Volcker rule comes of age, E.U. banking union begins to take shape as Christine Lagarde defies the notion of a “jobless recovery”

Dec 11 • Morning Roll Call • 1631 Views • Comments Off on Volcker rule comes of age, E.U. banking union begins to take shape as Christine Lagarde defies the notion of a “jobless recovery”

shutterstock_78036481In a relatively quiet day for high impact news events on Tuesday, potential fundamental policy decisions took centre stage. There were two banking regulation news events that flew under the radar and failed to ignite the interest of the mainstream financial press; namely the Volcker rule finally coming into being and the start of the final stages of discussion that will lead to a banking union across Europe. Six years after the financial crisis began and more than three since it was mandated by Congress, U.S. regulators have finally approved the Volcker rule, barring banks from proprietary trading and strictly limiting their alternative investment activities.

It’s not often that you feel you can stand up and applaud a major figure from the banking apparatus but Christine Lagarde, the boss of the IMF, finally voiced what many of us in the analyst community have believed for several years; without mass job creation globally and in Europe specifically, there is no real recovery. Perhaps she’ll now begin to affect the overall narrative, claiming that the Western Hemisphere has undergone a jobless recovery.

December 2013 UK GDP Estimates from NIESR

Monthly estimates of UK GDP suggest that output grew by 0.8 per cent in the three months ending in November after growth of 0.7 per cent in the three months ending in October 2013. Estimates suggest that the recent pattern of broad based sectorial growth has continued. These robust rates of growth are consistent with a gradual narrowing of the UK’s negative output gap. NIESR’s latest quarterly forecast (published 5th November 2013) projects GDP growth of 1.4 per cent per annum in 2013 and 2.0 per cent in 2014.

US Job Openings and Labour Turnover – October 2013

There were 3.9 million job openings on the last business day of October, little changed from September, the U.S. Bureau of Labor Statistics reported on Tuesday. The hires rate (3.3 percent) and separations rate (3.1 percent) were also little changed in October. This release includes estimates of the number and rate of job openings, hires, and separations for the non-farm sector by industry and by geographic region. Job Openings There were 3.9 million job openings in October, little changed from September. The number of openings was little changed for total private and government.

US Small Business Optimism Sees Slight Bump in November

November ushered in the holiday season, but it did not translate into enthusiasm among small-business owners, whose optimism increased, but only slightly, under a point (0.9), for a total reading of 92.5, according to NFIB’s monthly Index. Of note in November is the positive trend, albeit sluggish reality, of job growth. Small-business employment is better at the end of this year than last year, as the NFIB indicators anticipated, but not enough to restore the 2007 level hiring. However, uncertainty remains throughout the sector, as it anticipates increased taxes, regulations and health-care costs.

Lagarde: No recovery with youth jobless rates so high

Lagarde was most pointed in her comments about youth unemployment, which hit a new record high of 24.4% in the euro area. She said:

Can a crisis really be over when 12% of the labour force is without a job? When unemployment among the youth is in very high double digits, reaching more than 50% in Greece and Spain? And when there is no sign that it is becoming easier for people to pay down their debts? What is at stake is Europe’s potential for growth in the future.

Lagarde went on to propose a four-point solution:

  • * More efficient credit flow (by cleaning up weak banks).
  • * Supporting demand (through loose monetary policy, and possibly more accommodative fiscal policy) reducing households, firms and government debt (through fiscal consolidation.
  • * More efficient private sector debt restructuring, and by putting the bill for future bank rescues on creditors, not taxpayers).
  • * Making markets more growth-friendly (through labour reforms, lower direct taxes on employees and increasing competition across borders).

Unemployment across the 34 mainly rich countries which make up the OECD remained flat at 7.9% in October.

In a new report today, the OECD said:

In the euro area, the unemployment rate decreased by 0.1 percentage point to 12.1% in October, the first decline since February 2011. This mainly reflected a decline in the unemployment rate in France for the first time since March 2011 (by 0.2 percentage point to 10.9%) while unemployment rates remained unchanged in Germany and Italy, at 5.2% and 12.5%, respectively.

The unemployment rate was stable in Japan (at 4.0%) in October and it decreased in Mexico (by 0.1 percentage point to 4.9%). In the United States, the unemployment rate increased (by 0.1 percentage point to 7.3%), but more recent data show that it decreased in November 2013 (by 0.3 percentage point to 7.0%), while it remained stable in Canada during the same period(at 6.9 %).

