The euro remains under assault, falling to a new one year low
of 1.2690 against the U.S. dollar. To market's disappointment,
the European Central Bank failed to announce new policy measures.
Everyone was hoping that the ECB would resume its long term
funding facilities or more dramatically, buy government bonds.
Unfortunately not only did they fail to do so, but Trichet said
the ECB did not even discuss the option which either suggests
that they do not think the Greece situation is as severe as the
market believes (which we do not think is the case) or they want
to wait to see how the market reacts to the German vote before
throwing out the rulebook. Leaving interest rates and current
policies unchanged should have helped the euro but instead
investors were more disappointed by the fact that no one is
willing to make the sensational announcement that is needed to
truly stabilize the markets.
Nuclear Option Not Off the Table
Trichet also repeatedly said "Greece will not default" which
implies that the ECB will stand behind Greece and resort to a
nuclear option of purchasing government bonds and act as the
buyer of last resort before allowing Greece to fail. Most likely,
they want to give it a last ditch effort and see if a successful
vote by German lawmakers in favor or aid to Greece will be enough
to permanently bring down Greek bond spreads and pacify investor
concerns. The hope is that the prospect of removing Greece out of
the debt markets for a few years will remove them from the
headlines.
Trichet spent most of his speech downplaying fiscal concerns
and emphasizing the improvements in the Eurozone economy. He said
the latest economic data confirms that the economic recovery is
continuing and the economy will expand at a moderate pace in
2010. The fact that Trichet pointed to this morning's economic
releases and said that they have been "unexpectedly good" further
confirms that his goal was to downplay the market's concerns. He
even opted to blame any slowdown in growth to "weather" and not
fiscal austerity measures. Trichet called for more aggressive
measures on fiscal consolidation and emphasized that Portugal and
Spain are not in the same boat as Greece. Inflation continues to
be a nonissue because of demand but higher oil prices creates
upside risk. As we suspected, ECB President Trichet had no
intention of supporting the euro.
Meanwhile the intensification of contagion fears continues to
push the currency lower. Rumors circulated this morning about a
possible downgrade of Italy. S&P refused to comment on the
rumors and reiterated that their most recent outlook on Italy is
"stable." The German Parliament will be voting on the Greek
bailout package tomorrow - a successful vote should bring
temporary relief to the euro and perhaps a prospect of this vote
could limit today's losses.
U.S. Jobless Claims Fall
As for the U.S. dollar, the latest jobless claims figures
reinforce the recovery story in the labor market. Weekly Claims
fell to 444k from 451k while continuing claiming dropped from
4.653M to 4.594M. Productivity growth in the first quarter
exceeded the market's forecast but at 3.6 percent, growth in the
first 3 months of the year was far more tepid than the 6.3
percent reported in Q4. Unit labor costs continue to fall as
productivity outpaced the rise in hourly compensation. These
numbers suggest that job growth has continued but given the drop
in the employment component of service sector ISM yesterday,
payrolls could fall short of expectations.