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Sounding confident, ECB President Draghi seemed prepared to reduce the asset purchases,and this overshadowed his explicit recognition that substantial accommodation is still necessary. This is very much in line with what many, including ourselves, anticipate: At the September ECB meeting, an extension of the asset purchases into the first part of next year, coupled with a reduction in the amounts being purchased. Â
The yield on the German 10-year Bund finished last week near 25 bp. Today it briefly traded as high as 40 bp. Peripheral European bonds got crushed yesterday, but seemingly, the quest for yield brought in buyers today, and Spain, Italy and Portuguese yields are lower today, while the core is firmer.Â
Also, consider other elements of the news stream. The French cabinet is expected to approve Macon’s new labor code, which is hoped to be approved by parliament in September. Consensus thinking is that the rigidities in the labor market are undermining French competitiveness. Macron proposes limiting severance pay and the costs of dismissing employees, simplify worker representation, and make companies, not industries the key bargaining unit.Â
There are two risks here. First, that Macron does not get what he wants. After all, he is not the first French President to push for labor reforms. Sarkozy and Hollande both tried, but unions and others successfully resisted. Second, Macron can get what he wants but finds that the reforms were oversold and that the key to French competitive is not so much about cutting labor costs, but in the flexibility of capital; incentives for entrepreneurship, innovation, and incentives for profit-seeking instead of rent-seeking behavior. Â
Eurozone money supply and lending figures were published. M3 growth improved to a 5% pace. It has averaged 5% over the past six months. Lending to non-financial businesses was steady rising 1.6% year-over-year, roughly in line with GDP growth. Lending to households improved a 2.7% pace from 2.6%. Â
