Tag Archive | "Ben Bernanke"

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Summers Out, Wall Street Up

Faced with a grueling confirmation process that appeared likely to come up short, Lawrence Summers bowed out of the race for the Chairmanship of the Federal Reserve. With Chairman Ben Bernanke’s tenure set to expire in January, the new frontrunner for the post is Janet Yellen, considered a stimulus tapering dove by most observers.

Wall Street greeted the Summers withdrawal with enthusiasm pushing early morning markets to robust highs before settling in the wake of the Navy Yard shootings in Washington. Markets were lukewarm to Summers, thought to be a hawk or more aggressive about tapering.

In the wake of the announcement, equities climbed and the dollar slumped as CME Group’s Fed Watch projected A 55 percent probability rating that the first rate hike would be in December 2014. January 2015 had a 68 percent probability rating. Before Summers’ withdrawal, traders indicated that the first tapering would take place in October of this year.

Summers was most likely guided by an announcement after trading hours on Friday that four Democratic Senators on the Senate Banking Committee would be voting against his confirmation. When Montana Senator Jon Tester stated his opposition, the die was cast.

Obama Addresses Upcoming Debt Ceiling Talks

President Obama told the public that he will not negotiate with Congress regarding the upcoming debt ceiling increase that could expire as of October 15, 2103. Republicans in Congress have used the debt ceiling to extract a heavy price in the past but with an election year coming up, the President appeared unlikely to give in to Republican demands.

If the extension is not passed and if the President does not bend, the government will be shut down. If the public perceives Republicans are to blame, the precedent of the mid-90’s would favor Democrats in the 2014 elections.

The current debt ceiling limit is $16.7 trillion. Republicans continue to want to include revisions to Obamacare as part of an extension.

On Monday, Obama said; “Let’s stop the threats. Let’s stop the political posturing. Let’s keep our government open. Let’s pay our bills on time. Let’s pass a budget. I will not negotiate over whether or not America keeps its word and meets its obligations. I will not negotiate over the full faith and credit of the United States.”

Currency Markets Move

The dollar index slipped 0.2 percent against six major currencies to 81.273.

The dollar lost 0.2 percent against the yen to 99.12 after rallying from the low of the day 98.48. The dollar hit its lowest level against the yen since September 6, 2013.

The euro climbed to $1.3336 after reaching a three week high of $1.3385 earlier in the session.

The strongest currency against the USD was the South African rand which jumped 1.8 percent against the greenback.

Speculation prevailed that the first round of easing under a Yellen leadership would be $10 billion per month.

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Fed Governor Hawkish Talk Spills Equities

Comments by a hawkish Federal Reserve Governor tamed US equity markets and pushed the dollar higher on Friday, wrapping up a week of high volatility and leaving some investors cautious about the future. The comments also give insight into the tension from his peers that Chairman Ben Bernanke may be feeling. Bernanke is set to retire in the early part of 2014.

However, equity investors have enjoyed a remarkable run in 2013. The S&P 500 ended Friday on a  down note but still managed to record the strongest six months of any year since 1998. The S&P 500 fell 6.92 points after three days of gains. The Dow Jones fell 114.89 while the Nasdaq gained 1.38 points, closing at 3,403.25. The S&P 500 closed at 1,606.28, down for the month of June but still recording the first second quarter gain in four years.

Equity markets around the world have been volatile since May 22nd when Chairman Bernanke hinted that the Fed’s bond buying spree might be tapering down. His confirmation of that in June sent markets into a three day tailspin that has been marked by volatile shifts ever since.

Fed Governor Speaks Out  

Federal Reserve Governor Jeremy Stein and Richmond Federal Reserve President Jeffrey Lacker said on Thursday that the Federal Reserve’s historic accommodation policy could be reduced significantly sooner rather than later. Stein indicated that September may well be the month when Bernanke’s tapering begins.

The speeches unnerved equity investors. Steven Baffico, the CEO of New York’s Four Wood Capital Partners, explained the reaction; “The mixed signals from both the economic data and the Fed’s direction have caused a lot of anxiety and some opportunistic buying and selling, and it’s just created a much less predictive environment going forward.”

