I arrived at my desk this morning to find an email from “Down Under” which read as follows: “Bill Gross is on the news saying the Bund (10-year) is the short of a lifetime – is he right?”
I’m not sure when he first said that. It must be six or eight weeks ago and I’m also not sure whether he has repeated the observation or whether it has simply been pulled out and dusted off again in light of the wicked four-point sell-off and concomitant 35bp rise in yields which the German 10-year benchmark has suffered in the past two days.
The way in which the Greek situation ebbs and flows certainly doesn’t help nor does the palpable lack of market liquidity which has even benchmark securities flying in and out of air pockets. The days when the monetary authorities took care of benchmark markets and intervened in order to smooth oscillations are evidently long gone; it’s each man to himself.
Not only that but the rout – an overused word in markets but one which can quite sensibly be used in the current context – was not helped by the otherwise verbally very cautious president of the ECB, Mario Draghi, who said in the post-Governing Council meeting press briefing in Frankfurt yesterday: “We should get used to periods of higher volatility. At very low levels of interest rates, asset prices tend to show higher volatility. The Governing Council was unanimous in its assessment that we should look through these developments and maintain a steady monetary policy stance.”
It might sound fatuous, but European markets suffer from there being too many moving parts for a single benchmark bond to reflect all of the goings on. Obviously Greece has taken centre stage and it now looks increasingly likely that the outcome will resemble a FIFA World Cup staging award than it will anything to do with solid economics and accounting. First you decide the outcome you want, then you do whatever is necessary to engineer a process which permits you to celebrate the democratic path by which this outcome has been achieved. For the rest, we remain blinkered.
French funk
France, for example, continues to suffer from rising unemployment. On Monday we were treated to the April’s monthly figures for jobseekers which has risen to 3,536,000 after posting an increase of 26,200. Forecasts had been for a flat reading.
Since President Francois “Qui? Moi?” Hollande was elected on a ticket of job creation four years ago, this number has only seen five month-over-month declines and has in total increased by over 600,000. There are now more methods of calculating the effective unemployment rate than one can shake a stick at but following the Eurostat methodology which must be the one which the ECB uses for policy purposes, Germany has 4.7% of its workforce idle as opposed to France which is looking at 10.5% in the face of a declining overall figure for the eurozone as a whole.
According to Eurostat, unemployment for the entire single currency region peaked in March 2013 at 12.1%. Since then, the collective figure has fallen to 11.1% while in France it has risen from 10.3% to the current 10.5%. To have the second-largest economy in the eurozone so clearly bucking the trend should have investors worried, but luckily, the Hellenic lightening conductor is doing a great job in keeping focus off France and its structural problems.
While the powers that be argue over the need for and the size of the desired primary surplus which Greece is going to be asked to deliver, France is looking at a primary deficit of around 2¼% of GDP. Spain has a surplus of 1¼%, Portugal has a surplus of 2% and even Italy of 2.3%. The UK, by the way, has now also crept back into surplus, albeit at 0.1% only just but given the levels of GDP performance in the economy as a whole, the excess says more about output than it does about fiscal discipline.
No Fed arsenal
Despite the mixed messages coming out of various members of the FOMC – Charles Evans, voting member from the Chicago Fed, is on record as having said that the hurdle for a rate hike remains high – the case for early tightening is increasing.
It was former Treasury Secretary and Harvard president Larry Summers – not a man to everybody’s taste – who recently very pertinently highlighted that if the US economy were to go into a cyclical down-turn, the Federal Reserve would have no monetary artillery to bring up. This, of course, not only applies to the Fed but also to the Bank of England, the ECB and the BoJ of course, which has been scraping the barrel for years and which has left the country, one of the world’s industrial power houses with a debt/GDP ratio of well north of 200%.
The Fed must replenish the arsenal before it is too late; tighten and be damned!
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Finally, I had the great pleasure last night of attending a dinner at which the legendary cricket commentator, Henry Blofeld – yes, Ian Fleming was at Eton with his father so the name Blofeld, well known to aficionados of James Bond, was not just plucked from the sky – gave the after-dinner address. What a delight to be in the company of the great man and to be reminded that there are matters which as so much more important in life than plunging Bund prices.
