 200 (+0.7%) outperformed on broad-based gains across sectors, while Chinese markets rose with Shanghai Comp (+0.4%) and the Hang Seng (+0.3%) continued to benefit from Shenzhen stock connect hopes. Finally, 10yr JGBs traded with mild gains despite the positive risk sentiment, as the BoJ entered the market to purchase over JPY 1.2trl in government debt.

Top Asian News

  • SoftBank Cutting Its $109 Billion Debt Leaves Funds Wary of Son: Sale of $8.9 billion stake in Alibaba to boost cash, pay debt
  • China Search Engine Giant Baidu Said to Raise Loan to $2 Billion: Gets commitments from 21 banks for facility, people say
  • Goldman Sees Rising Risk of China’s Yuan Repeating January Rout: Trading wagers on one-off devaluation may intensify again
  • China Said to Seek New Global Economic Summits for Bigger Voice: Communist Party leaders want greater say in global economics

In Europe traders have been somewhat in a state of limbo this morning, recovering from the ECB and OPEC non-drama yesterday, while also looking ahead to the risk event of the day in the form of the nonfarm payroll reports. European equities have followed their US and Asian counterparts and trade modestly higher on the day (Euro Stoxx: +0.3%). Energy names are among the best performers this morning, benefiting from upside in the commodity complex, with WTI trading back above USD 49.00 despite the lack of action by OPEC yesterday. Bunds trade near contract highs this morning, continuing the trend seen in the wake of the slightly underwhelming ECB press conference and projections, with further downbeat news this morning coming from the Bundesbank in the form of downgrades to both growth and inflation forecasts. Participants also saw mixed services and composite PMIs, with both final readings from France as well as the German Composite missing on expectations, although the Eurozone wide figure did see a modest beat.

Top European News

  • Euro-Area Economy’s Lacklustre Growth to Persist, Markit Says: Gauge of new business growth at manufacturing and services firms fell to a 16-month low in May, meaning output is likely to stay subdued in the coming months
  • Brexit Worries Curb U.K. as Markit Sees Economy Barely Growing: Latest data indicate the U.K. economy may expand just 0.2% this quarter, Markit said. That compares with 0.4% growth in 1st 3 months of 2016 and marks the weakest level since 2012
  • Brexit Puts 400,000 Services Jobs at Risk in U.K., Osborne Warns: Service companies, Britain’s biggest employers with a workforce of 25m, could be forced to cut 400,000 jobs over the next two years, Osborne will say in a speech on Friday
  • As Brexit Flusters Pound Traders, U.K. Equities Remain Calm
  • Brexit Alarm Has Bank Watchdog in Sweden Demanding Action Plans
  • Shire Completes Merger With Baxalta, Eyes >$20b Revenue Target: Says it will issue additional details on combined company when it reports 2Q results on Aug. 2
  • ICAP Lands Deal for Mainland China’s Yuan-Trading Platform: Contract for yuan trading technnology is worth $65 million
  • Deutsche Bank Online Banking Shows June 1 Bookings Duplicated: Comments on “display problems” in online banking service
  • Emirates Sees Euro in Freefall, Flights Flatlining After Brexit
  • Santander, BPI Consider Buying Novo Banco: Diario Economico
  • China’s Jin Jiang Wants to Boost Accor Stake to 29%: Figaro: Jin Jiang now controls 15%, Le Figaro reports

In FX, there is little to read into this morning’s FX trade, apart from the heavy tone in the EUR, with the market going into meeting yesterday looking for a more upbeat outlook than was alluded to by governing council head. The inflation and growth forecasts were disappointing in this respect, and this has only been exacerbated by the Bundesbank announcement this morning of downward revisions in Germany’s equivalent stats. EUR/USD has really struggled to break 1.1160 this morning, though lack of activity may also be attributed to this as we await the non-farm payrolls release later on. USD/JPY has been edging higher though, as have the AUD and NZD, so risk sentiment can be deemed stable on this basis, with the CAD also steady but trading in a very tight range after yesterday’s OPEC meeting. All hangs on the US data later today, but there may be some confusion over the impact of the Verizon strikes. Euro zone retail sales lower than expected, but EU composite PMIs higher in the final read, but weakness seen in the French numbers. UK services PMIs were better than expected, but EU polls continue to dominate.  The Bloomberg Dollar Spot Index was down 0.1 percent for the week.  Two ICM polls, carried out both online and by telephone, put “Leave” ahead this week, while an an Ipsos Mori poll on voter attitudes found 58 percent of respondents said they don’t think leaving the EU would affect their own standard of living. The Number Cruncher Politics website is calculating a Brexit probability of 21.7 percent. The rand slipped 0.1 percent, after appreciating 1.5 percent in the previous three days. South Africa faces the prospect of having its credit rating cut to junk when S&P Global Ratings announces the outcome of a review on Friday.