Friday volume was the second highest day of the year. 10 billion shares changes hands across the three major US exchanges. For the month, The Dow lost 1.4 percent. The S&P 500 shed 1.5 percent. Nasdaq also lost 1.5 percent.

Consumer Sentiment Running High

Defying the volatility, consumer sentiment improved in late June after Bernanke’s comments. Sentiment was extremely strong among high income earners but weaker in low income families. The Thomson Reuters/University of Michigan consumer confidence index registered 84.1, slightly below May’s 84.5 mark but higher than expectations.

The survey’s director said; “Consumers believe the (economic) recovery has achieved an upward momentum that will not be easily reversed. To be sure, few high or low income consumers expect the economy to post robust gains or think the unemployment rate will drastically shrink during the year ahead.”

Consumer sentiment is a key indicator because consumer spending accounts for 70 percent of the nation’s GDP. However, despite the optimistic view, household expenditures only grew 2.6 percent in the first quarter, well below government estimates of 3.4 percent.

The Institute of Supply Management – Chicago reported that Midwest business activity dropped to 51.6, a dangerous figure. 50 points indicates a contraction. These contradictory indicators typify the economy and add to the sluggishness of the recovery.

The Dollar Post Gains  

Equity market volatility is translating to solid gains for the USD. The dollar continued its upward march against the yen and the euro. The dollar befitted from Governor Stein’s comments.

Michael Feroli of JP Morgan said; “Stein’s remarks cannot be lightly dismissed and raise risks that some on the Committee may have already essentially decided on September. More generally, compared to remarks from Fed officials earlier this week, Stein’s speech was less geared toward calming market perceptions of Fed policy and did less to question market pricing of the first rate hike.”

The euro hit a session low of $1.2990 before closing at $1.3015. Against the yen the dollar rose again closing at 99.2, a gain of 0.9 percent. Dollar/yen activity surged to $4.0 billion. Euro/dollar trade reached $4.3 billion.

Markets are anxiously awaiting this week’s policy release from the European Central Bank. ECB president Draghi is expected to be more dovish than in the past.

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Bad Jobs Report Ominous

The President warned us that the sequester would cost jobs and the March non-farm payroll report looks to have ominous signs for the economy, the recovery and the Federal Reserve. Only 98,000 new jobs were created in March, well below the projected 200,000.

The unemployment rate ticked down one percent to 7.6 percent based on 468,000 persons leaving the unemployment lines. These numbers are in sharp contrast to job creation in January and February, where adjustments added another 68,000 new jobs. More importantly the prevailing mood among investors and business persons is pessimistic.

One of the biggest cuts was in retail, which had been showing strong job growth. After several months of surprising gains, retailers trimmed more than 24,000 jobs in March. On the brighter side, construction which rebounded last month, added another 18,000 jobs in March. This comes if the face of brutal weather across the Northeast.

The March employment figures may squash conversation about the Federal Reserve paring down its easing program. Chairman Ben Bernanke is committed to staying with the Fed’s acquisition policy until unemployment dips well below seven percent. There had been optimistic speculation that the Fed would reduce expenditures by the end of the year. That now appears unlikely.

These numbers should not be a great surprise. The payroll tax holiday expired and Congress insisted on implementation of punitive budget cuts that are going to cost jobs. Republicans are likely to take the rap for this newest jobs development and it will be well deserved.

US Markets are poised to turn down as is the USD. The jobless rate is the lowest since December 2008. The percentage of people looking for work or employed shrunk to 63.3 percent, the lowest rate since 1979.

The real question is will Washington do anything about the reversal. After more than 200,000 jobs gained in February, optimistic has cautiously ruled the day. However, the dysfunction in Washington has unnerved investors and business persons who do not know what to expect next. Rather than look to expand, businesses are once again covering their bases and tightening spending and investment.

Meanwhile, the number of Americans filing for new unemployment benefits rose to the highest level in four months in March. Initial claims increased 28,000 in arch, the highest level since November.

These numbers are consistent with what President Obama projected when debating the sequester. Republicans have staunchly resisted any new jobs programs at a time when economists warned the focus should be more attuned to growth than austerity.

