Overnight News and Sentiment...

In "The Week Ahead" I laid out some of the more important events taking place this week with a relatively light US economic data docket.

Here's what happened overnight...

ES futures, as I suspected from the 3C negative divergence from last night's open, continued to slide until 4 a.m. EDT about the time Europe opened trade. At 5:40 ES futures started making their way higher, the apparent catalyst, the German IFO Business survey after seeing a very weak Flash PMI in March, slightly beat consensus coming in at a slight beat at 109.8 vs consensus of 109.6.

As mentioned last night, early rumors about this Friday/Saturday's EU Eco-Fin meeting were out fresh this morning from none other then Angela Merkel.

From the FT:

"Germany is poised to bow to international pressure and allow a temporary increase in the eurozone’s financial “firewall” this week, to prevent the crisis in the region’s periphery spreading to other member states.

Officials in Berlin signalled on Sunday that the government would allow funds to be boosted as a way of calming financial market pressures.

Angela Merkel, Germany’s chancellor, had resisted any increase, despite pressure from most of her eurozone partners and the US administration, because she risks a political backlash from sceptical allies in her ruling coalition if it means any increase in Germany’s overall financial guarantees for its partners. But the thinking in Berlin is that she cannot resist the international pressure indefinitely."

This coming on the back of talk from the ECB (European Central Bank) that there may not be more liquidity coming from the LTRO.

From Bloomberg

ECB Suspending Long-Term Loans, Asmussen Tells Helsingin Sanomat

The European Central Bank won’t provide more long-term loans until it has studied how the funds are distributed into the economy, council member Joerg Asmussen told newspaper Helsingin Sanomat.

“We need to see how this liquidity feeds through over the next few months,” Asmussen said, according to a transcript of an interview with the Finnish newspaper on March 24 and published today.

The ECB has offered European lenders more than 1 trillion euros ($1.3 trillion) for three years since December. The bank’s two long-term refinancing operations have brought down yields on peripheral debt and helped calm markets. That doesn’t mean more such funds are forthcoming, Asmussen said.

“Nobody should expect that we will do a third LTRO based on the fact that we have already done two LTROs,” he said. “We never pre-commit on our actions.”

Apparently on the same day the LTRO article was published, rumors came out of Europe early, long before the Eco-Fin meeting to calm the markets as the ECB is making clear that they may not continue supplying EU banks with liquidity, naturally the pressure internationally under this scenario would be intense on the Finance Ministers to do something to keep contagion from spreading, thus the early statements out of Germany regarding the ESM.

As mentioned, there' no shortage of F_E_D speakers this week and Bernie got a jump on some other F_E_D members who have been talking about less accomodative policy and possibly higher rates sooner then expected, when Bernie was speaking this morning at 8 a.m. at the National Association for Business Economics.

Here's  link to the speach

The most important thing Bernie said which boosted ES futures at 8 a.m. precisely, was the following...

" A wide range of indicators suggests that the job market has been improving, which is a welcome development indeed.  Still, conditions remain far from normal, as shown, for example, by the high level of long-term unemployment and the fact that jobs and hours worked remain well below pre-crisis peaks, even without adjusting for growth in the labor force.  Moreover, we cannot yet be sure that the recent pace of improvement in the labor market will be sustained.  Notably, an examination of recent deviations from Okun's law suggests that the recent decline in the unemployment rate may reflect, at least in part, a reversal of the unusually large layoffs that occurred during late 2008 and over 2009.  To the extent that this reversal has been completed, further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies.

I also discussed long-term unemployment today, arguing that cyclical rather than structural factors are likely the primary source of its substantial increase during the recession.  If this assessment is correct, then accommodative policies to support the economic recovery will help address this problem as well.  We must watch long-term unemployment especially carefully, however.  Even if the primary cause of high long-term unemployment is insufficient aggregate demand, if progress in reducing unemployment is too slow, the long-term unemployed will see their skills and labor force attachment atrophy further, possibly converting a cyclical problem into a structural one.


If this hypothesis is wrong and structural factors are in fact explaining much of the increase in long-term unemployment, then the scope for countercyclical policies to address this problem will be more limited.  Even if that proves to be the case, however, we should not conclude that nothing can be done.  If structural factors are the predominant explanation for the increase in long-term unemployment, it will become even more important to take the steps needed to ensure that workers are able to obtain the skills needed to meet the demands of our rapidly changing economy."


And that is largely what has ramped futures this morning...