In commodities, the Bloomberg Commodity Index rose 0.3 percent to 86.99, a seven-month high. The gauge bottomed this year at a closing low of 72.88 in January, and a finish above 87.45 points would mark a 20% advance, meeting the common definition of entry into a bull market. Brent crude added 0.1 percent to trade at $50.10 a barrel. The third drop in U.S. crude inventories in four weeks tempered the impact of OPEC’s decision to stick to a policy of unfettered production, turning down a proposal to adopt a new ceiling on output. Zinc rose for a seventh day for its longest rising streak in almost two years amid continued speculation of a raw materials shortage, rising with copper and aluminum. Net-long positions in LME futures for the metal are close to an 11-month high seen in May, indicating that investors continue to bet on a rally. Soybean futures climbed 1.2 percent to the highest since July 2014, taking this week’s advance to more than 6 percent. Prices surged Thursday amid forecasts for dryer weather in the U.S. growing area.

On today’s calendar in the US, the big release is the payrolls print and other components of the May employment report. Away from that there’s other important data due out too. In particular the ISM services reading will be under the spotlight, with current expectations of a 0.4pt drop to 55.3. The final May PMI’s will also be released as well as April factory orders, the April trade balance (which is expected to show a modest widening in the deficit) and finally the last revisions to the April durable and capital goods orders. Away from the data expect there to be the usual focus on the Fedspeak with Evans due to speak this morning in London along while Brainard who is expected to speak in the early evening. Both are scheduled to speak on the economy and policy.

Bulletin Headline Summary from RanSquawk and Bloomberg

  • Equities modestly higher this morning amid notable outperformance in energy names with WTI crude holding above USD 49
  • FX pairs largely range bound as participants remain sitting on the side-lines ahead of the US NFP report
  • Looking ahead as well as the US Nonfarm Payrolls, highlights include US Durable Goods Orders, Factory Orders, Composite and Services PMI and comments from Fed’s Brainard
  • Treasuries little changed in overnight trading while global equities and commodities rally; today brings nonfarm payroll report with consensus for a gain of 160k and the unemployment rate to drop to 4.9% from 5.0%.
  • The May payroll reading will be difficult to decipher after the U.S. jobs recovery suffered a bit of a slowdown in April. A strike involving workers at Verizon probably depressed payrolls last month
  • Fears of a potential Brexit may spur Fed to hold off on a June rate rise, playing a bigger role in the central bank’s decision than any positive surprise from U.S. payrolls later today, Bloomberg strategist David Finnerty writes
  • The potential effect of the U.K.’s referendum on EU membership “is a substantial unknown,” Federal Reserve’s Evans told reporters in London, added Fed might be in a better place to judge outlook after June meeting, once events like the referendum are out of the way
  • The extra yield Treasuries pay over U.K. gilts is surging before a U.S. payrolls report, while investors seek safety in British government bonds as the nation prepares to vote on leaving the European Union
  • China’s latest effort to rid its banks of bad loans looks sensible. By packaging the debt into securities, lenders hope to unload them onto risk-hungry investors. But if the first deals in this 50 billion yuan ($7.6 billion) program are any guide, the whole exercise may end up just shuffling bad debt between banks
  • The U.S. will push China to reduce excess capacity in its economy at upcoming talks in Beijing, with Treasury Secretary Lew calling it an “area of central concern.” The issue bears watching when “excess capacity is distorting markets and important global commodities,” Lew said
  • The euro area’s lackluster pace of growth is set to continue as the economy cools from a strong first-quarter performance, according to Markit Economics. Its gauge of new business growth at manufacturing and services firms fell to a 16-month low in May
  • Commodities are nearing bull-market territory after rebounding from the lowest level in at least 25 years as oil prices rallied, complementing advances in recent weeks in soybeans and zinc

