04-May (Financial Times) — Here’s how to start an argument in Britain. Suggest that far from being inherently flawed, the euro is fixable and could succeed in the long run. Suggest Britain should even consider joining it at some point. This last idea is a proposition with which the majority of British people disagree, strongly. I know this because the think tank Policy Network has today published new polling that tells you that eight in ten British people believe Britain should never join the euro, in any circumstances, even if it costs Britain influence in Europe. I am going respectfully to disagree.

…the political will to preserve the currency bloc is intensely strong in continental Europe. Indeed the current crisis may well provoke the institutional and political innovation that was lacking in the eurozone’s design a decade ago.

[source]

PG View: Even as Norway’s sovereign wealth fund slashes its exposure to Europe, there are those that still think the grand experiment will succeed.

(04-May (MarketWatch) — Take heart, gold traders!

While bullion’s listless behavior over the last couple of months is undeniably frustrating, a very robust wall of worry is being built. Eventually, gold will begin to climb it.

I emphasize “eventually” because it’s been two months since I first reported that gold market sentiment conditions had begun to improve. ( Read my Mar. 7 column, “Gold market sentiment finally improving.” )

Since then, of course, gold on balance has gone virtually nowhere, stuck instead in a relatively narrow trading range between $1,600 and $1,700 an ounce.

Gold traders’ increasing impatience has led even more of them to throw in the towel than before — which, in turn, is why contrarians are confident that gold’s next major move is most likely up.

[source]

04-May (Financial Times) — Norway’s oil sovereign wealth fund has sold all its holdings of Irish and Portuguese government debt and reduced its ownership of Spanish and Italian bonds as part of a continuing protest over its forced participation in Greece’s debt restructuring.

The fund, which has more than $600bn of assets under management and owns 2 per cent of all European equities, said the eurozone still faced big problems and that the Greek debt deal had worsened matters.

“Predictability is important for a long-term investor and the euro area faces considerable structural and monetary challenges,” said Yngve Slyngstad, chief executive of Norges Bank Investment Management, the official name of the fund.

The comments are one of the most explicit warnings by a big-name investor of the negative consequences of the Greek debt restructuring on all of the eurozone’s government bond markets. It shows how many international investors are shunning the eurozone because of how it has managed the debt crisis.

[source]

04-May (MarketWatch) — Gold futures edged higher Friday, vying to break a four-day losing streak after a pivotal U.S. jobs report proved disappointing.

Gold for June delivery added $4.20, or 0.3%, to $1,639.70 an ounce on the Comex division of the New York Mercantile Exchange. The move brought week-to-date losses to 1.5%.

The much-awaited jobs report left investors disappointed, with the Labor Department reporting creation of 115,000 jobs in April and a slight decline in the employment rate, mostly as people stopped looking for work.

Gold caught a slight bid from expectations of additional monetary stimulus, bolstered by the weak employment figures, as the metal is seen as a safe store of value and inflation hedge.

[source]

04-May (USAGOLD) — Gold rebounded from overseas losses following a disappointing US nonfarm payrolls report. Payrolls rose by just 115k in April, well below market expectations of +163k. Nonetheless, the unemployment rate ticked lower to 8.1%, its lowest level in three years.

The reason behind the lower jobless rate is hardly cause for celebration. While there were a cumulative +53k in back-month revisions, a stunning 522k dropped out of the labor force in April. The latter pushed the labor force participation rate to a new 30-year low of 64.2%.

Grim news indeed, stirring fresh talk of QE3. This initially lifted both stocks and gold, but while shares were unable to sustain those gains, the yellow metal is proving to be more resilient.

Oil dropped below $100, reflecting Goldman Sachs summation of the jobs data: “One Consistent Message: Weak Growth”

More PMI misses in the eurozone — further evidence of a double-dip — weighed on the euro initially, but the single currency bounced back as the weaker than expected US jobs data took the wind out of the dollar’s sails. This is a critical weekend for Europe, with elections scheduled in France and Greece. The outcomes of both could have severely destabilizing affects on the EU, which remains in the throws of sovereign debt crisis and on the verge of recession.

