Friday

March 6, 2015

www.bloombergbriefs.com

 

Snow to Blanket Jobs Report; Fed's Williams on RatesALEX BRITTAIN, BLOOMBERG BRIEF EDITOR

WHAT TO WATCH: , a voting member of the , said mid-yearJohn Williams FOMCmay be time for a “serious discussion” about raising interest rates, according to the textof a speech he gave late yesterday. Harsh weather in February probably hit the U.S.

reading due at 8:30 a.m. The number of hires is expected to fall tononfarm payrolls235,000, a four-month low. The winter effect may muddy the impact the jobs report hason the Fed's plans for its first post-crisis rate increase (see analysis ). The here

, also due at 8:30 a.m., will probably fall back to 5.6 percent afterunemployment rateticking up in January. Soon-to-retire policy maker gives a farewellFed Richard Fisherspeech at 1:30 p.m.

ECONOMICS: The expanded by 0.3 percent quarter-on-quartereuro-area economyin the final quarter of 2014, a second reading confirmed, with growth driven by trade andhousehold consumption.

GOVERNMENT: U.S. Secretary of State , seeking to counter a wave ofJohn Kerryanxiety among Persian Gulf allies, said a potential nuclear deal with isn’t part of aIran “grand bargain” to improve U.S. relations with the Islamic Republic.

COMPANIES: will pay at least $1.4 billion to settle federal and stateCommerzbank claims that it violated U.S. sanctions, a person briefed on the matter said.  

MARKETS: The climbed to an 11-year high against the before the U.S.dollar euro jobs report. extended their highest level since July 2007.European stocks

(All times local for New York.)    

Justin Wolfers@JustinWolfers

IMF research: "the decline in unionizationappears to be a key contributor to the riseof top income shares" imf.org/external/pubs/…Details

COMMENTARY IN THIS ISSUE

February's reportpayrolls reminds us that sometimesmeteorology has to be abranch of economics: Carl

(pictured) andRiccadonna  Josh Wright.

RBS Head of Macro CreditResearch Alberto Gallodiscusses the near-termmove of the andeuro/dollar the start of the ECB's QEprogram:  Tom Keene.

QUOTE OF THE DAY

"The last thing one can say isthat the ECB is not supportingGreece. To what extent aredecisions dependent on whathappens at the Eurogroup? Toan enormous extent. If there is anagreement, our backgroundchanges completely, and we’d bein much better place to takefavorable decisions for Greece."  

— ECB President at yesterday's Mario Draghi

press conference.

NUMBER OF THE DAY

—100% Proportion of the 31 big bankssubjected to a stress test that the Fedsaid have sufficient capital to absorblosses in a sharp, prolonged economicdownturn. It’s the first time since thecentral bank started stress tests in 2009that no firm fell below any main capitalthresholds. Read the full story .here

TWEET OF THE DAY

BIG PICTURE  CARL RICCADONNA AND JOSH WRIGHT, BLOOMBERG ECONOMISTS

Weekly Confidence Spike May Point to Monthly Rebound

Bloomberg's weekly consumer sentiment index rebounded from a year-low level of 42.7 lastweek. The rise — to a level of 43.5 in the week ended March 1 — may give an indication ofwhat to expect in the March readings of the Conference Board's Consumer ConfidenceIndex and University of Michigan consumer sentiment survey. The levels of both of theseimportant indicators dropped off in February, the former to 96.4 from 103.8 the prior month,and the latter to 95.4 from a January level of 98.1.

— Ben Baris, Bloomberg Brief Editor

March 6, 2015 Bloomberg Brief Economics 2

BIG PICTURE  CARL RICCADONNA AND JOSH WRIGHT, BLOOMBERG ECONOMISTS

February Jobs Data May Be a Weather ReportFebruary was a month for the record

books, as much of the U.S. experiencedunusually cold temperatures and almostunprecedented snowfall. This may bringdistortions in February economic data. IfFebruary nonfarm payrolls are soft,analysts must determine whether this issimply a weather-related aberration orsomething more nefarious. The answercould affect the timing of the FOMC’sremoval of the word “patient” from itsforward guidance.

There is little reason to believe thatlabor market momentum significantlyslowed in February. Several keyindicators released for the month showedresilience, including jobless claims,non-manufacturing ISM employment andthe ADP employment survey. TheBloomberg consensus forecastanticipates a 235,000 headline NFPincrease, tame relative to movingaverages over the past three (336,000),six (282,000) and 12 (267,000) months.

