While the US seems to be a relatively easy call – or it did at least until Friday’s Labor Department report disappointed on all fronts – the eurozone is truly a difficult place for us all to deal with. It wasn’t as much the August payroll figures which perplexed us even though they were below consensus but the sharp downward revision of the July numbers.
The July total Nonfarm Payrolls increase was revised down from 162,000 to 104,000 and the Private Payrolls from 161,000 to 127,000. However, the real “killer”, if you so want, was that Manufacturing Payroll which was revised from an increase of 6,000 jobs to a decrease of 16,000. These figures don’t really fit into the prevailing view of the economic landscape but rather than causing the markets to fall out of bed, they called for something of a pause for thought.
Maybe markets and their participants have matured over the years – what an encouraging thought – and are more prepared to accept that recoveries don’t happen in entirely straight lines but I actually think that it’s more probably to have been the result of traders not being quite certain what the Federal Reserve will make of the blip and whether it will have any effect on its policy thinking, whatever that might precisely be.
In watching the monetary authorities and in trying to gauge their future actions, we should never forget that they, as we are ourselves, fishing in uncharted waters. The reversal of their much-vaunted unconventional measures is rendered more difficult by dint of the fact that nobody seems entirely sure what they had achieved in the first place. How do you micro-manage a herd of stampeding elephants? So much for the Fed which has the easy task.
The ECB and Germany
The ECB, on the other hand, not only has to sort out where its stimulus packages might be going but has to continue to deal with the significant divergence of the national economies within the eurozone. This might appear to be a facile statement but I would like to remind that many of the problems which led to the sovereign debt crisis within the eurozone would appear to have been brought about by the single-market monetary policy. Although this was neither a rigid assumption nor a subject for official discussion, this seemed to treat the entire economic area as something of an extension of Germany. Whenever discussing the overheating of the Irish and Spanish real estate markets or Greek profligacy on tick, the “one size fits all” monetary policy pops up, if not as the principal culprit, then at least as a willing handmaiden.
Thus, when dealing with the green shoots of recovery which eurozone statistics are also beginning to demonstrate, St.Mario and his merry men need to face up to the impact policy will have on each and every component of the eurozone. Currently the talk is still more of easing than of tightening as liquidity concerns stalk ECB policy. There is certainly another round of LTRO or even VLTRO on the cards which should also help to ease the sharp steepening in the overall euro yield curve.
Whether Fed, ECB of BoE, the commitment to forward guidance may look and sound nice but, as I learnt very early in my banking career, if you don’t know where you’re going, you don’t know when you’re lost. It is now five years since the darkest days of the financial crisis – next Sunday marks the 5th anniversary of Lehman Brothers’ Chapter 11 filing. Financial markets, along with the global economy, have been governed by a series of emergency measures emanating from the monetary authorities which are, bless them, trying to offer long term solutions to problems which they haven’t yet seen. Not an easy job.
Bright Verizon
Meanwhile, on a more practical note, speculation is growing over the refinancing package which Verizon is looking at with respect to the Verizon Mobile deal with Vodafone. There is much talk today about an article in the Pink’un suggesting that they are looking at an issuance at 100 years maturity. So what? Firstly, the 100 year bond is nothing new – I recall Disney opening that market 20 years ago (Disney 7.55% 21-7-2093 with a call in 2023). Secondly, if you have the kind of financing needs which Verizon have, there is nothing, and I mean nothing, which is not open for discussion.
That the first round of issuance will be in the record $20bn area looks clear now and investors should be licking their fingers – at the right price. If there is one thing which is certain, it is that there will be plenty of Verizon paper around – it already has $49bn outstanding – but players with cash to put to work should avoid getting whipped into the inevitable new issue frenzy. This is not Apple which was a new name to the bond markets. This is a big, stable and highly desirable issuer but one to which one can expose oneself both in timing and sizing pretty much at will. Methinks there is no need to rush.