US Event Calendar

  • 8:30am: Trade Balance, April, est. -$41b (prior – $40.4b)
  • 8:30am: Change in Non-farm Payrolls, May, est. 160k (prior 160k)
    • Change in Private Payrolls, May, est. 150k (prior 171k)
    • Change in Mfg Payrolls, May, est. -2k (prior 4k)
    • Unemployment Rate, May, est. 4.9% (prior 5%)
    • Average Hourly Earnings m/m, May, est. 0.2% (prior 0.3%)
    • Average Hourly Earnings y/y, May, est. 2.5% (prior 2.5%)
    • Average Weekly Hours All Employees, May, est. 34.5 (prior 34.5)
    • Change in Household Employment, May (prior -316k)
    • Labor Force Participation Rate, May (prior 62.8%)
    • Underemployment Rate, May (prior 9.7%)
  • 9:45am Markit US Services PMI, May F, est. 51.4 (prior 51.2)
    • Markit US Composite PMI, May F (prior 50.8)
  • 10:00am: ISM Non-Mfg Composite, May, est. 55.3 (prior 55.7)
  • 10:00am: Factory Orders, April, est. 1.9% (prior 1.1%, revised 1.5%)
    • Factory Orders Ex Trans, April (prior 0.8%, revised 1%)
    • Durable Goods Orders, April F (prior 3.4%)
    • Durables Ex Transportation, April F (prior 0.4%)
    • Cap Goods Orders Non-def Ex-Air, April F (prior -0.8%)
    • Cap Goods Ship Non-def Ex-Air, April F (prior 0.3%)
  • 1pm: Baker Hughes rig count

Central Banks

  • 12:30pm: Fed’s Brainard speaks in Washington

DB’s Jim Reid concludes the overnight wrap

So here we go again. Another payroll Friday has been reached. By my crude calculations this morning I think today’s might be the 250th of my career. Interestingly they’ve only averaged 95k over this whole period but this number is heavily skewed by the recessions. I wonder what the probabilities of me writing this by the time my 500th comes along. By then a robot will likely be the author which is ironic to discuss on employment day.

In preparation for this main event, yesterday saw ADP report a 173k private payroll gain in May – exactly in line with expectations. There was no evidence that the Verizon strike impacted the number. However the BLS strike report suggests that payrolls are likely to show a 35k impact from the striking Verizon workers which is why consensus is at 160k not 200k – the 3 month trailing average. DB is at 135k on concerns weaker growth and profits will dampen employment. As always it’s worth also keeping an eye on the other important components of the report. The market is expecting a +0.2% mom rise in average hourly earnings, no change in average weekly hours of 34.5hrs and a slight decline in the unemployment rate to 4.9%.

This follows on from what must have been a busy day in Vienna where both the ECB and OPEC met. Both meetings ended with not much new to report with the ECB being as expected but with the OPEC result a disappointment for some reflected in the 2% drop in WTI to just below $48/bbl after news came through that no production ceiling would be agreed upon but with much of the chatter from the various major oil producing nations actually fairly upbeat. However we rallied back into the close and in fact actually finished +0.33% higher on the day at $49.17/bbl following the latest US crude inventory data which showed stockpiles dropped by 1.4m barrels last week. Brent actually settled at just above $50/bbl at the end of play and both are hovering at similar levels this morning.

It was those moves in Oil yesterday which dictated much of the market direction for risk on both sides of the pond. European equities ended up little changed with the Stoxx 600 closing +0.07% while in the US the performance in the S&P 500 appeared to be a mirror image of Wednesday. Indeed the index hit its lows for the day (-0.50%) about an hour in, before then climbing back over the remainder of the session to finish +0.28%. That puts the index now at a seven-month high. Rates-wise US 10y Treasury yields dipped a few basis lower to close below 1.80% (at 1.799%) for the first time since mid-way through last month. There were similar moves in Europe where 10y Bund yields were down 2bps and at 0.113% – the lowest since April 11th.

Switching over to the latest in Asia where markets are closing the week on a more mixed note. The Nikkei (+0.17%) has bounced back modestly following two days of steep declines, while the Hang Seng (+0.25%) and ASX (+0.68%) are also ending the week on a more positive note. The Shanghai Comp (-0.02%) and Kospi (-0.10%) are both a bit lower however, while the latest China data showed some deterioration in the services sector. The Caixin services PMI edged down 0.6pts last month to 51.2, the second consecutive monthly decline with the composite reading of 50.5 down from 50.8.