It seems March may be a sign of bigger disappointments to come. Although there was one ray or light released by the Commerce Department on Friday. The trade balance shrank further in march, continuing a positive trend.

US equities opened lower and continued to shed recent gains in light of the disappointing report. The euro climbed above $1.30 and the yen rose above 96.5 against the USD in early trading. This jobs report is a real setback to the global economy and to the US. It is especially unnerving to think it could have been prevented.

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Bernanke and The Fiscal Cliff

Wednesday morning saw US equity markets climb slightly higher as commodities also rose while the US dollar gave ground to the euro and hit four month lows against the Australian and New Zealand dollar. The USD gained strength against the yen on belief that the Bank of Japan is on the verge of a major quantitative easing initiative.

Fed Chairman Ben Bernanke is expected to announce a continuance of the Fed’s purchase of mortgage-backed securities and to replace a stimulus package that is winding down. The Fed is also expected to keep interest rates at the current, favorable levels.

As markets await the Bernanke announcement, the furor surrounding the fiscal cliff leaves many Americans and international investors wringing their hands in frustration. More importantly, the American consumer is retreating even as equity markets continue to climb. Some analysts predict a selloff in equity markets if Bernanke does not ease investor concerns.

The pressure on the Fed remains strong as doubts about the success of the ongoing Fiscal Cliff negotiations befuddle Americans. IMF President Christine LaGarde, who was not shy about criticizing how the US handled the failure of Lehman Brothers when she was President of France’s Central Bank, has reprimanded Congress for not arriving at a balanced approach to the deficit. The airwaves are filled with what appear to be incompetent and confused members of Congress.

While the Republicans reject the President’s request to act on a standalone bill calling for relief for person earning less than $250,000 per year, Democrats are holding firm on reductions to entitled programs.

The Republicans are in a no-win situation. The result of the decay of the GOP is that Independent ranks are swelling as a group of congressional members, who appear to be oblivious to the fallout the expiration of the Bush Tax cuts will reap on the economy. To many Americans, the presence of Eric Cantor, Paul Ryan and Grover Norquist is what is holding up an agreement. Hopefully, voters will not vote for Norquist pledge signers and the Tea Party will take a hit in the 2014 election as Democrats will gain control of the House and the Senate.

House Speaker John Boehner has aged considerably this week. He is taking criticism within his party and is getting little help from President Obama, who is adamant that he was elected on a ticket to increase taxes on the top 2 percent of the income earners.

Recently Boehner and Obama have had head-to-head discussions. On January 1st, the tax rate hike caused by the expiration of the Bush Tax cuts is one of several critical issues constituting the Fiscal Cliff. American taxpayers will lose the temporary payroll tax reduction. However there are more than $600 billion in budget cuts that will add thousands of government workers to unemployment list.

Just as Republicans have dug their heels in on tax rate increases, Democrats are just as stubborn about trimming entitlements, Medicare, Social Security and Medicaid. More than 60 percent of Americans support increasing taxes on high income earners while Congress mulls a complete tax reform package. Republicans have proposed a series of revocations concerning tax deductions. The President and many experts agree these deductions may raise revenue but will fall far short of expectations.

Americans want less talk and more work. This is the time for a large scale move that should exceed the Simpson-Bowles deficit reduction plan of $4.6 trillion.

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Did Bernanke Get it Right?

On Thursday, Chairman Ben Bernanke of the Federal Reserve announced the Fed’s much awaited easing stimulus program.  Under this program, the Federal Reserve will pump $40 billion into the US economy each month until the depressed job market turns significantly downward.  Bernanke’s decision came under fire from Republicans but was praised by Democrats.

Republican members of congress immediately denounced the stimulus, calling it a political maneuver to support President Obama.  This morning, CNBC analysts quickly reminded congressional members that it was congress that added the unemployment to Federal Reserve’s responsibilities.

The new initiative sparked a strong rally for all U.S.  equity markets as did most international equity markets.  In his announcement, Bernanke said the fed would increase its purchasing policy for mortgage-backed securities.  The goal is to encourage activity in the troubled housing sector, which Bernanke prescribed as the “missing piston in the economic recovery.”