Mario Draghi urges action on banking union

ECB president Mario Draghi has repeated his call for European governments to agree banking union and make the structural reforms needed to put the Eurozone on a firmer footing. Speaking in Rome at an event in memory of the economist Curzio Giannini, Draghi declared;

We need to continue and further strengthen the financial sector reform agenda and build more resilience in the financial system. While our knowledge to fine-tune the financial cycle may be limited, the financial system must be made more robust to shocks by, for example, increasing capital and liquidity buffers.

As Don Kohn recently said, “We may not be able to make better drivers, but we can make cars and roads safer to reduce damage when accidents happen”. The creation of a banking union and the comprehensive assessment leading up to it are essential steps in improving the governance of the financial sector in the euro area and increasing its resilience.

Market overview at 23:00 PM Tuesday UK time

The DJIA closed down 0.33% on Tuesday, the SPX down 0.32% and NASDAQ down 0.20%. European markets suffered big losses; STOXX down 0.93%, CAC down 1.04%, DAX down 0.88%, UK FTSE down 0.55%.

Looking towards equity index futures the DJIA future is down 0.30%, SPX future down 0.33%, NASDAQ down 0.07%. STOXX is down 0.90%, DAX future down 0.84%, CAC down 1.02%, FTSE future down 0.36%.

Commodities enjoyed an improvement through Tuesday’s sessions. NYMEX WTI oil up 1.20% at $98.51 per barrel, NYMEX nat gas up 0.12% at $4.24 per therm, COMEX gold enjoyed a significant bounce, up 2.18% at $1261.10 per ounce with silver at $201.41 up 3.60% on the day.

Forex focus

The euro rose 0.2 percent to $1.3761 late in New York after reaching $1.3795, the strongest since Oct. 29th. The six straight increases were the most since the seven days ending Dec. 18th, 2012. The common currency fell 0.3 percent to 141.53 yen after climbing to 142.17, the highest since October 2008. The dollar fell 0.4 percent to 102.85 yen.

The U.S. Dollar Index, tracking the U.S. currency versus its 10 major counterparts, dropped 0.3 percent to 1,012.57, reaching the lowest level since Nov. 1st. The euro advanced for a sixth day versus the dollar, the longest streak in almost a year, as regional finance ministers met in an attempt to break a deadlock about a single resolution mechanism for failed European banks.

The franc advanced 0.2 percent to 1.22169 per euro as in London’s afternoon after appreciating to 1.22065, the strongest level since May 2nd. The currency rose for a sixth day versus the dollar, gaining 0.4 percent to 88.66 centimes per dollar. The Swiss franc advanced to the strongest level in seven months against the euro as investors weighed improving economic data before the nation’s central bank meets this week.

The pound advanced less than 0.1 percent to $1.6437 London afternoon time after climbing to $1.6466, the highest level since August 2011. Sterling was little changed at 83.67 pence per euro after appreciating to 82.53 pence on Dec. 2nd, the strongest since Jan. 11th. The pound rose to the strongest level in more than two years versus the dollar after reports showed U.K. house prices and industrial production increased and the trade deficit narrowed.

Bonds

Ten-year UK gilt yields dropped the most in a week as a decline in European stocks and U.S. stock futures revived demand for fixed-income securities. The yield on the 10-year gilt benchmark fell three basis points, or by 0.03 percentage points, to 2.78 percent, the biggest decline since Dec. 3rd. The 2.25 percent bond maturing in September 2023 rose 0.255, or 2.55 pounds per 1,000-pound face amount, to 94.61.

The U.S. 10-year yield fell four basis points, or 0.04 percentage point, to 2.80 percent at 5 p.m. in New York. It slid as much as five basis points, the biggest intraday drop since Nov. 13th. The price of the 2.75 percent security due in November 2023 gained 10/32, or $3.13 per $1,000 face amount, to 99 18/32. The benchmark yield climbed to 2.93 percent on Dec. 6th, the highest level since Sept. 13th.

Fundamental policy decisions and high impact news events for December 11th

Wednesday sees the publication of the USA oil supplies data, expected to print at -5.6 bn barrels, whilst the USA federal budget balance is expected to print at $154.6 bn, significantly worsening from the previous month’s figure of $91.6 bn.

In New Zealand the cash rate is announced, predicted to stay the same at 2.5%. The press conference, the rate statement and the policy statement will accompany the announcement of the base interest rate, finally later that evening the RBNZ governor Wheeler will conduct a conference.

Later Australia will announce the change in unemployment and as a consequence publish the unemployment rate; expected to rise to 5.8% with circa 10K new jobs created.


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