ECB awaits Spain's pleasure

Researchers have discovered that puppies and kittens improve workers' productivity. A team of psychologists at Hiroshima University separated 48 volunteer students into three groups. They asked the first group to look at photos of cute baby animals. The second group saw snaps of adult animals while the third looked at pictures of food. The groups were then given difficult tasks to perform. Those who had seen the photos of cute baby animals "significantly outperformed participants from the other two study groups". 

Mariano Rajoy has a difficult task to perform. Perhaps Mario Draghi should have sent him an album of puppy and kitten photos. At his monthly press conference yesterday the European Central Bank (ECB) president again reminded investors - and the Spanish prime minister - that the ECB rescue plan could only go ahead if Spain asks for help and accepts the conditions that accompany it: "We view conditionality as an essential part of the activation of the OMT*." But conditionality does not necessarily mean austerity. Sig. Draghi made a sales pitch to the Spanish premier, saying; "There is a tendency to identify conditionality with harsh conditions. Conditionality doesn’t necessarily have to be punitive." The implication was that Spaniards may simply be forced to look at pictures of cute baby animals.

His encouragement was lost on Sr. Rajoy though. Earlier in the day Spain had successfully auctioned €4bn of short- and medium-term government bonds at lower rates of interest than feared. The two-year bonds went at an average yield of 3.282%, appreciably lower than at the previous such auction three months ago. An interest rate of 3.282% is still a whole lot higher than the 0.04% Germany would have to pay but the prime minister might rather live with it than suffer the ignominy of a bailout.

There was a bit of a flurry in the FX market as Sig. Draghi spoke to the press but in the end he had minimal impact on the value of the euro. Thursday's economic data did not achieve much either. US weekly jobless claims continued their gentle downward trend and factory orders fell by a monthly -5.2%, slightly less than forecast. Canada's Ivey purchasing managers' index (PMI) was two points lower in September but still managed a sprightly 60.4. Overnight the Australian construction sector PMI fell further to a dismal 30.9.

Among the major currencies the only real mover was the US dollar, which strengthened by three quarters of a cent against the pound and half a cent against the euro. The South African rand had a bad day, falling by -1% in reaction to spreading labour disputes. 

Statistical excitement will be in short supply this morning, with nothing more than Germany factory orders to relieve the tedium. It will be a different matter after lunch when Canada and the States release their employment data. US non-farm payrolls are forecast to have risen by 115k in September following a slightly disappointing 96k increase in August. The payrolls announcement is arguably the most important data announcement of the month and any significant deviation from the expected figure would be likely to move the dollar. Have a good weekend.

* OMT is the TLA for Outright Money Transactions, the process by which the ECB will buy one- to three-year government notes or bonds. The abbreviation has been around for a month or so but has not yet gained currency.