In the question and answer session following the announcement, Chairman Bernanke fended off accusations of political favoritism calling the initiative nothing more than a direct effort to improve the employment marketplace.  “While the economy appears to be on a path of moderate recovery, it isn’t growing fast enough to make significant progress reducing the unemployment rate.”

QE3 is designed to reduce mortgage rates, thus boost the housing market and encourage investors in mortgage-backed securities to invest in other assets, like corporate bonds.  Lowering the yield of corporate bonds is expected to encourage more aggressive lending which will lead to faster and stronger economic growth and cut une3mployment. On the surface, the theory is practical but the Fed and the Treasury has been fooled before.   US GDP fell below the projected 2.0 percent annual rate in the second quarter, settling at 1.7 percent annual rate.

However, August provided the Federal Reserve all the data needed to approve QE3.  Only 96,000 jobs were created in the month.  The unemployment rate did fall to 8.1 percent, but analysts believe the improvement was due to more Americans losing their benefits or giving up looking for work.

US businesses have been slow to hire.  Despite strong balance sheets, businesses have kept a nervous eye on the European debt crisis and another eye on what is called the US fiscal cliff, which consists of scheduled tax increases combined with deeper government spending cuts.  Many analysts believe this formula will set the recovery back and may create a perfect economic storm.

Bernanke’s language was forceful and direct.  The Chairman made it clear that if the labor market does not improve substantially The Fed will not only continue these purchases of mortgage-backed securities but will also expand the range of asset purchases and deploy all tools at its disposal until unemployment does improve. Some analysts projected that the Federal reserve could conceivably buy more than $ 1 trillion dollars in new debt before the unemployment rate improves.

Becky Quick of CNBC struggled to explain the Fed’s position. She explained that this initiative favored high income taxpayers because these individuals profit when the equity markets rise.  At the same time, low income people suffer as the cost of goods increases as the dollar weakens.  Ms. Quick commented that there is a form of trickle-down economics.  The Fed appears to be helping the rich at the expense of Main Street.  Ms. Quick thought it ironic that Republicans criticized this initiative, while Democrats supported Bernanke’s position.

The Dow Jones industrial average hit its highest level since December of 2007.  Gold hit a six month high as oil topped the $100 per barrel milestone. The Federal Reserve is continuing its Operation Twist program which calls for the Feed to sell short-term bonds for the purpose of purchasing longer-term debt.

The Fed projects the unemployment rate will range between 6.7% and 7.3% into 2014. Only one Federal Reserve Bank President, Jeffrey Lacker of the Richmond Federal Reserve Bank, dissented against QE3.

Asked to quantify the Federal Reserve goals one analyst referred to the position held by Chicago Federal Reserve President, Charles Evans. The Chicago Fed President has advocated a benchmark at 7.0% for unemployment and an inflation benchmark of 3.0%. Currently, unemployment is 8.1% and inflation is below 2.0%, comfortably below the 3.0 benchmark.

If Governor Romney is elected president and the Republicans control Congress, Chairman Bernanke term will not be renewed. Throughout the recession and the recovery, Bernanke has distanced himself from the political rhetoric.  In fact, the Federal Reserve remains apolitical. Bernanke’s actions are bold but necessary. Here’s hoping he got it right.

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Consumer Spending Up, Unemployment Flat

In the United States, the loudest response to political orchestrations may have come from the Commerce Department. Consumer spending increased 0.4 percent for July after no gains in June. After adjustments for inflation, the increase was the largest the largest since February. Domestic spending by consumers accounts for 70 percent of US economic activity.

The Thursday report from the Department of Labor showed unemployment virtually unchanged. The four week moving average for new claims rose 1,500 to 370,250. In August, jobless claims have increased by 10,000. The employment trend has been volatile. In June, 64,000 jobs were created but in July, the employment number increased by 163,000.

With Ben Bernanke set to speak at Jackson Hole, there is ammunition to trigger a stimulus round but also reasons to continue to monitor. The biggest reason to enter a third round of quantitative easing is unemployment which has remained above 8 percent for three years. If the Federal Reserve pulls the trigger, it will not be until mid-September.