Moving on. In terms of the ECB yesterday, as highlighted earlier there wasn’t a huge deal of new news to come out of the meeting. The overall tone of meeting was one of confidence and patience about the new policies being implemented before any real conclusions are drawn. DB’s Mark Wall summed up Draghi’s press conference as waiting on three things before reassessing policy stance. First, the UK referendum result. Draghi’s comments suggested that the euro area could suffer from a UK decision to leave the EU. Second, an assessment of the benefits of soon to be implemented policies, namely the CSPP and TRLTRO2 with the former beginning on 8th June and the latter auction allotted for 23rd June. Third, the exchange rate. The ECB Council continues to expect the exchange rate to weaken thanks to divergent monetary policy cycles. Mark notes that should Brexit be avoided, then he would expect the ECB to remain on hold until at least September which is the soonest the ECB could make a preliminary judgement about the benefits of CSPP and TLTRO2. In this scenario he expects the ECB to err on the side of caution and extend QE further in September. If Brexit occurs, he expects further policy easing from the ECB and for this to occur relatively quickly.

That brings us to the CSPP then and some of the finer technical details released by the ECB yesterday after the programme was confirmed as starting on the 8th June. It was confirmed that in addition to banks and their subsidiaries, investment firms as per MiFID II are ineligible. We understand this to mean then that insurers and REITS are eligible as previously expected, but the newly added condition eliminates brokers, securities firms and asset managers. Meanwhile, the Eurosystem can hold onto fallen angel bonds, i.e. those that later lose the IG status necessary for eligibility for purchases. It was confirmed that the ‘market capitalisation’ definition means the amount outstanding for the internal benchmark. The bonds purchased by the Eurosystem will be available for borrowing and their list will be published weekly. The definition of a ‘public undertaking’, for which primary market purchases are not allowed and lower issue share limits apply, has been clarified and finally some PSPP-eligible corporates have been moved to CSPP. More details on this are in the report published by Michal Jezek in my team which should have hit your emails a short time ago.

Staying on the central bank theme, there was also a little bit of Fedspeak for markets to digest yesterday. The Fed’s Kaplan (moderately hawkish usually) said that he is expecting ‘solid job growth’ in today’s employment report and that he would advocate for tightening in the ‘near future’ without offering more specific timing. On the subject of the Brexit vote, he said that the Fed needs to ‘be prepared’ although a more cautious view on that was given by the Fed’s Tarullo yesterday. One of the more dovish voters on the committee, Tarullo said that the Brexit vote is bringing alot of uncertainty and is a factor that he would consider in his policy outlook. He went on to say that ‘in the short term it is more a question on the immediate impact on markets’. Tarullo also spoke on the subject on banking regulation and said that he expects stress tests for the bigger US banks to get stricter in the near term.

With regards to the other data yesterday, initial jobless claims in the US last week were down a modest 1k to 267k (vs. 270k expected). That’s had the effect of lowering the four week average to 277k. The other data yesterday came in the form of the NY ISM survey which turned a few heads with its near 20pt decline in the index to 37.2pts in May. That’s actually the lowest level since 2009 although the index is notoriously volatile from month to month so we take the data with a bit of a pinch of salt for now.

Looking at the day ahead, this morning in Europe it’s all about the remainder of the PMI’s where we’ll get the final services and composite readings for the Euro area (the initial composite flash reading was 52.9) as well as the data out of the periphery. Euro area retail sales for April are also due to be released this morning. Over in the US the big release is the aforementioned payrolls print and other components of the May employment report. Away from that there’s other important data due out too. In particular the ISM services reading will be under the spotlight, with current expectations of a 0.4pt drop to 55.3. The final May PMI’s will also be released as well as April factory orders, the April trade balance (which is expected to show a modest widening in the deficit) and finally the last revisions to the April durable and capital goods orders. Away from the data expect there to be the usual focus on the Fedspeak with Evans (8.45am BST) due to speak this morning in London along while Brainard (5.30pm) who is expected to speak in the early evening. Both are scheduled to speak on the economy and policy.

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Martin Wolf: There Will Be Another “Huge” Financial Crisis

Martin Wolf writing in the Financial Times has warned that there will be another “huge” financial crisis given the nature of the modern fractional reserve banking and financial system. 

