Time for a little Friday sing-song: “If you know what’s going on, clap your hands…!” Roaring silence… Thursday’s price action in European government bond markets made most of what has recently passed as volatile look like a stroll in the park.
The benchmark German Bund, the DBR ½% 15-Feb-2025 had a roller coaster of a day which would put Disneyland’s best to shame.
The sell-down had really begun early-afternoon on Wednesday when the Bund was trading at around 0.75% yield. By 10:00 am Thursday morning it was knocking at the door of 1.00% yield, peaking just a half bp shy.
By close of business, it had rallied back to 0.83%. Mario Draghi, President of the ECB, had already told markets to be prepared for higher volatility and that is exactly what they got. I can’t remember the Bund trading a 3½ point price range with such ease and over such a short space of time since the days of German reunification in 1990 which were also defined by politicians high-jacking the economic agenda.
As though the Greek situation were not opaque enough, we now have another set of question marks to deal with following Christine Lagarde’s most unexpected plea to the Federal Reserve not to hurry when it comes to lighting the blue touch paper. In fact, she was remarkably outspoken when she suggested that it would be plainly unwise to begin raising rates before 2016.
I would, of course, like to believe that this bold challenge to Janet Yellen – between them they are two of the most powerful women in the world – has nothing to do with the fact that both she and her Chief Economist, Olivier Blanchard, happen to be French and it is France which is the main laggard (no pun intended) in the post-crisis recovery stakes.
If Madame Lagarde’s timing could have been worse, it’s not by much for today, Friday, brings us the US’s May Payrolls report. The forecast is, for lack of better understanding, for a steady increase in jobs by more or less the same 220,000-odd which we saw in April with the Unemployment Rate to remain unchanged at 5.4%.
The FOMC meets on June 17 and there is no doubt that a decent number today will add ammunition to the arsenal of the hawks. Lagarde referred to the lack of inflation when arguing that it was too early to tighten policy and the persistently low global commodity price complex – the CRB Index is only just north of 425 – lends credence to her contentions.
The counter argument which has impressed me is that of Larry Summers who warns that the Fed has next to no room to manoeuvre, should the economy enter a cyclical downturn.
Confused? Join the gang.
The fall of empires
So back to Greece. Will they or won’t they? Can they or can’t they? Should they or shouldn’t they?
I have heard contentions that if Greece exits the currency, it flags failure of the entire project for the ability to enter and exit turns it from single currency zone into nothing more than a fixed exchange rate mechanism between sovereign states. Oops!
Yes, the eurozone has been created to exist in perpetuity but even the 1000 Year Reich only just made it past its first decade. The Soviet Empire did a bit better and the British Empire, on which the sun never set, did a little better even than that. If there is one lesson from history, it is that nothing lasts forever and that a failure to acknowledge that fact is prone to speed up the demise of whatever had been meant to go on and on.
There is nothing wrong with the single currency, other than that it was introduced without the most basic of necessities, namely fiscal union. With or without Greece, it is a flawed construct and had there been the required fiscal union, Greece would surely never have happened. But it didn’t and therefore it did… and it might again.
Collectors of antique china will know that, irrespectively how well a broken piece might have been repaired, in the eyes of the world it remains broken and of significantly diminished value. The greatest mistake the collector can make is to convince himself that his piece is as good as the one without the damage. I rest my case.
So Athens has rejected the proposals put forward by the Troika (which is no longer the Troika) which would only, in their own words “deepen poverty and unemployment”. Prime Minister Tsipras called the proposals “extreme” which goes a long way to displaying the deep divisions and the width of the chasm which still exists between the two sides. Athens has decided to take up the bulking offer by the IMF which confirms that they didn’t have the money to meet today’s scheduled payment.
The situation isn’t getting better and now Andreas Dombret of the Bundesbank has come out and declared that a Grexit would not be systemically unmanageable. Talk of softening up the defences and preparing the ground…
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Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful week-end. Summer is now threatening to make a visit which is about time as the garden is weeks behind where it should be.
The way it’s going, the grapes might just about be ripe by Christmas.