Economists feel that despite positive trends, Bernanke and company have enough motivation to pull the QE3 trigger. The expectations about more easing are reflected in the volatile price of gold, which has gained traction in each of the last three sessions. Last week, the price of gold finished on the upper end of a four-month range at $1,640 per ounce. At the latest Federal Reserve policy meeting, notes indicated the possibility deploying stimulus that would significantly increase the gold prices.

The annual Federal Reserve’s Jackson Hole meeting was expected to answer many questions about how ECB President, Mario Draghi, sees the future of the euro zone. Hopes for any headway were dashed over the weekend as Draghi announced he would not be attending the assembly.

With the ECB scheduled to meet on September 6th, all eyes are on Bernanke and Draghi. The ECB president has pledged that the central bank would take action to stabilize euro zone member’s borrowing rates. However, Germany’s central bank, the Bundesbank, has publicly resisted this remedy.

Draghi is working diligently to coordinate actions of the 17 nation alliance. However, despite his good intentions, Germany has the clout. And, as it has been for four years, that Germany’s position is the fly in the ointment. And, a low euro is good for German exports.

In addition to how the US Fed will respond to the possibility of QE3, and the ECB meeting in early September, investors are even more concerned about the outcome of Germany‘s constitutional ruling about the possibility of bailout funds. The ruling is expected by September 12 and the euro zone ministers are set to meet September 14. That meeting can only be describes as critical to the euro zone and the US. The German ruling will have been rendered and the ministers will be considering Greece’s progress and if the country has made progress worthy of another release of bailout funding. That will be a close call because German Chancellor Merkel has never backed down from her stance that the country must be in compliance with the bailout terms.

In any case, the first decision will be rendered by Bernanke tomorrow or Saturday at Jackson Hole, Wyoming. Leading up to the Fed meeting, US trading in all markets has been light. Whatever Bernanke announces will cause a flurry of activity. The same can be said about Draghi’s September 6th conference.

Personally, there does not seem enough data to support another round of easing and dollar devaluation. The only reason to pull the trigger is the unemployment rate. While the Fed is apolitical, a round of easing would work against the resident and provide Republicans with new quantitative ammunition.


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Bernanke and Geithner Stand Tall

Appearing on the Hill for the second time in two days, Ben Bernanke may not have scored many points but he made it very clear that he was the smartest man in the room when it comes to fiscal policy.  The Chairman of the Federal Reserve sailed through a Senate hearing yesterday and faced a more hostile crowd from the disheveled House on Wednesday. House Republicans were accusatory, hostile and befuddling. If anything demonstrates the futility of the House, it is when Congressmen begin to talk money.

And, it was evidently clear that while Ron Paul knows a lot about the Constitution, it is not so clear that he understands money and Congress, who until recently thought it appropriate that they be permitted to trade with inside information. Paul had the floor twice during today’s session. He used his time to doggedly pursue Bernanke.  This may have been the retiring Texan’s last chance to pressure Bernanke.

Paul has proposed a bill that calls for an audit of the Federal Reserve by Congress en route to an initiative that would put the governance of the central bank under the control of the Congress. Bernanke reacted strongly, “That is very concerning because there’s a lot of evidence that an independent central bank that makes decisions based strictly on economic considerations and not based on political pressure will deliver lower inflation and better economic results in the longer term. The presumption that the U.S. Congress could intervene or manage the central bank is almost inconceivable. Think of the risks!

We are talking about the same governmental body that can eat the same soup and come up with a hundred different descriptions of what they just ate. The United States owes a great deal to Mr. Bernanke. His ability to work with Treasury heads Paulson and Geithner and to remain calm and focused in the face of the storm and apolitical in our hour of need kept this country afloat.

Ben Bernanke is not your typical Washington personality. He is smart. He is not political. He presides over a body that is responsible for monetary policy and unemployment. But, to a degree, he has no control over the unemployment rate. It is Congress that is supposed to come up with employment initiatives and Congress is not cutting the mustard.  They point fingers, make accusations but in the end, unemployment will rise and fall according to legislation from the Congress.

