After the confusion that has existed this week over the state of US economy and specifically the likelihood of an improvement in employment and hence hopefully unemployment we received further information yesterday. The weekly statistics from the US Department of Labor were as follows.
In the week ending Jan. 1, the advance figure for seasonally adjusted initial claims was 409,000, an increase of 18,000 from the previous week’s revised figure of 391,000. The 4-week moving average was 410,750, a decrease of 3,500 from the previous week’s revised average of 414,200.
By initial claims they mean initial claims for unemployment assistance. If we look at the seasonally adjusted figures that they produce the headline number is higher than the previous week but as this number is rather volatile I also like to look at the four-week average. This has been falling over the past 3 months or so and this week it has continued that trend. In essence this sums up the report as being positive.
A More Troubling Perspective: non-seasonally adjusted figures
If we look at the underlying figures without seasonal adjustment the trend is not so hopeful as this week they were 577,279 which was some 52,038 higher than the previous week’s number of 525,241 which was some 29,693 higher than the previous week’s 495,548. So we had better hope that the seasonal adjustment is working properly! There is some comfort in the fact that in the equivalent week last year the figures were 645,446 but even so it is worth watching.
So we see that assuming the seasonal adjustment process is working we received a number which tends to indicate an improvement in the US employment situation and this does continue a trend. This is by no means as positive as the ADP employment numbers I reported on yesterday but is perhaps more reliable. Of course the ISM numbers were somewhat weaker. Just in case the waters were not already muddy enough the polling organisation Gallup has released a survey suggesting that by its measure unemployment is rising and in fact rose by 0.2% over the last month and that there has been an increase in part and short-term working leading to its measure of underemployment which relates to the U-6 measure rising to 19%. Tucked away in the report was also something of a criticism of the official US figures and the emphasis is mine.
Because the Gallup unemployment measure is not seasonally adjusted, it tends to more accurately reflect what is actually taking place in the U.S. job market — and may not agree with the government’s estimate that is seasonally adjusted. Further, Gallup’s data tend to be more up-to-date than the government’s because Gallup polls on the unemployment situation continuously.
Ouch. So we have something of a problem as we approach today’s figures for non-farm payrolls (employment) and unemployment in the United States. The figures from ADP have led markets to be more optimistic and to raise their forecasts for job creation. Others feel that the recorded level of unemployment may drop back slightly partly due to concerns over seasonal adjustment. In a nutshell you can sum events up thus, if you trust the seasonal adjustment they seem to be improving, if you have concerns about it then it may not be. Roll on one thirty UK time and please remember that non-farm payrolls is a volatile series and is accordingly unreliable on a monthly basis.
The US dollar exchange rate: Dollar Strength or Euro Weakness?
After referring to the way the recent raised hopes for the US economy had led to an improvement in the US dollar I was left wondering how far it would go. Against the Euro it has pushed through the 1.30 barrier and is now at 1.298. However I believe that whilst the dollar is strong we have also to realise that the Euro is going through something of a weak phase. Worries are again gathering over the Euro zones plans for the peripheral nations and in particular Portugal and unlike the Sunday Times the markets do not appear to feel that the worries for Portugal have passed. Also there has been signs of more political instability in Belgium. If we look at the Euros exchange rate against the pound we can see that the pound has risen from 1.16 to 1.19 which expresses the Euro’s weak performance.
But the Dollar is strong and has reached 83.48 against the Yen which will provide some relief for the Bank of Japan and the trade-weighted dollar index has risen to 80.98 up from yesterday’s 80.3. With commodity prices currently so high there is a danger that a stronger US dollar will be an inflationary influence on countries which do not have it as a currency as most commodities are priced in it. Just what we need you might think but then many did not like a falling dollar either!
Another New Plan for Bondholders in the Euro zone
Regular readers will be aware that there have been quite a few proposals on this front in recent times by Euro zone officials and ministers. This, in my view, shows indecision at a time of crisis which is one of the things you must not do. Accordingly it has been one of the main contributors to the fact that the crisis is appearing to widen and deepen rather than reduce. Undaunted by such failure the European Commission has come up with a new plan that involves burdensharing for bondholders should a bank be in danger of insolvency or default, so in essence exactly the opposite of what has happened so far! Here are the relevant excerpts from the press release and the emphasis is mine.
