Soft job creation in March may actually reflect economic strength rather than weakness; the Fed confronts how to shrink its swollen balance sheet; Greece's bailout lumbers on.
“I think, long-term, we are going to have a very, very great relationship.”
U.S. jobs: Good miss The "miss" in Friday's headline figure for private payroll growth in March – 98k new jobs, far below the average consensus forecast of 170k – reflects strength rather than weakness. The tells are in the better-than-expected unemployment rate (4.5% vs. a forecast 4.7%); continued strength in average hourly earnings (2.7% year on year, as expected); and a continued fall in broadly-measured underemployment. A reasonable conclusion would be that companies unsuccessfully tried to hire and were reluctant to fire in March, despite the continued growth in average hourly earnings.
Central banks: You go your way… The minutes of the Fed's March 14-15 FOMC meeting revealed the tentative timing of a program to start reducing the Fed’s $4.475 trillion balance sheet, much of which is made up of Treasury and mortgage-backed securities, the result of the Fed's post-crisis quantitative easing programs. The minutes suggested that the first steps would be a gentle slowdown of the current reinvestment program (designed to maintain the current level of assets), perhaps by the end of 2017 – that is, if the economy continues to cooperate.
Meanwhile, the minutes of the ECB's March 9 meeting, told a different story: no change in rates, and no change contemplated in the Bank's own bond-buying program. The difference in direction – or timing, if one believes that the ECB does have tightening in mind – reflects the gap in economic conditions between the U.S. and Europe. But it's also quite possible that the schedule of elections for the remainder of the year is top-of-mind for Draghi's Executive Council – with France and Germany up next. The upswing in nationalist sentiment in Europe, as well as the results of the recent U.S. election, may be working to strengthen the dovishness of the Council.
Greece: Tsipras' paradox Yet another interim agreement was struck between Greece and its creditors on Friday. The latest compromise put off pension reform to 2019 and tax reform to 2020, and grants permission to put in place "expansionary" economic measures at that same time, if Greece's economic strength would be strong enough. The pension and tax reforms are intended to account for 2 percent of Greece's GDP.
The immediate result of this latest agreement: the return of bailout auditors to Athens to finalize the agreements, But the €7.5 billion of eurozone aid hanging in the balance won't be released until the audit is concluded. Germany is on board with this new deal. One explanation: German Finance Minister Wolfgang Schäuble is on record as believing that the IMF, one of the three creditors, "has always been somewhat too pessimistic compared to reality."