The implications seem exaggerated by the investors' sensitivity and the some media accounts. First, the average of dollar borrowing per bank at the ECB has been higher. Even the cumulative amount is not indicative of a crisis.  Second, the borrowings cover quarter-end. There was an increase in borrowings and participation in June as well, just on a smaller magnitude.  

Third, part of the demand for dollar funding may be a function of the dislocation being caused by the new rules regarding US money markets. The preference for funds that invest solely in government securities appears to have driven up LIBOR yields. In turn, this is exacerbating extreme pricing in the commonly used cross-currency swap market, where the cost of transferring liquidity or hedging euro and yen exposure into dollar has risen dramatically. 

The new money market rules come into effect in the middle of October. The risk is that a previous buyer of short-term paper, US money markets, will have a considerably lower appetite. A new source of demand has yet to materialize. This warns that LIBOR rates may stay elevated in both absolute terms and relative to T-bills (TED spread). Traditionally, the TED spread was a function of credit risk as T-bills have the backing of the US government while Eurodollars bear the credit risk of the depository institution.  

At the end of the week, the US reports September employment data. Although non-farm payrolls are difficult to forecast, we note that four pieces of data point to a strong report. Weekly jobless claims have fallen since August. The BLS data found about 50k more people than average missed work in August due to the weather. Most of theses should be expected to have returned. A job availability measure, embedded in a recent consumer confidence report, rose to its best level since 2008.  Reports indicate that the withholding tax (from paychecks) rose 6% in September.

Not only is there scope for an upside surprise to the median market guesstimate of 170k, but other details of the report are expected to be constructive, including average hours worked and hourly earnings. Although pricing of the Fed funds futures strip continue discounts about a 50% (50.6%, according to Bloomberg) of a hike this year, we think the bar to a December hike is relatively low, and the jobs report will more than meet it. 

If the market is under-pricing the risk of a December hike, it appears to be exaggerating the likelihood of a November move.  Bloomberg's calculation estimates that market pricing is consistent with a 17.1% chance of a hike next month. The CME's calculation puts its 10.3%, while my own calculation puts at 7.5%.  However, that is just the math.  Away from the abstract computation, we want to say that there is no chance of a hike a week before the US election. There is simply no precedent for it, and that urgency is not such that would demand a violation of this precedent. 

Claims that the Federal Reserve has not raised rates this year (yet) is based on some political calculus is wide of the mark, even though we thought a hike could have been prudently and cautiously delivered already this year. Our error lie not with under-appreciation of political leverage, but in not sufficiently recognizing the extent of the inventory-investment cycle (slower cyclical growth) and difficulty in getting the domestic economy and global developments to be aligned. 

Growth is accelerating here in Q3 and broadening.  It will still snap the string at three consecutive quarters of less than 2% growth.  The Atlanta Fed GDP tracker says 2.4% growth, while the NY Fed's tracker puts it at 2.2%. Consumption rose 4.3% in Q2. Last week's data confirm a slowing around 2.7%, according to the Atlanta Fed, which matches the past four quarter average. Despite the talk of insufficient aggregate demand, US consumption, which is a little more than 2/3 of the economy, is not the problem. Inventories will be less of a drag, and the net exports may contribute positively to GDP.  

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