Financial_Times_corporate_logo.svgWolf asks whether there will a “another huge financial crisis” and then answers his question by saying that there will be and warns that banks “are designed to fall. So fall they surely will.”

He warns that a system built on making promises it cannot keep is bound to crash, and crash again:

Will there be another huge financial crisis? As Hamlet said of the fall of a sparrow: “If it be now, ’tis not to come. If it be not to come, it will be now. If it be not now, yet it will come – the readiness is all.” So it is with banks. They are designed to fall. So fall they surely will.

A recent book explores not only this reality but also a radical and original solution. What makes attention to this suggestion even more justified is that its author was at the heart of the monetary establishment before and during the crisis. He is Lord Mervyn King, former governor of the Bank of England. His book is called The End of Alchemy.

The title is appropriate: alchemy lies at the heart of the financial system; moreover, banking was, like alchemy, a medieval idea, but one we have not as yet discarded. We must, argues Lord King, now do so.

As Lord King remarks, the alchemy is “the belief that money kept in banks can be taken out whenever depositors ask for it”.

This is a confidence trick in two senses: it works if, and only if, confidence is strong; and it is fraudulent. Financial institutions make promises that, in likely states of the world, they cannot keep. In good times, this is a lucrative business. In bad times, the authorities have to come to the rescue. It is little wonder, then, that financial institutions have become so large and pay so well.

His solution to the dangerous alchemy of the current banking system is to make Central banks pawnbrokers of last resort. This seems somewhat more prudent than the more dangerous deflationary experiment of bail-ins and confiscating deposits, both individuals and families life savings and indeed SME and corporate deposits above a certain level, in order to bail out failing banks.

Wolf joins a long list of investment and finance experts and even the Prime Minister of Japan who are warning that another global financial crisis is coming. The question is not if, but when.

Read full FT article via Irish Times here

Recent Market Updates
– Silver Price To Surge 800% on Global Industrial and Technological Demand
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– World’s Largest Asset Manager Suggests “Perfect Time” For Gold
– Gold As “Extremely Low-Risk Asset” – Rogoff Advises Creditor Nations
– Silver – “Best Precious Metals Trade”

Protecting-Your-Savings-In-The-Coming-Bail-In-Era
Must Read Bail-In Guide Here

Breaking News and Commentary
Stocks, sterling roiled as ‘Brexit’ poll unnerves (CNBC)
Gold Sees Short-Covering, Bargain-Hunting Bounce (Bloomberg)
Gold steady after overnight losses; Fed in focus (Reuters)
Gold Traders Pay Most in Years to Keep Big Bullish Bets Alive (Bloomberg)

Global commodity assets rise to $220 billion in Aprill – PMs 50% of AUM (Reuters)
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Disappearing Money and Opportunistic Candidates (Huffington Post)
Gold Isn’t A Hedge Against Monetary Disorder, It’s “An Investment In It” (Zero Hedge)
Read More Here
 

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Exposing The ECB’s Illusory Independence

Following Mario Draghi's seemingly constant mention of The ECB's credibility during yesterday's press conference, none other than ECB member (and Austrian national bank chief) Ewald Nowotny exclaimed rather oddly that "The ECB is the most independent central bank in the world." This was apparently more than former Greek FinMin Yanis Varoufakis could handle as he unleashed a scathing op-ed to explain why, in fact,  The ECB is the least independent central bank exclaiming that "the pretense of independence serves as a fig leaf for interventions that are not only politically driven, but that are also utterly inconsistent with the principles of liberal democracy."

Via Project Syndicate,

A commitment to the independence of central banks is a vital part of the creed that “serious” policymakers are expected to uphold (privatization, labor-market “flexibility,” and so on). But what are central banks meant to be independent of? The answer seems obvious: governments.

 

In this sense, the European Central Bank is the quintessentially independent central bank: No single government stands behind it, and it is expressly prohibited from standing behind any of the national governments whose central bank it is. And yet the ECB is the least independent central bank in the developed world.

 

The key difficulty is the ECB’s “no bailout” clause – the ban on aiding an insolvent member-state government. Because commercial banks are an essential source of funding for member governments, the ECB is forced to refuse liquidity to banks domiciled in insolvent members. Thus, the ECB is founded on rules that prevent it from serving as lender of last resort.