There have already been hints ofweather effects in the ISM surveys andthe Fed’s Beige Book. Also, unit motorvehicle sales appeared to be hindered.Dealership traffic is very weathersensitive.

Big misses on vehicle sales tend toforeshadow similar forecast misses onpayrolls. February vehicle sales came inat an annualized 16.2 million units,compared with expectations of 16.7million. The consensus has not been sooverly optimistic since January 2014,when payrolls also fell short ofexpectations (by 67,000). In the past, amiss of 0.5 million units annualized hascorresponded to a negative miss onpayrolls 71 percent of the time. Thismeans that if the jobs number missesexpectations, it probably will be aone-time anomaly related to weather.

There should be clues in the report’sdetails. One of the first could show up inthe nonfarm workweek — average weeklyhours, projected unchanged at 34.6hours. More detailed evidence will comefrom the Household Survey data. From2005 to 2014, February has averaged387,000 weather-related absences and2.2 million weather-related curtailments.The former indicates full days of work

 View an interactive version on this chart .  here

lost; the latter, reductions in total workinghours (for instance, a late open/earlyclose due to weather). To show evidenceof a weather distortion, the Februaryfigures will need to exceed typicaldisruptions. Last year, February absenceswere 55 percent above average andcurtailments were 217 percent aboveaverage. The curtailments figure was thelargest since 1996 and the third largestsince 1977.

Assuming that payroll gains remainabove 200,000, market participants willfocus on the various measures of labormarket slack followed by monetary policymakers, including the unemployment rate,the underemployment rate (U-6) andduration of unemployment.

The Bloomberg consensus estimate isfor unemployment to fall 0.1 percentagepoint to 5.6 percent after edging up to 5.7percent previously. The consensusestimate may be too conservative, basedon the move in the labor forceparticipation rate (LFPR), up 0.2 percentin the January report. Following a monthwith that large an LFPR increase, boththe participation rate and theunemployment rate tend to decline. Infact, for four out of five such instancesduring the last five years, theunemployment rate fell by 0.3 percentagepoint or more in the following month.

This NFP report is an important data

point for policy makers at the MarchFOMC meeting, a much anticipated17-18

event. First, policy makers will beupdating their projections, including thefed funds “dot plot.” Second, markets willbe watching whether the Fed drops“patient” from its forward guidance,thereby placing the June FOMC meetingin play as a potential liftoff date.

It would probably take a payrollsincrease well below 200,000 for the Fedto keep "patient" in its forward guidance.In addition, there would have to be clearsigns that weather didn’t play a big role inany low number, such as if strong-dollarimpacts are likely to be sustained.

The next couple of employment reportswill be critical to policy makers’confidence about low inflation ultimatelytrending higher and the economyweathering the fed funds liftoff.  If themid-year liftoff timing holds, therebyputting the June, July and September Fedmeetings in play, then policy makers havebetween three and six more employmentreports after February to digest.

Fed policy makers’ reaction to the latestemployment figures will be closelyscrutinized. Market participants will nothave to wait long, with retiring Dallas FedPresident Richard Fisher speaking latertoday, and non-voters Loretta Mester(Cleveland) and Narayana Kocherlakota(Minneapolis) set to speak on Monday.