The difference between today’s hearing and the Senate hearing became quickly evident. Republicans charged forward from the start, digging and probing to find a weakness in the Chairman. No luck.  Frustrated, they became angrier and resorted to talking politics to score some points at home.  A viewer could only sit back and wonder what the heck this branch of government has done to itself and to the American public. The House of Representatives is little more than a bunch of high priced do-nothings.  If voters do not take drastic measures, we will return to the glory days of GW Bush.

Geithner Speaks

Speaking at a CNBC sponsored event, entitled Institutional Investor Delivering Alpha, Treasury Secretary Timothy Geithner faced questions about the Libor scandal.  Like Bernanke, Geithner gets to the point and stays on message. He has been criticized for not taking enough action in response to improper Libor practices discovered by the NY Fed when Geithner was the Chairman. Geithner indicated that he had been in touch with the Bank of England and the British Bankers Association but to no avail. As many have expected, the Libor scandal appears to involve more than Barclay’s.

Banks under investigation are UBS AG, JPMorgan Chase, Royal Bank of Scotland, Deutsche Bank, HSBC and Citigroup, Inc. This has the makings of an international price fixing arrangement that used to send people to jail. At a time when international markets are stale, consumer confidence is shaken. To see the puppet show in the House and the corrupt actions of banks too big to fail is leading to a tragic global malaise.

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Euro Zone Offers Spain 100 Billion Euros

After receiving calls from leaders of most of the global community, the euro zone nations agreed to lend Spain up to 100 billion euros to be used to capitalize the country’s struggling banking sector and build adequate reserves. A 2.5 hour conference call between the 17 euro zone member nations was reported to be heated at times. However, Spain’s application for assistance was met with strong support and euro zone members were quick to state their intentions to help Spain.

A statement from the euro group said, “The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to 100 billion euros in total.” This is the type rescue plan the global economy needed to see.  A banking failure in Spain would lead to euro zone contagion on a much wider scale.  With most countries on the continent in recession, one failure could devastate the euro economy.

In the tense and fragile global economic environment all nations are now feeling the economic pain.  The world’s largest economy, the US, is struggling with political dysfunction and a thread bare recovery so delicate that Fed Chairman Ben Bernanke appealed to Congress to reserve severe austerity trimming until the economy has an upward trend. Bernanke would like to see additional investments in growth and employment, a message echoed by the President on Friday.  The President called upon Europe to take swift and decisive action to remedy the regions multiple debt crises.

Spain has been hesitant to request assistance because of a sense of national pride and because the austerity programs required by the euro zone were too stringent. With its back to the wall, Spain opted to request the aid.  The amount will be determined by an audit that was scheduled to be released Monday but will now be released June 21, 4 days after Greece votes for a new government.

Spain insisted that the IMF not provide any assistance. Spain’s Economy Minister Luis de Guindos announced that “The Spanish government declares its intention to request European financing for its recapitalization of the Spanish banks that need it.”

While the IMF funding will not occur, the IMF and EU institutions will participate in monitoring Spain’s economic and banking activity. While euro zone embers preferred that a specific amount be requested, Spain chose to wait until the completed audits were presented. The region would like to have finances in place before the Greek elections which could lead to a withdrawal of Greece from the euro zone and a fiscal collapse.

In an interesting report provided by the BBC, the youths of Spain and the youths of Greece have a common pursuit. Disillusioned by city life and high unemployment, youths are migrating to the country to attempt to make use of farming land.

While the promise of funds for Spain’s banks is encouraging, markets will be only moderately settled until specifics of where the funds will come from are described. Funds could come from the EFSF or the more permanent ESM which goes live next month.

To satisfactorily capitalize itself with acceptable reserves, Bankia will need 23.5 billion euros.  Bankia was nationalized last year and now consists of the original entity plus seven community banks. Moody’s had pared Spain’s credit rating by three notches to BBB.  The reason for the downgrade is the banking sector’s exposure to bad real estate loans and a slumping marketplace. Last week, Spain was extended another year to get its sovereign debt down to 3 percent of GDP.

The next two fire alarms in the euro zone will be the Greek elections and the fate of Italy’s banks. It will be interesting to see what the credit agencies think of this plan and what its effect on stronger euro zone nations will be.

