What's Important (9/4/2012)

Rates Drop on Threat of ECB Action

ECB President Mario Draghi has not backed away from his assertion that the bank can buy the short-term paper of Europe's weakest nations. Some of his allies were worried that the resignation of Bundesbank President Jens Weidmann would help forces that want to hold Draghi back. But Weidmann does not appear to be leaving. And Draghi apparently is convinced that the region's financial crisis is so severe that he may be the only person who can offer a quick and decisive block to rates of Spain and Italy that have spiraled higher recently. The belief that Draghi is about to act has brought interest rates down quickly. According to MarketWatch:

Short-dated Spanish and Italian government debt rallied sharply, dragging down yields and steepening yield curves Tuesday, a day after European Central Bank President Mario Draghi indicated a new bond-buying plan could embrace debt with maturities of up to three years without violating the prohibition on central-bank financing of government borrowing.

Capital Flees Spain

There is still plenty of negative news out of Europe. Recent data about the PMI of most nations showed their economies continue to slow or even contract. And unemployment in the eurozone has reached an all-time high in the decade-long history of the region. News came out today that the rate at which people in Spain are moving money out of the nation has hit a critical level. A similar problem crippled Greece's banks. According to some experts, the problem has reached extraordinary levels. CNBC reports:

The flight of capital from Spain is now worse than what Indonesia, one of the hardest hit countries during the Asian financial crisis, experienced in the late 1990s, according to analysis by Nomura.

On a three-month rolling basis, portfolio and investment outflows from Spain totaled 52.3 percent of the country's gross domestic product (GDP), (that's) more than double the outflows from Indonesia, which reached 23 percent of GDP at the time of the Asian crisis, Jens Nordvig, global head of G10 FX strategy at Nomura wrote in a note to clients on Tuesday.

Even a bailout of Spain will not bring back most of that money. It has reached safe harbors where yields are low, but principal is safe.

August Employment Forecasts

The guessing about the August jobs numbers will be amplified as Friday's announcement approaches. Some analysts believe that the figures will prove that the U.S. rate of GDP growth has moved to near zero. Others argue that a very weak report will harm the election prospects for President Obama. Yet another camp claims a decision about the timing of QE3 is on the line. The August report is the first time in a long while that job creation may be nil. The most recent month the economy lost jobs was in September 2010 when the deficit was 27,000. Since then, there have been seven months in which the increase was less than 100,000. Three of those were this year. Few if any analysts forecast a net loss of jobs for August. But, based on a range of data from PMI to consumer confidence, it would not be a shock.

Douglas A. McIntyre

Filed under: 24/7 Wall St. Wire, Market Open