DATA & EVENTS

Winter, Often February, the Peak for Absences, Curtailment

March 6, 2015 Bloomberg Brief Economics 3

DATA & EVENTS

COUNTRY TIME EVENT SURVEY PRIOR

Brazil 7:00 IBGE Inflation IPCA MoM 1.08% 1.24%

Canada 8:30 Building Permits MoM -4.00% 7.70%

Canada 8:30 Int'l Merchandise Trade -1.00B -0.65B

U.S. 8:30 Change in Nonfarm Payrolls 235K 257K

U.S. 8:30 Two-Month Payroll Net Revision -- --

U.S. 8:30 Change in Private Payrolls 225K 267K

U.S. 8:30 Change in Manufact. Payrolls 10K 22K

U.S. 8:30 Unemployment Rate 5.60% 5.70%

U.S. 8:30 Average Hourly Earnings MoM 0.20% 0.50%

Canada 8:30 Labor Productivity QoQ 0.00% 0.10%

U.S. 8:30 Average Hourly Earnings YoY 2.20% 2.20%

U.S. 8:30 Average Weekly Hours All Employees 34.6 34.6

U.S. 8:30 Underemployment Rate -- 11.30%

U.S. 8:30 Change in Household Employment -- 759

U.S. 8:30 Labor Force Participation Rate -- 62.90%

U.S. 8:30 Trade Balance -$41.2B -$46.6B

Mexico 9:00 Consumer Confidence Index 91.1 91.1

U.S. 15:00 Consumer Credit $14.750B $14.755BSource: Bloomberg. Surveys updated at 5:50 a.m. New York time.

CALENDAR

Click on the to see the full range of economists' forecasts on Bloomberg.   highlighted releases

OVERNIGHT

Stronger growth in the euro-area at the end of last year waseconomy

driven by private consumption and foreigntrade. Gross domestic product rose 0.3percent in the fourth quarter afterexpanding 0.2 percent in the previousthree months, the European Union’sstatistics office in Luxembourg said,confirming a Feb. 13 estimate. Householdconsumption and investment increased0.4 percent each, while exports were up0.8 percent.

German industrial production rose fora fifth month in January in a sign that themomentum in Europe’s largest economyis strengthening. Output, adjusted forseasonal swings, was up 0.6 percent inJanuary after a revised 1 percent gain inDecember, a report from the EconomyMinistry showed. The increase in thetypically volatile figures compares with amedian estimate of a 0.5 percent gain in aBloomberg News survey. Productionclimbed 0.9 percent from a year earlier.

China cut pay for top executives at itsbiggest banks and some otherstate-owned companies as part of effortsto combat inequality, said people withknowledge of the matter. Seniormanagers at the nation’s five largest

— all of which arelenders government-controlled — had their totalcompensation for this year cut to no morethan about 600,000 yuan ($95,800), saidthe people.

The was about 2Australian dollarpercent overvalued last month and couldstill be considered too high to achieve“desired domestic economic outcomes,”Reserve Bank of Australia documentsshow. In papers released under aFreedom of Information request byBloomberg News, the central bank saidits modeling showed the currency wasabout 5 percent overvalued in the fourthquarter against a basket of currencies.

Europe

Asia

ORANGE BOOK: CEO ECONOMIC COMMENTS

Trade Balance May Give Clues on Impact of Dollar Strength

In addition to the much-anticipated jobs report, the January trade balance is also releasedthis morning. Analysts will be watching for the effects of the stronger dollar on exports,balancing that against what imports imply about domestic demand. The trade deficit isexpected to contract to $41.6 billion from $46.6 billion. That would be consistent with recentranges: in 2014, the quarterly average of the trade deficit bounced between $41 and $43billion. View this chart on the Bloomberg terminal: ECWB P 5452789F0F1C08B4

— Josh Wright and Carl Riccadonna, Bloomberg Economists

March 6, 2015 Bloomberg Brief Economics 4

ORANGE BOOK: CEO ECONOMIC COMMENTS

Dollar Strength Casts Long Shadow, Denny's Sees 'Inflationary Headwinds'RICHARD YAMARONE,BLOOMBERG ECONOMIST  

When inclement weather

strikes, U.S. retailers are first

to complain. Similarly, when

the dollar appreciates rapidly,

multinational corporations

come out in droves to cite the

associated impact on

performance and outlook.

These nagging corporate

complaints are making their way into economic

indicators. Manufacturing, export, and sentiment

data have moderated according to several

measures. Prices at the pump have climbed in

recent weeks and could crimp spending on

discretionary purchases like restaurants. The CEO

Economic Comments Sentiment Index for the

week ended Mar. 6 was 50.0, unchanged from the

previous week’s posting. Sub-50 readings suggest

a contraction.

Deere [DE] Earnings Call 2/20/15: “Oneother item worth emphasizing in today'searnings report is the impact of a strongerU.S. dollar. It is putting significantpressure on reported sales made outsideof the United States, a fact reflected inboth our first quarter results and ourfull-year forecast.”

Wolverine World Wide [WWW] EarningsCall 2/17/15: “Because of our globalfootprint, a significantly stronger U.S.dollar will put pressure on our reportedrevenue and earnings in 2015.”

