April 1, 2011
Equity markets are getting a solid bid this morning on better than expected monthly employment figures. Nonfarm Payrolls increased by 216k in March vs. expectations of 190K, and private payrolls rose by 230K vs. expectations of 203K. The unemployment rate dropped to 8.8% vs. expectations of 8.9% and vs. the prior reading of 8.9%. The rate of new hiring is the best since the first quarter of 2006. Hourly earnings continue to be weak as they were flat vs. expectations of an increase of 0.2%. Bond markets are trading off on the news as the 10 year moves back to 3.5%.
Hawks are now pressing the Fed to raise rates and pull back on QE2. The odds of a rate increase by year end have jumped to 62% this morning. Given the lagging nature of employment, the economy looks like it is at mid-cycle, which is concerning given the weak growth we are seeing. If the Fed’s hand is forced and they raise rates later this year, the economy may not be able to overcome the increase and could see another significant slowdown in 2012. My sense is that the dovish Bernanke will hold out on raising rates and cutting back on stimulus, erring on the side of aggressiveness in an effort to avoid a double dip. Fed Governor Bill Dudley said this morning that the “recovery is still tenuous”, that “we must not be overly optimistic about the growth outlook”, and that the better employment numbers are welcome but “not a reason to reverse course.”
In what is sure to be a brewing controversy, Bloomberg is reporting that that the Arab Banking Corp, which is 59% owned by the Central Bank of Libya, borrowed over $5 billion from the Federal Reserve in 2008-2009. In spite of the freeze of Libyan assets around the world, an exemption was made to the Arab Banking Corp which allows it to continue operations by borrowing from the Fed.
Ohio followed Wisconsin with much more stringent rules for state workers and their ability to engage in collective bargaining. California is heading in the other direction as lawmakers moved forward a bill that would make it easier for farm workers to unionize by eliminating the need for a secret-ballot election. “We’re increasing freedom by eliminating secret voting” said one union official.
Libyan rebels have called for a cease-fire after the US announced it is withdrawing aircraft and most other support. Secretary of Defense Robert Gates told Congress the US would “significantly ramp down our commitment” to Libya after political pressure caused the Administration to review its strategy. Germany is one of 8 NATO members who have refused to participate in the action. Oil prices have risen 25% since the fighting began in mid-February.
Europe’s sovereign debt crisis continues to worsen. Ireland released results of it bank stress tests yesterday showing banks were in worse condition overall than initially feared. Additionally, Portuguese officials said that last year’s deficit was 8.6% of GDP, 130 bps above expectations. The Portuguese have avoided tapping the EU and IMF for assistance, but many feel that will be inevitable.
APAC markets (with the exception of Japan) were strong last night after China announced strong manufacturing data. The Federation of Logistics and Purchasing said its PMI increased from 52.2 to 53.4. Private measures confirm the increase, but the readings aren’t as strong as those of the government.
Corn futures have soared as supply continues to decline. The USDA said new crop planting won’t be enough to replenish the inventory drawdown driven by global demand for food and bio-fuel. A UN index showed that global food prices hit a record high last month.
The WTO ruled that from 1989 to 2006 Boeing receive $5 billion in illegal government subsidies. US Trade Rep Ron Kirk said that subsidies given to Airbus (Boeing’s top competitor) were much bigger. Both the US and EU are considering an appeal.
David Sokol, who ran Berkshire Hathaway’s energy investing group, resigned on Wednesday after it was disclosed he made over $3 million in profit on his personal holdings of Lubrizol. Berkshire agreed to acquire Lubrizol in March based upon Sokol’s recommendation. It came to light that Sokol acquired his shares in January.
The Final Four kicks off tomorrow in Houston with Butler facing Virginia Commonwealth and U-Conn facing Kentucky.
Have a great weekend.