Germany’s normally conservative Finance Minister, Wolfgang Schaeuble, threw his support behind Spain’s request. “Spain has taken big steps to get its economic and financial problems under control. It has launched profound structural reforms and that is what all international institutions are saying.”

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Good News From China And Spain

Equity and currency markets reacted swiftly to a solid bond auction in Spain and to the Central Bank of China’s aggressive pro-growth actions. China’s moves to reverse faltering growth included a lowering of the interest rate and allowing lenders more flexibility than in the past. China is expected to introduce a stimulus package in the near future. These moves stabilized volatile markets throughout Asia and paved the way for currency shifts.

The success of the Spanish auction can only be based upon a belief that the euro zone and the European Union will take action to structure a long-term solution to the lingering debt crisis plaguing the continent. There is also the possibility that the US will come to the aid of its biggest export customer.  This possibility has been previously dashed by President Obama and Treasury Secretary Geithner but gained some momentum after German Chancellor Merkel and President Obama spoke Wednesday.

Adding to this formula, good news from the US Department of Labor showing that jobless claims fell by 12,000 last week sparked confidence in US equities. Speculation was that the gains were short-term but it marks the first time in four weeks that claims have fallen. The number of Americans receiving emergency unemployment benefits fell by 45,808 for the week ending May 19.  The number of Americans receiving extended benefits fell by 58,829 in May. Last week, the Labor Department reported that growth had slowed in May for the fourth successive month.

In mid-morning, Fed Chairman Ben Bernanke testified that the economic recovery was fragile. He encouraged Congress to address the nation’s debt carefully and implement no anti-growth strategies at this time.

The euro posted a strong gain against the dollar topping the $1.26 mark before settling at $1.255. The GBP rose 0.42 percent to $1.555USD. The dollar gained 0.5 percent against Japan’s currency to 79.61 yen.

IMF Report

The IMF released basic points of a report to be released on Monday indicating that the Spanish banks needed a minimum of 40 billion euros to stabilize the troubled sector.  Spain has resisted international assistance but clearly underestimated the gravity of the real estate crisis that has endangered the entire euro zone. Only recently has Mariano Rajoy, Spain’s President, tested international waters. This tactic was necessary because investors were not responding to auctions even at rates above 6 percent.

The IMF report cites information from an audit performed by accounting firms Oliver Wyman and Roland Berger. Despite the report, Spain’s Minister of Economy, Luis de Guindos, was hesitant to say that the country would apply for bailout funding. Based on yesterday’s pullback by the ECB, there would appear to be no other option for the country.  The success of today’s auction is based on the belief that Spain will apply and receive the necessary capital to avoid a collapse and open up credit windows.

Spain has asserted that the IMF report would prove that 70 percent of the banking sector is solid. The government has aggressively merged the smaller, failing banks with larger banks.  Bankia has absorbed seven banks and now needs 19 billion euros to continue operations.


German Chancellor Merkel, whose political clout is greatly diminished, has been forced to deal with the reality of shifting from a strict austerity approach to debt resolution to a combination of austerity and growth. The Chancellor said that Germany is prepared to unleash any tools within its grasp to stabilize the euro zone.  This is a dramatic shift from policy and may encourage Spain to formally apply for assistance.     

Spain’s resistance is based upon national pride and fear of the German austerity programs.  With 24 percent unemployment, further austerity would be disastrous to Spain’s social and political structure. If Spain does apply for capital, it would reach out to the European Financial Stability Facility.

On June 18th, the day after Greece’s second round of elections, the G20 will meet with the European debt crisis expected to dominate the talks. The European Union summit is scheduled for June 28-29.

On the table will be the possibility of a new, more expansive central bank, deposit insurance and a long-term structured debt program that would lessen certain austerity measures. With 11 new political leaders in the 17-member euro zone, the shift is away from austerity toward growth initiatives.

Now that Merkel has apparently softened, the biggest obstacle to a reconfiguration of the European Union’s banking facilities will be Great Britain. On Thursday. Chancellor of the Exchequer, George Osborne told the BBC that, “There is no way that Britain is going to be part of any euro zone banking union. I think Britain will require certain safeguards if there is a full-blown banking union.”