Goodyear Tire [GT] Earnings Call2/17/15: “The most significant headwindfrom 2014 that will carry over andcontinue to have an impact into the yearahead is unfavorable foreign currencytranslation due to the continuing strengthof the U.S. dollar.”

[UFPI] Earnings CallUniversal Forest2/19/15: “There have been transportation

challenges in our country from theproblems at the ports on the West Coastdue lack of available equipment anddrivers in the trucking industry. While fuelprices for diesel have seen a smalldecline, the potential savings is beingoffset by driver cost, new equipmentregulations and lack of available andcompetitively priced third-partyresources.”

Denny’s Corp [DENN] Earnings Call2/18/15: “During 2015, we will continue toface inflationary headwinds, includingminimum wage increases and commodityinflation. We anticipate that commoditycost inflation this year will be less than 2percent.”

Armstrong World [AWI] Earnings Call2/23/15: “Within the fourth quarter results,our North American Residentialbusinesses were challenged. The woodbusiness continue to see volume lossesas a result of competitive pricing actionsand profitability for the segments swungto a loss. Residential resilientexperienced a mid-single-digit salesdecline. Commercial resilient in theAmericas had a solid quarter with salesand Ebitda both up.”

Waste Management [WM] Earnings Call2/17/15: “We're seeing generally sort ofoverall economic improvement, whetherit's new business starts or new housingstarts. And so we've been waiting for thepick-up in commercial volumes for a longtime. And I guess for the first time in thelast three years, what I would say is we'repretty optimistic they're going to improve.Now, we're not going to try to say they'regoing to turn positive in 2015. But wehaven't said in three years that we'repretty optimistic that they're going toimprove in 2015.”

[MGM] Earnings CallMGM Resorts

2/17/15: “Our largest market, of course,Las Vegas, is showing solid signs ofgrowth. Visitation was up 4 percent lastyear to a new record of over 41 millionvisitors. The LVCVA has a goal ofreaching 45 million visitors over the nextfew years, and growing our internationalmix of those visitors from about 20percent now to 30 percent.”

Jack in the Box [JACK] Earnings Call2/18/15: “We've been reading some of thearticles out there that are pointing towardsthis competition for talent and that there'sthis war being waged for talent acrosscompetitive brands. We're not seeingthat.”

Hyatt Hotels Corp [H] Earnings Call2/18/15: “The economies across the eurozone continue to underperform the U.S.We are seeing relative strength in theUnited Kingdom, while continental Europecontinues to struggle. Eastern Europewas negatively impacted by the continuedconflict in Ukraine and the weaker ruble.”

Wal-Mart [WMT] Earnings Call 2/19/15:“One of the headlines in e-commerce isthe tremendous growth from mobiledevices. In fact, nearly 70 percent ofwalmart.com traffic in the U.S. came viamobile during the recent holiday period.Customers who previously shopped usingtheir laptops are now using their phonesand tablets. And this isn't just a U.S.trend.”

Hormel Foods [HRL] Earnings Call2/19/15: “We definitely have heard morepositive commentary in terms of thegeneral outlook for the marketplace. Thelower gas prices seems to kind of playitself out fairly quickly within that segmentin terms of traffic builds.”TO SEE ORANGE BOOK POSTINGSON THE BLOOMBERG TERMINALTYPE NI ORANGEBOOK <GO>  

  

WOMEN IN THE WORKFORCE DEIRDRE FRETZ, BLOOMBERG BRIEF EDITOR

March 6, 2015 Bloomberg Brief Economics 5

 

WOMEN IN THE WORKFORCE DEIRDRE FRETZ, BLOOMBERG BRIEF EDITOR

Super Moms Can Rescue Sagging GDPWomen remain underrepresented in the

workforce. That's an economic problem,since it limits productivity and GDPgrowth. Governments in countriesincluding , , , Japan Australia South Korea

, and have startedSweden Chile Malaysiato make the issue a larger priority. Forexample, in Japan, where only 38 percentof women return to work after giving birth,the government is seeking to raise theproportion of working mothers to 55percent by 2020 to boost the nation'ssagging GDP.  

Click the chart to launch an InteractiveStoryChart.