 

The Achilles heel of this arrangement is the lack of insolvency procedures for euro members. When, for example, Greece became insolvent in 2010, the German and French governments denied its government the right to default on debt held by German and French banks. Greece’s first “bailout” was used to make French and German banks whole. But doing so deepened Greece’s insolvency.

 

It was at this point that the ECB’s lack of independence was fully exposed. Since 2010, the Greek government has been relying on a sequence of loans that it can never repay to maintain a façade of solvency. A truly independent ECB, adhering to its own rules, should have refused to accept as collateral all debt liabilities guaranteed by the Greek state – government bonds, treasury bills, and the more than €50 billion ($56 billion) of IOUs that Greece’s banks have issued to remain afloat.

 

Of course, such a refusal would close down Greek banks and lead immediately to Greece’s exit from the eurozone, because the government would be forced to issue its own liquidity. The only alternative would be a meaningful debt restructuring to end Greece’s insolvency. Alas, Europe’s political establishment, unwilling to adopt either option, has chosen to extend Greece’s insolvency – which it pretends has been resolved through new loan tranches.

 

The ECB’s ongoing acquiescence in the extend-and-pretend charade demanded by Greece’s creditors has demolished its claim to be independent. To keep Greece’s banks open, and accept their government-guaranteed collateral, the ECB is obliged to grant Greek debt an exemption from its no-insolvency rule. And, to keep the noose firmly around Greece’s neck, Germany insists that this exemption is conditional on its approval – or, in euro-speak, that the Eurogroup of eurozone finance ministers confirms that “Greece’s fiscal consolidation and reform program are on track.”

 

So, in effect, it is politicians that tell the ECB when to cut off liquidity to an entire banking system. While the ECB can claim independence vis-à-vis insolvent, peripheral governments, it is entirely at the mercy of the governments of Europe’s creditor countries.

 

To illustrate the ECB’s conundrum, it is worthwhile revisiting the creditors’ treatment of the Greek government elected in January 2015. By December 2014, it had become clear that the previous government was on its last legs and that the leftist Syriza party was on its way to power. The governor of Greece’s central bank, an arm of the ECB, “predicted” that markets were facing a liquidity squeeze, implying that a Syriza victory would render the banking system unsafe – a statement that would be inane were it not calculated to start a bank run.

 

By the time I became Finance Minister that February, after Syriza’s electoral victory, the bank run was in full swing and stocks were in free fall. The reason, of course, was the common knowledge that Germany, vehemently opposed to our government, was about to switch off the green light required by the ECB to maintain the exemptions allowing it to accept Greek collateral.

 

To stabilize the situation, I flew to London to address financiers with a message of moderation and sensible policies regarding both reforms and debt restructuring. The following morning, the stock exchange rebounded 13%, bank shares rose by more than 20%, and the bank run ceased.

 

On that day, the ECB, pressured by Germany, rescinded an important part of its exemption, thereby cutting off Greek banks’ direct access to the ECB and diverting them to pricier financing from Greece’s central bank (so-called emergency liquidity assistance). Unsurprisingly, stock prices plummeted and the bank run returned with a vengeance, bleeding €45 billion of deposits out of the system over the next few months. Meanwhile, Germany and other creditors began to push Greece to accept new austerity measures as the price of reversing the “ECB’s” decision.

 

This was not the ECB’s only politically driven intervention. Equally aggressive was its decision to curtail Greek banks’ spending on government treasuries, by instructing them to refuse debt rollovers. This diminished my ministry’s capacity to repay the International Monetary Fund, which was insisting on drastic pension cuts and on the removal of the last protections for Greek workers.

 

For five months, as the ECB’s noose tightened, we resisted German and IMF demands for further austerity. Finally, the complete cessation of all liquidity to Greece’s banks in June 2015 forced their closure. This was followed by the final push to divide our government and force the prime minister to capitulate – as he did, accepting the latest extend-and-pretend loan of €85 billion.

 

Almost a year later, Greece’s creditors were pushing for even greater austerity in exchange for more loan tranches. At this point, Greece’s central-bank governor (who had triggered the original bank run in December 2014) publicly alleged that our government’s stance until June 2015 caused the loss of €45 billion worth of deposits, the ensuing bank closures, and the new extend-and-pretend loans. The bully was blaming the victim, and the ECB was openly embracing its role as enforcer for its political masters: the creditors.

