FX market seems not to be punishing the ECB

Outlook:

The ECB meets tomorrow and we get US payrolls for Sept on Friday. According to Bloomberg, the forecast of the ADP forecast for the private sector jobs report is 205,000 and the Friday all-sector version will be 217,000. Before these two events, we have to expect churning. Today we get the ISM manufacturing report for Sept, forecast down to 58.2 from 59 in August (WSJ). We also get auto sales, probably down from last month’s record blockbuster. Sales are expected at a 16.6 million annualized rate from 17.5 million in Aug, the biggest since Jan 2006.

It’s possible we already have the number we need. Yesterday’s consumer confidence fell to 86.0 from 93.4 in Aug, with the “present situation” down by about 5 points and “expectations” down by about 10 points. The US consumer/investor/voter is not a happy camper. There’s a lot to worry about—another war in the Middle East, Russia/Ukraine, a dysfunctional Congress, intruders in the White House, the first ebola case in the US, an overvalued stock market, GM recalling millions of cars, sports figures having feet of clay, and so on.

This is not the picture of an economy bursting at the seams with demand and threatening inflation. Con-ditions, including the strong dollar, are a deterrent to a hawkish Fed. With every passing week the Fed gets more reasons why the First Rate Hike can be deferred past “the summer.” At some point soon, those expecting a hike at end-March will throw in the towel, followed by those expecting it at end-June. This implies the 10-year yield will remain well under the 3% posted at year-end and possibly under 2.50%, too. To the extent the dollar is underpinned by even lower yields elsewhere—the Bund is 0.94% this morning—as well as flight-to-safety, lower yields may not matter. The bond gang calls it the least dirty shirt in the laundry basket.

And note that the 2-year is fairly steady at 0.57% while the German 2-year Schatz is -0.08. Negative returns are now the norm for European sovereign paper. Bond guys understand this—we don’t.

Meanwhile, the tirade against the ECB becoming a bailout agency by IDO’s Mr. Sinn yesterday seems to be accurate. Today the FT reports Draghi will push the ECB to buy junk-rated baskets of assets from Greek and Cypriot banks. The FT writes the minimum ECB rating is triple B, the lowest investment-grade rating, but banks’ ratings are capped by he country where they are domiciled. Greece and /Cyprus are both single B, a sub-investment grade rating, at S&P, while “Fitch rates Greece as single B, and Cy-prus as single B-minus. Moody’s rates Greece Caa1 and Cyprus as Caa3.” To get an exception for Greece and Cyprus in order to include them in the ABS program to be announced tomorrow, Mr. Draghi has to get past the BBK’s Mr. Weidmann, who opposes ABS in the first place, let alone buying junk. We wonder if a possible solution is a separate, commissioned rating of specific assets to be considered inde-pendent of the sovereign. But that would break the sovereign cap rule as well as cost a bomb.

The FX market seems not to be punishing the ECB for becoming a bailout agency. That probably means we can tread water for a little longer. Another big move needs a trigger event and we don’t see it yet, unless payrolls disappoints on the downside or something.