GEOPOLITICAL RISK PAUL SMITH, BLOOMBERG BRIEF EDITOR

Women Are Less Likely to Work Than Men

March 6, 2015 Bloomberg Brief Economics 6

GEOPOLITICAL RISK PAUL SMITH, BLOOMBERG BRIEF EDITOR

Instability Knocks: the Flip Side to Cheap OilCapitalism requires law that is known,

consistent and can be "counted upon, likea machine," espoused one of sociology'sforefathers Max Weber. The largepetrostates are varying degrees awayfrom the Weberian ideal of the rule of law.That could spell trouble. Low oil pricesthreaten the ability of these inefficient,sometimes corrupt states to service theirdebts and may curtail the governmentspending that keeps the masses content.This may in turn ignite demands for afairer distribution of these dwindling oilproceeds and, possibly, regime change.

As the U.S. has re-emerged as a majoroil producer, the price of crude has sunkbelow the breakeven levels for manycrude-dependent government .budgetsSaudi Arabia, Russia, Nigeria andVenezuela have seen their credit-defaultswap spreads widen — usually a reliablesignal of a heightened risk of default andpolitical instability.

Venezuela's position is the mostprecarious of the big oil producers. Its5-year CDS stands at more than 4,000basis points and the economic outlook isdire: consumer price inflation is projectedto be 78.45 percent this year. Such is theshortage of basic goods, the primeminister of neighboring Trinidad & Tobagooffered, with a straight face, an exchangeof tissue paper for oil. Among a list of 81countries, Venezuela ranks worst on theWorldwide Governance Indicators' rule oflaw score. Nigeria is second-worst buttops the Economist Intelligence Unit'spolitical risk ranking. Russia places sixthon WGI's metric of least able to controlcorruption. (Bloomberg subscribers cansee these metrics .)here

Saudi Arabia scores relatively wellacross these measures: it ranks 25th onpolitical risk — slightly less risky thanChina — and it's better than Italy atfighting corruption. Saudi's 5-year CDShas risen to 75 basis points from 40 basispoints in June last year. This pales incomparison with the almost 150 basispoints scaled in January 2012 at theheight of the Arab Spring. This shows thatlow oil prices don't presently threatenregime change in the way an uprisingwould. It helps that the King is cossettedby substantial savings, worth 111 percentof GDP, according to Fitch Ratings.

Closer to the paragon of democracy

and less dependent on oil, Brazil is theleast political risky of the bunch but stillfinds itself embroiled in a graft scandal atits state-run oil producer Petrobras, whileinflation has accelerated to 7.1 percent.

What's to be done? The advises oilIMFexporters to use savings to run fiscaldeficits if they're able or depreciate theircurrency. They need a strong monetaryframework to avoid depreciation leadingto "persistently higher inflation and furtherdepreciation," said the IMF's Rabah

and .  Arezki Olivier BlanchardLow oil prices may impinge supply

further out if exporting economies wiltand, as a result, social unrest erupts. "Apersistently low oil price could affectproducers’ ability to maintain domestic

infrastructure and in the medium-term bea force for geopolitical instability," saidMichael Hintze, the billionaire founder ofLondon-based hedge fund CQS, in a 2015 outlook report for investors.  

Tracking the post-revolution of oilpathproduction in Libya and Iran showsregime change can dent outputindeterminately. U.S. production maytherefore flip the perception of oil'srelationship with global security.Developed economies havelong-bemoaned the riskiness of oilproducing nations for making crude moreexpensive, but higher oil prices might beconsidered a subsidy the world has to payto keep these countries stable and ensuremedium-term supply.

DEFLATION WATCH    CHASE VAN DER RHOER, BLOOMBERG APPLICATION SPECIALIST

Risky Business: Oil Exporters' CDS Soar 

Sickly Scores

March 6, 2015 Bloomberg Brief Economics 7

DEFLATION WATCH    CHASE VAN DER RHOER, BLOOMBERG APPLICATION SPECIALIST

Great Deflation Poses Great Dilemma for Policy Makers  The last time deflation was so

widespread globally, there were no citieswith electric light.  

Last week, U.S. inflation turnednegative for only the second time in 60years. Today, 58 percent of developednations — as defined by the UN HDIcriteria, plus China — are experiencingdeflation. Of 19 euro-area members, onlythree have managed to avoid it.

The use of ultra-low interest ratesacross the developed economies haslimited the solutions to address this.Raising rates aggravates the situation,and there is little scope to ease further.