 

The eurozone’s current design makes ECB independence impossible. Worse, the pretense of independence serves as a fig leaf for interventions that are not only politically driven, but that are also utterly inconsistent with the principles of liberal democracy.

As the policies of central planners are increasingly exposed for the smoke and mirrors 'distraction' that they really are, one wonders how long before not just the elected officials of Europe are roiled to extremist parties but when these un-elected officials – who wield more power than anyone – are finally knocked off their ivory tower?

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Brickbat: Not So Secret

Rep. Jason ChaffetzForty-one agents of the Secret Service have been disciplined for their roles in leaking information from the personnel file of Rep. Jason Chaffetz in an attempt to embarrass him. Department of Homeland Security Secretary Jeh Johnson says the discipline meted out ranged from letters of reprimand to suspension without pay for up to 45 days.

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Delayed Consequences: Germany Angers Turkey With Genocide Vote

Submitted by Michael Shedlock via MishTalk.com,

A year ago, Germany’s Green Party wanted to hold a vote on responsibility for the Ottoman massacres, a systematic expulsion and annihilation of over 1 million ethnic Armenians in 1915.

Germany delayed the vote, not wanting to upset Turkey… until yesterday, when Germany held the vote, upsetting Turkey much more.

After a near-unanimous vote, Turkey recalled its ambassador to Germany calling the vote, “null and void”.

Turkish Protest in Berlin

Protest in Berlin

 

Germany Angers Turkey with Genocide Vote

Please consider Germany Angers Turkey with Genocide Vote.

Germany’s parliament condemned the Ottoman massacres of ethnic Armenians as genocide on Thursday in a vote that could damage ties with Turkey and complicate handling of Europe’s migrant crisis.

 

MPs voted almost unanimously for the motion despite the reservations of the government which battled for months for a delay for fear of the reaction of Recep Tayyip Erdogan, Turkey’s president, who is often criticised for authoritarianism.

 

Ankara immediately recalled its ambassador for consultations in response to what the Turkish government described as a “null and void” vote.

 

Mevlut Cavusoglu, foreign minister, said on Twitter: “The way to close dark pages in [Germany’s] own history is not to defame the history of other countries with irresponsible and baseless parliament decisions.”

 

Mr Erdogan warned this week that passing the resolution would harm “all diplomatic, economic, trade, political, military and Nato relations”. He reacted to the vote by warning of a “serious impact on bilateral relations”, adding that Turkey would consider further actions soon.

 

Ahead of the vote, Binali Yildirim, Turkey’s prime minister, described the debate as a “test of friendship”. The dispute also comes in the wake of a fragile EU-Turkey deal championed by Ms Merkel that has so far halted refugee flows across the Aegean.

 

That pact could collapse because Mr Erdogan’s goal of visa-free travel for 80m Turks is mired in EU politics and unlikely to be delivered before October.

 

The diplomatic arguments have resounded around Germany, prompting pro-Ankara demonstrations from the large ethnic Turkish community, and even death threats to MPs.

 

More than 20 countries, including France and Russia, as well as Pope Francis, recognize the 1915 killings as genocide.

 

The US has not, partly out of concern at alienating Turkey, a Nato ally and key Middle East partner.

Lie of the Day

German chancellor Angela Merkel immediately sought to limit the damage, saying ties with Turkey were “broad and strong”.

As proof of the “strength” of the relationship, Turkey pulled its ambassador and Erdogan is “considering actions”.

The “test of friendship” clearly failed.

Will Turkey cancel its refugee agreement with the EU?

If so, that would be a positive outcome for Europe, albeit one that would cause a lot of short term pain.

The benefit is the EU would have to come up with a real solution to the refugee mess rather than making a bargain with the devil.

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Trump Supporters “Terrorized” In Massive San Jose Street Brawl As Police “Lose Control”

Shocking scenes are occuring on the streets of San Jose as anti-Trump supporters are chased, punched, kicked, and, as ABC News' Tom Llamas reports "terrorized" as the local police "appears to have lost control." Mobs of protestors, many carrying mexican flags, took over the streets ahead of a Trump rally branding tire irons and burning American flags.

Full video of the chaotic situation…

 

 

Social media is awash with videos of the events…

 


And just general rioting…



Anti-Trump rioters even burned American flags…

No this is not the streets of Tehran… this is San Jose – the best city in America to get a job!!

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