Britain’s independence from the euro has permitted the country to implement two rounds of quantitative easing with another expected shortly.  The country has just posted its worst manufacturing figures in three years and unemployment is 20 percent. While there appears an easing of tensions on the continent, the rift with Britain continues to add drama.

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Unemployment Rate Disappoints

Once again, the ADP Payroll number runs counter to the Department of Labor’s Non-Farm Payroll Report.  The optimistic ADP employment numbers were released on Thursday but today’s Labor Department Non-Farm Payroll report indicates that the private sector added 120,000 new jobs in the month of March.  The Labor Department data indicates 100,000 fewer jobs than the ADP survey.

Despite the disappointing news, the unemployment rate fell 8.2 percent, the lowest rate since 2009.  New jobs created in March settled at the lowest level since October 2011.  The reduction is attributed to the fact that unemployment benefits have expired for a vast number of workers and that a number of persons have stopped looking for work.

Earlier in the week, Fed Chairman Ben Bernanke commented that the recent successes in job creation would be difficult to sustain.  Bernanke had previously predicted that GDP growth would slow in the first quarter to an annually adjusted rate of 2 percent compared to the 3 percent rate enjoyed in the 4th quarter of 2011.

The disappointing employment numbers lend credence to speculation that the Federal Reserve is considering another round of stimulus spending. Bernanke continues to warn those who listen that the US recovery is on fragile footing. One standard that the Fed seems to use is job creation.  In a one-month cycle, Bernanke would like to see 300,000 jobs created.

There is speculation that the February employment gains were fueled by seasonal workers returning to the work force due to the warm winter weather.  However, the most encouraging component is that the manufacturing sector added 37,000 jobs.

Canada Employment Surges

While US employment figures teeter, 82,000 Canadians returned to work in March.  To understand the magnitude of this employment surge, analysts had projected the addition of just 10,000 jobs in March.  For the past six months, job growth in Canada had been flat.  However, the Canadian workforce had already returned to pre-recession strength.

Canadian unemployment dropped from 7.4 percent to 7.2 percent.  The Canadian jobs report stabilized the Canadian dollar against the USD.  The Canadian dollar settled at C$0.9938 against the dollar.  The number of investors flocking to the Canadian currency led to a 0.4 percent lift before the Easter weekend.

The numbers may well justify a Canadian interest rate increase in the third quarter of 2012.  If The Bank of Canada raises interest rates, the Canadian dollar will increase immediately.

Over recent months, the Canadian dollar has been a model of stability, never increasing or decreasing by more than $0.02.  The Canadian economy would suffer if the economic conditions in China or North America worsen.

The 2-year Canadian bond settled at 1.259 percent while the ten-year climbed 2 cents to 2.128 percent.  Canada’s good fortune seemed to positively impact the SD more than its own currency.        

The Euro

On Thursday, the euro fell to 3-week lows against the USD.  News from Greece never fails to impact the euro and with Spain in treacherous waters euro anxiety continues.  The Swiss National Bank is expected to initiate actions designed to pare the Swiss franc against the euro.  During the week, the euro fell 0.6 percent against the dollar.

Broad selling of the euro saw the currency dip below the 1.2 Swiss franc level for the first time since the Swiss National Bank established the 1.20 level as a cap in September 2011. The euro fell to 1.192 francs.

The plight of Spain will most likely cause the European Central Bank (ECB) to re-enter the investment market.  The action plan will be expected to stabilize the Spanish bond market.

Spain is the euro zone’s 4th largest economy.  The region’s 3rd largest economy is Italy, now run by technocrat Mario Monti.

To add to the euro worries, Greece is pressuring Greek bank shareholders to post billions of euros to re-capitalize the state.  April 20th is the target date for the contributions.  Failing to raise the necessary funds, it is probable that the state will nationalize the banks; not exactly the remedy investors have in mind.

In 2011, Greek bank shares have trimmed by 77 percent.  The banks are calling for 3.5 percent interest on any investments in the state.  Importantly, there “investor exhaustion” is a coined term that best decides the Greek debt.  And, everything about Greece remains exhausting.  Unfortunately, the handling of Greece and the strong possibility that another euro zone member may be falling by the wayside has signaled a retreat for investors.

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