Some 73 percent of all developednations have policy rates below 1 percent.Just 15 years ago the number was lessthan 4 percent. These countries represent42 percent of the world’s GDP.

The collapse in oil prices hasundoubtedly helped drag prices down. Asa result, U.S. consumers may have a littlemore disposable cash, but they remaincautious and liable to wait for stores todiscount before buying.

Gas prices may soon rebound with oil.Households might eventually purchase at

a greater rate, emboldened by greatereconomic stability and jobs growth asmemories of the Great Recession fade.

Deflation arises when aggregatedemand falls relative to supply or demandfor cash money rises, most often due to

economic uncertainty. This historicdistortion spotlights the dilemma for policymakers: how to stop prices falling whenmost developed economy rates arealready below 1 percent.

 

ECONOCHAT

Race to Rates Bottom Failed to Spur GDP Acceleration

March 6, 2015 Bloomberg Brief Economics 8

 

ECONOCHAT

ECONOMIC COMMENTARY AND RESEARCH FROM AROUND THE WEB

In a Philadelphia Fed working paper, , and Paul S. Calem Lauren Lambie-Hanson dig into . TheyLeonard I. Nakamura home appraisal and mortagage application data

find that "information loss in appraisals may increase the procyclicality of housing boomsand busts."

Oxford University professor of economics responds to PaulSimon Wren-LewisKrugman post on . Krugman argues against a causal relationship betweenausteritygrowth in government consumption and GDP. Not so, says Wren-Lewis. "If everycountry planned to keep the ratio of G to GDP constant, in the fast growing countries youwould be likely to see high growth in both GDP and G, while in the others you wouldexpect slower growth in both variables," he writes. "What you would observe is lots ofpoints close to a 45 degree line. This would tell you nothing about how a shock to Gwould influence [GDP]. If you tried to read the 45 degree line as telling you about a Gmultiplier you would get implausibly large numbers."

Nobel laureate and Columbia's discuss theJoseph Stiglitz Martin Guzmanimplications of the U.K.'s ruling that are under U.K.Argentina's interest rate paymentsjurisdiction as opposed to prior U.S. judicial rulings. "With multiple debts subject to aslew of sometimes-contradictory laws in different jurisdictions, a basic formula for addingthe votes of creditors...would do little to resolve complicated bargaining problems. Norwould it establish the exchange rates to be used to value debt issued in differentcurrencies. If these problems are left to markets to address, sheer bargaining power, notconsiderations of efficiency or equity, will determine the solutions. The consequences ofthese deficiencies are not mere inconveniences. Delays in concluding debtrestructurings can make economic recessions deeper and more persistent, as the caseof Greece illustrates."

WHAT TO READ

Financial stocks, and arebonds goldsignaling that an almost six-year advancein U.S. shares has further to go,according to Michael Hartnett, chief globalequity strategist at Bank of America’sMerrill Lynch unit. “The bull market shouldremain intact” until the performance of thethree investments starts pointing towardfaster inflation, Hartnett said. That has yetto occur, he said.

Energy stocks have become“unquestionably expensive” in the U.S.after rebounding from last year’s lows,according to Dan Greenhaus, chiefstrategist at BTIG.

“Strong nonfarm payrolls may send falling sharply and swiftly, possiblygold

to $1,180,” with a number higher than250,000 likely to have that effect, HowieLee, an investment analyst at PhillipFutures, said. “If nonfarm payrolls comein below 230,000, we may see gold rallyto $1,230.”

Royal Bank of Scotland Group said it’spossible the will drop to parity euroagainst the as soon as next month.dollar

MARKET CALLS

MARKET INDICATORS

March 6, 2015 Bloomberg Brief Economics 9

MARKET INDICATORS

KEENE'S CORNER

Source: Bloomberg. Updated 5:50 a.m. New York time.

March 6, 2015 Bloomberg Brief Economics 10

 

KEENE'S CORNER

RBS Head of Macro Credit

Research Alberto Gallo

speaks with Bloomberg's

Tom Keene and Michael

McKee about the near-term

move of the euro/dollar and

the prospects for Europe's

recovery with respect to the

start of the European

Central Bank's quantitative easing program.

