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Central Banks Squeezing Sovereign Debt

Market Analysis

EURUSD, H4            

Central banks are squeezing sovereign debt according to a WSJ article, “A buying spree by central banks is reducing the availability of government debt for other buyers and intensifying the bidding wars that break out when investors get jittery, driving prices higher and yields lower. The yield on the benchmark 10-year Treasury note hit a record low Wednesday. The squeeze could get worse if central banks in Japan and Europe decide, as expected, to step up their stimulus efforts following Britain’s vote to leave the European Union. The world is running out of positive-yielding safe-haven bonds, among those feeling the worst pinch are pension funds and life insurance firms in Japan, Europe and the U.S. Those investors now face tougher competition for the high-grade, long-term bonds they need to match their long-term liabilities.” Even central banks are having trouble finding needed bonds as yield curves turn deeply negative, with nearly half of German bonds ineligible for repurchase below the ECB’s -0.4% depo rate.

Two positive US data points add to the NFP melting pot for tomorrow:

US initial jobless claims fell 16k to 254k in the July 2 week, more than unwinding the 12k bounce to 270k in the last week of June (revised from 268k). The 4-week moving average dipped to 264.75k from 267.25k (revised fro 266.75k). Continuing claims dropped 44k to 2,124k, from a revised 29k increase to 2,168k (revised from 2,120k). The BLS said no special factors impacted, however 6 states did estimate claims. And there are usually some difficulties in seasonal adjusting around holidays too. The claims data continue to suggest a healthy employment report for June.

The 172k June ADP rise nearly matched our estimate, though it undershot our 200k private nonfarm payroll estimate with a 210k total payroll gain, after a slight trimming in the 168k May ADP rise to 168k (was 173k) that narrowed the gap to the 38k private payroll rise in that month. We had expected an undershoot given the impact of strikes and weather on the BLS data that doesn’t impact ADP. The “as reported” ADP figures have run 18k/month weaker than private payrolls since the October 2012 methodology change. Yet, we’ve seen recent ADP overshoots of 148k in May, 26k in April and 33k in March, after undershoots of as much as 122k in four of the prior five months. The ADP as-reported average absolute error since the Moody’s methodology change is 50k, versus a 45k average absolute error over this period for the survey median.

EURUSD moved down marginally to 1.1070, GBPUSD gave up the 130.00 handle and USDJPY moved north of 101.10.

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Stuart Cowell

Market Analyst


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