The Commission intends to come forward with a legislative proposal for a comprehensive framework for dealing with failing banks before the Summer of 2011……………..by ensuring that authorities across the EU have the powers and tools to restructure or resolve (the process to allow for the managed failure of the financial institution) all types of financial institution in crisis, without taxpayers ultimately bearing the burden………Indeed, the objective is to ensure that the resolution tools can be used on all banks, irrespective of their size, complexity or systemic importance………..This might include possible mechanisms to write down appropriate classes of the debt of a failing bank to ensure that its creditors bear losses. Any such proposals would not apply to existing bank debt currently in issue.
Now let me start with the principle which I believe to be correct that bond holders should bear some of the risk. So I agree there but we may have a big problem with trying to introduce this in the middle of a crisis rather than when it began as I suggested. It would have been much better to have put such policies in place then as whilst markets may not have liked it they probably half expected it. I still feel that this crisis would have been ameliorated if a haircut had been put on Greek debt back in the spring of 2010. The problem of doing it now and excluding existing bondholders has several factors.
1. Weaker banks are in effect backed by implicit guarantees by their governments, this weakens this which is likely to weaken these banks.
2. New bank funding will plainly be more expensive than existing bank funding which will hardly make banks more liquid and willing to lend.
3. This structure rather casts Ireland adrift as her taxpayers are on the hook but bondholders in her banks are let off it by this.
4. The speed of this as in lack of is extraordinary. I have often argued that such policies should be considered and debated in secrecy and then applied immediately whereas this consultation does not end until mid 2011. Occasionally I read articles saying that the Euro zone is moving quickly which I have to say I read with bafflement.
Just to add to the potential problems raised above the issue of the political problems in Belgium has reared its head again. In essence there seems to be yet more confusion over whether a new government can be formed which has led to questions about economic policy. This in some ways poses a rather serious issue for the Euro zone as Belgium is something of a core country in the arrangement and accordingly not at the top of the list for rising bond yields caused by uncertainty. Be that as it may the ten-year government bond yield in Belgium has risen steadily since last summer and is now at 4.1%. The spread with the German equivalent is now at 1.2% which is widening but I feel that the most revealing comparison is with the UK where the ten-year gilt yield is 3.53%. So the first pause for thought comes with a relatively core Euro zone country having to pay higher yields and the second comes from the fact that the difference is now 0.57%.
Unfortunately for it on a day with the uncertainty described above Portugal was always likely to suffer. After her short-term bill issue of earlier this week minds were always likely to switch to when this year Portugal will choose to try to issue the around 20 billion Euros of new debt and refinancings that she needs to do. As this was digested then her government bonds were sold and prices fell and yields rose with her ten-year yield rising by 0.34% to 7.14%. So all the buying by the European Central Bank (which has been estimated to have bought some 20% of the entire Portuguese government bond market by Goldman Sachs) has been unable to prevent her looking soundly insolvent again. Just to rub it in price falls also raises questions about the size of the losses in this area at the ECB and reinforce the questions I have raised about its solvency.
I reported yesterday that the rescue schemes (even though they charge interest-rates which are too high in my view) offered by the Euro zone and the IMF must be starting to look attractive to Portugal. Well after the way her yields rose during the day and the way they are rising this morning the matter must be being debated in Lisbon. Is it time for her to call for help? Yes and a few months late.
Other nations in the Euro zone
Spain got a brief period of relief when China promised to buy some 6 billion Euros of her bonds earlier this week. Markets appeared to be willing to ignore the fact that China seems to be making a lot of such promises recently and accordingly one has to question how serous she is. However her ten-year yield is now approaching 5.5% again and whisper it quietly but the Italian equivalent rose by 0.11% yesterday to 4.82%. The scale of either of these two economies would mean that the so-called shock and awe package would run out of money if either of these two hit trouble and as I type this I think of the boasts of May 2010 by Elena Salgado and other Euro zone ministers and hubris comes to mind.
The UK and our gilt yields
After reviewing the government bond yields of other countries it would appear that the UK government bond market (gilts) is being perceived as something of a safe haven. However if you look at our economic fundamentals I feel that you cannot avoid the view that if you applied the same criteria on the UK as others are suffering then prices look too high and yields too low. Just to confirm this is an opinion and not an investment recommendation!