• US Apr nonfarm payrolls +115k, well below expectations of +163k, vs upward revised 154k in Mar; jobless rate ticks lower to 8.1%.
• US Monster.com jobs index +3 to 146 in Apr; +1% y/y.
• Eurozone Markit PMI – Composite revised down to 46.7 in Apr, vs 47.4 preliminary print.
• Eurozone Markit PMI – Services revised down to 46.9 in Apr, vs 47.9 preliminary print.
• Italy Markit PMI – Services falls to 42.3 in Apr, below expectations of 43.9, vs 44.3 in Mar.
• France Markit PMI – Services revised down to 45.2 in Apr, vs 46.4 preliminary print.
• Germany Markit PMI – Services revised down to 52.2 in Apr, vs 52.6 preliminary print.
• Switzerland retail sales (real) +4.2% y/y in Mar, well above expectations of -0.5%, vs +0.8% in Feb.
• Spain unemployment claims change -6.6k in Apr, vs +38.8k in Mar.
• Japan markets closed for Greenery Day.

04-May (ZeroHedge) — The comedy continues: the April “Not in labor force” seasonally adjusted print: 88,419,000. And yet, the maximum reading permitted by St Louis Fed Not in Labor Force (LNS15000000) graph: 88,000,000. The data has now officially dropped off the chart. No further commentary necessary.

03-May (Reuters) — ZeroHedge points out that the amount of U.S. debt outstanding has just surpassed the latest reading of our gross domestic product:

There is nothing quite like a $70 billion debt auction settlement at the last day of a month to bring total US debt to a record $15.692 trillion, which happens to be just $600 billion shy of the $16.394 trillion debt ceiling … And now that we know what Q1 GDP was at the end of Q1, or namely $15.462 trillion, it is simply math to divine that today alone total US/debt to GDP rose by 50 bps to a mindboggling 101.5%.

Now there is a whole school of thought, which counts New York Times columnist Paul Krugman among its leaders, that says that despite the amount of debt the federal government has incurred, more government spending and debt are needed given the stagnant state of the economy. Krugman elaborated on this idea in a recent interview with Julian Brookes of Rolling Stone:

A lot of people find emotionally unacceptable the idea that economic suffering on this scale could have a relatively trivial cause. But this has happened again and again through history. And it could be fixed fairly easily, by having government step in and spend.

The U.S. economy sits on a knife’s edge of slowing growth coupled with increasingly heavy debt loads.

…But propping up the entire economy by issuing more debt can’t be sustained for much longer. The U.S. has entered the twilight zone. Rushing headlong into the darkness is a risky approach.

[source]

04-May (ZeroHedge) — It is just getting sad now. In April the number of people not in the labor force rose by a whopping 522,000 from 87,897,000 to 88,419,000. This is the highest on record. The flip side, and the reason why the unemployment dropped to 8.1% is that the labor force participation rate just dipped to a new 30 year low of 64.3%.

[source]

PG View: Nobody should be touting that teeny dip in the jobless rate as an encouraging sign…

03-May (CNBC) — Elections in Greece on Sunday could throw the country into disarray once more, unsettling investors who believed that a deal struck earlier this year to restructure the country’s debt and avert a default marked the end of a major chapter in the euro zone debt crisis.

The outgoing Greek government has committed to harsh austerity measures in return for a second bailout by other euro zone countries and the International Monetary Fund, along with the debt restructuring, which saw private creditors take significant losses on their holdings.

Analysts expect a new pro-bailout government to come into power that will honor those commitments, but the new government will probably try to re-negotiate some of the points in the agreement it struck with the IMF in order to placate voters enraged by relentless wage and pension cuts.

[source]

03-May (USAGOLD) — Gold retreated deeper into the range amid a rising perception that the ECB is disinclined to do anything more at this point to stimulate growth in Europe. The ECB held its refi rate steady at 1.0%, which was broadly expected, but the market was hopeful for at least a hint from central bank President Mario Draghi that further easing might be possible if economic conditions within the eurozone continue to deteriorate. Such assurances were not forthcoming.

In fact, despite the mounting downside risks, Draghi said that a rate cut wasn’t even considered. One has to wonder what exactly they did discussed in their monetary policy meeting. Perhaps they just sat around eating jelly donuts until it was time for the rate announcement and press conference.