Q: Where will the euro be in twoweeks? What is the synthesis of thisas seen through euro/dollar?A: I think there are definitely pressures forthe euro/dollar to go even lower towardparity in the next months. It's going a littlebit higher now. There can be someprofit-taking around QE. But definitelythere's a big difference between what theECB is doing and what the Fed wasdoing. The difference is, in Europe,governments are not spending. The U.S.deficit was ten percent when Fed QE waslaunched. Here, it is three percent. Sotheir QE is quite big, but it also matterseven more because there is less supplyof bonds.

Q: Draghi says substantial easingsupports economic recovery. Doesthat mean a weak euro bails us out?A: That's the main transmission channelat the moment unfortunately, because wedon't have banks lending. We don't havecorporate investment. We don't havegovernment investment yet. So we are allrelying on the FX to do the job, but it's notenough. It's necessary, not sufficient.

Q: If the European model follows the American model, you're going to seeinterest rates rise in Europe. That'swhat happened when the Fed did QE.So it's going to have to be the euro ornothing, right?A: Thhere's a big difference, which is thatyou have a big supply of corporate bonds,a big supply of government bonds, highdeficits in Europe. You are buying therumor, but you're not selling the factbecause there is still lack of issuance.Euro bonds are a very scarce asset. Thebig driver here is government spending.Germany just increased its investmentplan from 10 billion euros to 15 billioneuros. You know, 5 billion euros overthree years is like building a highway. It'sreally, really small. So Europeangovernments are now getting paid toinvest. There is half of government bondsfrom core European companies are innegative yields, the negative yield club.Until they change their mind and startinvesting using these low yields forgrowth, we're not going to see a sell off inbonds here. They're very scarce.

Q: Mario gives you 60 billion euros a month in exchange for your bonds.

What do banks do with the money? Yes, the question is if they're going toA:

sell the bonds because there is lack ofbonds, there is lack of faith in investmentgrade high rated assets. Banks needliquidity and liquid assets for the newregulation, which asked them to hold alarge percentage of assets in liquidsecurities. And so the result is probablythat the ECB is going to have to pay even

more to buy bonds, pay an even higherpremium. We'll see more and more bondsin negative yields.

Q: Do you have a calculation of howmany basis points of yield they give upbecause they have to pay a premium?A: Since they announced, we basicallymoved from having five percent ofEuropean sovereigns in negative yields.Now, we have over one third of the totaloutstanding in negative yields. The netsupply of investment grade paper acrossEurope is going to be negative as long asthey continue to ease. It's hard to sayexactly in basis points, but a lot of thenegative yield environment is due to this. Q: Is this Draghi trying to have it bothways? We're doing QE, but don'tworry, everything is just fine.A: Well, the inflation forecast for 2015 iszero. So I think that's pretty dovish. Itunderlines a sense of urgency that theECB is running with. But I think, yes, thegrowth forecasts are more positive for thecoming three years. So they are quiteoptimistic. At the same time, Draghi issaying there should be no complacencyhere on reforms. Governments should dostructural reforms. Don't be complacent ifwe have this cyclical recovery. And that'sexactly what we're seeing. A lot of theEuropean green shoots and growth arevery linked to the euro depreciation here.So this is a sugar rush. It's an exportboost given the euro depreciation. Youneed investment.

This interview has been edited and condensed.

Bloomberg Brief: EconomicsBloomberg Brief Managing Editor

Jennifer Rossa

jrossa@bloomberg.net

Economics Editors

Ben Baris

bbaris1@bloomberg.net

William Johnsen

wjohnsen3@bloomberg.net

Global Director Economic

Research & Chief Economist

Michael McDonough

mmcdonough10@bloomberg.net

Chief U.S. Economist

Carl Riccadonna

criccadonna3@bloomberg.net

U.S. Economist

Richard Yamarone

ryamarone@bloomberg.net

U.S. Economist

Josh Wright

jwright136@bloomberg.net

Newsletter Business Manager

Nick Ferris

nferris2@bloomberg.net

+1-212-617-6975

Advertising

Adrienne Bills

abills1@bloomberg.net

Reprints & Permissions

Lori Husted

lori.husted@theygsgroup.com

To subscribe via the Bloomberg

Terminal or on theclick BRIEF<GO>

web at www.bloombergbriefs.com.

To contact the editors:

jrossa@bloomberg.net

© 2015 Bloomberg LP.

All rights reserved. This newsletter

and its contents may not be

forwarded or redistributed without

the prior consent of Bloomberg.

Please contact our reprints group

listed left for more information.