Could Draghi have been serious last week when he said, “Now, the ball is entirely, squarely in the court of governments and banks”? Politicians tend not to like inflicting pain on their constituents — even if it might be the best thing for them in the long-run — because they answer to those constituents. In an election year, retribution could be harsh and swift. Central bankers on the other hand are insulated from the populace, most of whom don’t even know what the central bankers do.

Here in America, it’s just far easier for the politicians to do nothing and force the Fed to act. Things are much more complex in the European Monetary Union with policymakers in Brussels mandating austerity on the periphery in exchange for bailouts. However, getting new governments to honor the promises of regimes ousted for making those very promises, may prove difficult indeed.

• US ISM – NMI (services) fell to 53.5 in Apr, below market expectations of 55.5, vs 56.0 in Mar.
• US Q1 productivity -0.5%, in line with expectations, vs +1.2% in Q4; ULCs +2.0%, below expectations of +2.9%.
• US initial jobless claims fell 27k to 365k for the week ended 28-Apr, below expectations of 380k, vs upward revised 392k in previous week.
• ECB left refi rate unchanged at 1.0%, in-line with expectations.
• Eurozone PPI +0.5% m/m in Mar, below expectations of +0.6%, vs 0.6% in Feb; +3.3% y/y, below expectations of +3.4% y/y.
• Turkey CPI rises to +11.4% y/y in Apr, vs +10.4% y/y in Mar.
• UK CIPS Services PMI falls to 53.3 in Apr, below expectations of 54.5, vs 55.3 in Mar.
• New Zealand HLFS unemployment rate rises to 6.7% in Q1, vs upward revised 6.4% in Q4.
• Singapore PMI falls to 49.7 in Apr, vs 50.2 in Mar.

by David Einhorn
03-May (Huffington Post) — A Jelly Donut is a yummy mid-afternoon energy boost.

Two Jelly Donuts are an indulgent breakfast.

Three Jelly Donuts may induce a tummy ache.

Six Jelly Donuts — that’s an eating disorder.

Twelve Jelly Donuts is fraternity pledge hazing.

My point is that you can have too much of a good thing and overdoses are destructive. Chairman Bernanke is presently force-feeding us what seems like the 36th Jelly Donut of easy money and wondering why it isn’t giving us energy or making us feel better. Instead of a robust recovery, the economy continues to be sluggish. Last year, when asked why his measures weren’t working, he suggested it was “bad luck.”

…As a result, I will keep a substantial long exposure to gold — which serves as a Jelly Donut antidote for my portfolio. While I’d love for our leaders to adopt sensible policies that would reduce the tail risks so that I could sell our gold, one nice thing about gold is that it doesn’t even have quarterly conference calls.

[source]

02-May (Financial Times) — The financial crisis has fully exposed the intellectual bankruptcy of the world’s central bankers.

Why? Central bankers neglect the fact that interest rates are prices. Manipulating those prices through credit expansion or contraction has real and deleterious effects on the economy. Yet while socialism and centralised economic planning have largely been rejected by free-market economists, the myth persists that central banks are a necessary component of market economies.

These economists understand that having wages or commodity prices established by government fiat would cause shortages, misallocations of capital and hardship. Yet they accept at face value the notion that central banks must determine not only the supply of one particular commodity – money – but also the cost of that commodity via the setting of interest rates.

Printing unlimited amounts of money does not lead to unlimited prosperity.

[source]

03-May (CNBC) — The European Central Bank held its main interest rate at 1.0 percent on Thursday as stubborn inflation offset pressure to loosen borrowing costs further and President Mario Draghi has refrained from pledging more liquidity in his monthly news conference.

Draghi remarked that the central bank’s second long-term refinancing operation (LTRO) was concluded on March 1 and that the LTROs needed time to work.

…Draghi said the monetary stance was “accommodative.” Asked whether the central bank mulled more measures to boost growth, he responded: “Nobody will deny that liquidity is abundant in the euro area. But having said that, any exit strategy is premature.”

Draghi said the economic outlook was “subject to downside risks” and that the latest data “highlight prevailing uncertainty.”

[source]

PG View: Despite a bit of a cautionary tone, any hopes that Draghi might hint at a little dovishness were pretty resoundingly dashed at the presser.

02-May (Dow Jones) — The cost of swapping euros into dollars has dropped to a nine-month low by one indicator, a sign of increased expectations for the European Central Bank to take new steps to shore up financial markets.

The three-month euro-dollar cross-currency basis swap was quoted at negative 42.5 basis points Wednesday, its tightest reading since July 29. The indicator reflects the cost to banks borrowing dollars by lending euros; the closer the swap is to zero, the cheaper dollars become for European banks.

[source]

02-May (Reuters) — Spain is sounding out investment banks including Credit Suisse, Goldman Sachs and UBS as it seeks a credible fix for its banks roiled by a collapse in real estate prices and now threatening the creditworthiness of Spain itself, sources familiar with the matter said.

Spain has repeatedly said it will not ask for European Union or IMF money to solve the problem of its banks, hit by billions of euros in losses after the bursting of a decade-long property bubble in 2008. Instead, the central bank is consulting about setting up a holding company to value and sell off the real estate assets.

[source]

PG View: So let me get this straight; Spanish banks are about to go bust and must look within Spain (with guidance from investment banks) for salvation. The Spanish banks are in turn propping up the Spanish government by using cheap borrowed euros courtesy of the recent ECB LTROs to buy Spanish bonds. The same government that presumably is on the verge of bailing out the banks.

What we have here are two drunks that without each other to lean on would collapse into heaps.

With blood in the water, they are asking the sharks (investment banks) for assistance. This can’t end well for Spain.

01-May (ZeroHedge) — There is nothing quite like a $70 billion debt auction settlement at the last day of a month to bring total US debt to a record $15.692 trillion, which happens to be just $600 billion shy of the $16.394 trillion debt ceiling. (and no, contrary to simple economic textbook lesson, this does not mean that the private sector just got another $70 billion in debt capacity courtesy of taxpayers, as explained here). And now that we know what Q1 GDP was at the end of Q1, or namely $15.462 trillion, it is simply math to divine that today alone total US/debt to GDP rose by 50 bps to a mindboggling 101.5%.

[source]

02-May (The Economist) — IN DECEMBER, The Economist warned that without dramatic intervention the euro zone could face a new depression. Soon after, the European Central Bank sprang into action, averting an immediate financial meltdown through heavy lending to banks. The resulting calm looked like an opportunity for euro-area leaders to seize the moment and escape, once and for all, from crisis. Instead, complacency set in. The ECB’s financial anaesthetic has not prevented a steady economic deterioration that now threatens to engulf—and perhaps end—the euro zone.

Across the euro area, unemployment is worsening. The unemployment rate touched a new record high in March: 10.9%, up a full percentage point from the prior year.

Of course, the pain is not evenly distributed. It is low and reasonably steady in the north but high and climbing in the south. Youth unemployment rates are staggering—over 50% in Greece and Spain, 36% in Portugal and Italy, rising sharply in all four.

There is worse to come. Manufacturing activity is slowing sharply across the euro area, and the core is no longer immune…

…The euro area is walking, eyes wide open, into depression. Led by its periphery, which is already there.

[source]

02-May (Bloomberg) — Euro-region unemployment rose to a 15- year high and manufacturing contracted for a ninth month, adding to signs the economic slump is deepening.

The jobless rate in the 17-nation euro area increased to 10.9 percent in March from 10.8 percent in February, the European Union statistics office in Luxembourg said today. That’s the highest since April 1997, according to Bloomberg News data. Separate reports showed euro-area manufacturing contracted more than initially estimated in April and unemployment in Germany, the region’s largest economy, unexpectedly increased.

[source]

Dollar Boosted by More Bad Data Out of Europe, Weighs on Gold

02-May (USAGOLD) — Gold is under pressure this morning, weighed by a rebound in the dollar. The greenback was boosted by a round of weak economic data out of Europe, which sapped risk appetite, pushing European stocks and the single currency lower.

The eurozone unemployment rate ticked higher in Mar to 10.9%, a 15-year high. Even in Germany, where the jobs market has been pretty resilient, there was a surprise uptick in the number of unemployed in April. Additionally, the April manufacturing PMI for the eurozone was revised lower to 45.9. Swiss manufacturing PMI was much weaker than expected at 46.9.

With the ECB maintaining that they’ve done enough and politicians experiencing mounting pushback on the austerity measures they have advanced, what is Europe to do? We’ve seen some pretty drastic measures on both the fiscal and monetary side in recent years, but I would submit that we haven’t seen anything yet.

Italian and Spanish banks are continuing to load up on sovereign debt, utilizing cheap 3-year money from the ECB LTROs to essentially finance their governments. However, when the money runs out, either the ECB is going to have to be forthcoming with additional (essentially) free money, or we’re going to start seeing sovereign defaults. If the ECB is not forthcoming with additional liquidity, Europe is going to have to find the money elsewhere.

One thing is broadly agreed upon though, the wealth (and ability to borrow at a low rate) is concentrated in the core of Europe — and in particular in Germany. Many of the worst case scenarios for Europe revolve around the likelihood that one of the periphery members might opt to leave the European Union, and the economic mayhem that would likely ensue. But what if, it were a core European member state that was the first to opt out? When Europe as a whole comes for that wealth at the core, that scenario just might be put to the test.

The BoE reported today that UK M4 money supply is now contracting at a record 5.0% y/y pace, as households and businesses continues to delever. Despite the central bank’s best efforts at expansionary monetary policy — a base rate at 0.50% for more than three-years and quantitative easing to boot — credit creation and hence money supply continues to crater.

Clearly this trend is reflective of disinflation, but while UK CPI is down markedly from the cycle peak of 5.2% in September of last year, it was still running at 3.4% y/y as of February, well above the BoE target of 2.0%. Despite the risk of ramping inflation higher once again, the BoE has few options at its disposal other than additional printing and asset purchases.

The Fed too — already troubled by weak growth and revived employment worries — is unquestionably monitoring the situations in Europe and the UK quite closely, with an eye toward the growth implications here at home. If Europe follows the path of the UK and falls back into recession, can the US be far behind? And if it becomes necessary to at least make an effort to thwart a double-dip here in America, this Fed would likely have few qualms about unleashing QE3.

• US factory orders -1.5% in Mar, just below expectations of -1.4%, vs +1.1% in Feb.
• US ADP employment survey +119k in Apr, well below market expectations of +180k, vs negative revised +201k in Mar.
• Eurozone unemployment rate ticked higher in Mar to 10.9%, in-line with expectations, vs 10.8% in Feb.
• Germany unemployment change (sa) +19k in Apr, on expectations of -10k; unemployment rate unch from upward revised 6.8% in Mar.
• Eurozone Markit PMI – manufacturing below expectations at 45.9 in Apr; manufacturing PMI missed expectations in Germany, France and Italy as well.
• Italy PMI +0.3% m/m Mar; +2.7% y/y, vs upward revised 3.2% y/y in Feb.
• Switzerland SVME Manufacturing PMI fell to 46.9 in Apr, well below market expectations of 51.0, vs 51.1 in Mar.
• UK CIPS Construction PMI falls to 55.8 in Apr, above expectations of 54.0, vs 56.7 in Mar.
• UK M4 Money Supply (sa) -0.8% m/m in Mar; -5.0% y/y, vs -3.4% y/y in Feb.
• China HSBC/Markit PMI – Manufacturing falls to 46.9 in Apr, vs 48.3 in Mar.
• Bank of Thailand holds overnight repo rate steady at 3.0%, in-line with expectations.

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02-May (Bloomberg) — Companies added the fewest number of U.S. workers in seven months in April, a reminder the job market will take time to strengthen, a private report based on payrolls showed today.

Employment increased by 119,000 following a revised 201,000 gain the prior month, according to figures from Roseland, New Jersey-based ADP Employer Services. The median forecast of economists surveyed by Bloomberg News called for a 170,000 advance.

Companies may remain hesitant about expanding their workforce until they see more evidence that the gains in consumer spending, which accounts for about 70 percent of the economy, will be sustained. A Labor Department report in two days is projected to show that private payrolls accelerated in April, while unemployment held at 8.2 percent.

“Employment growth is slowing,” said David Sloan, an economist at 4Cast Inc. in New York, who projected a 125,000 gain in the ADP figure. “The economy is growing at a fairly slow pace, though it’s sustainable.”

[source]

PG View: Expectations for Friday’s release of April nonfarm payrolls are running around +160k, although the weaker than expected ADP print may lower the median for payrolls over the next couple of days.