MacroScope

German newspaper Handelsblatt has got hold of a confidential Bundesbank report to Germany’s constitutional court, which sharply criticized the European Central Bank’s bond-buying plan. This could be very big or it could be nothing.

Bundesbank chief Jens Weidmann has made no secret of his opposition to the as yet unused programme and since the mere threat of massive ECB intervention has driven euro zone bond yields lower for months there is no urgency to put it into action. But the OMT, as it is known, is by far the single biggest reason that markets have become calmer about the euro zone, so anything that threatens it could be of huge importance.

The key point is not the Bundesbank’s stance but how the Constitutional Court responds. It is due to consider OMT in June. Through the three-year debt crisis, when Berlin has reluctantly crossed red lines it has had to get the court’s approval. So far, it has always been forthcoming, though sometimes with strings attached. But if it took the Bundesbank’s assertion that bond-buying could “compromise the independence of the central bank” at face value, it is almost certain to have a long hard look. We already know that the court is a potential stumbling block to banking union as it has ruled that any future euro mechanisms would only be in order if Germany’s maximum liability was clearly defined.

Angela Merkel is speaking again having surprised many yesterday by wading into monetary policy, saying if the ECB were setting interest rates for Germany alone, it would have to hike. Key ECB policymaker Joerg Asmussen is also appearing in public.

Spain will unveil a new slate of reforms today. The government is trying to get growth going while continuing to toe the austerity line so the likelihood is that none of this will be a game changer. Changes to the pension system, including a speeding up of an increase in the retirement age, are expected. So are a review of jobless benefits, measures to tackle a growing energy tariff deficit and Prime Minister Mariano Rajoy will have to renege on a previous promise by making permanent tax increases from the last two years which were labeled temporary.

First quarter UK GDP figures will show whether Britain has succumbed to an unprecedented “triple dip” recession. Economically, the difference between 0.2 percent growth or contraction doesn’t amount to much, and the first GDP reading is nearly always revised at a later date. But politically it’s huge.

Finance minister George Osborne has already suffered the ignominy of downgrades by two ratings agencies – something he once vowed would not happen on his watch. And even more uncomfortably, he is looking increasingly isolated as the flag bearer for austerity. The IMF is urging a change of tack (and will deliver its annual report on the UK soon) and even euro zone policymakers are starting to talk that talk. It was very much the consensus at last week’s G20 meeting.

The government can argue that it hasn’t actually cut that hard – successive deficit targets have been missed – and that it does have pro-growth measures such as for the housing market and bank lending. But the inescapable political fact is that Osborne and his boss, David Cameron, have spent three years arguing that they would cut their way back to growth and that to borrow your way out of a debt crisis is madness. In fact, it’s arguably perfectly economically sane, given that if you get growth going, tax revenues rise and will eat away at the national debt pile.

RBC economist Tom Porcelli is such a curmudgeon these days. Still, given that he was one of the few economists that accurately predicted the possibility of a negative reading on fourth quarter GDP, maybe it’s not a bad idea to listen to what he has to say.

This week, he expressed concern about a rapid decline in U.S. productivity – and that was before data showing U.S. nonfarm productivity fell in the fourth quarter by the most in nearly two years.

Productivity declined at a 2 percent annual rate, the sharpest drop since the first quarter of 2011 and a larger fall than the 1.3 percent forecast in a Reuters poll.

How about living in a fast-growing economy with tame inflation, record-low interest rates, stable exchange rate and shrinking public debt. Sounds like paradise, doesn’t it? But Brazil may be starting to realize that this is also impossible.

Inflation hit the highest monthly reading in nearly eight years in January, rising 0.86 percent from December. It also came close to the top-end of the official target, accelerating to a rise of 6.15 percent in the 12 months through January.

That conflicts with key pillars of Brazil’s want-it-all economic policy. The central bank cut interest rates ten straight times through October 2012 to a record-low of 7.25 percent, saying Brazil no longer needed one of the world’s highest borrowing costs. The government also forced a currency depreciation of around 20 percent last year, aiming at boosting exports and stopping a flurry of cheap imports.

Narayana Kocherlakota, the head of the Federal Reserve Bank of Minneapolis, has made a habit of turning economists’ heads. In September, the policymaker formerly known as a “hawk” surprised people the world over when he suddenly called on the U.S. central bank to keep interest rates ultra low for years to come. This week, Kocherlakota arguably went a step further into “dovish” territory, saying the Fed needs to ease policy even more. He wants the Fed to pledge to keep rates at rock bottom until the U.S. unemployment rate falls to at least 5.5 percent, from 7.8 percent currently – despite the fact that, just last month, the central bank decided to target 6.5 percent unemployment as its new rates threshold.

Kocherlakota’s bold policy stance is probably even more dovish – ie.  more willing to unleash whatever policies are needed to get Americans back to work – than even those of Chicago Fed President Charles Evans and Boston Fed President Eric Rosengren, until now considered the stanchest doves of the central bank”s 19 policymakers.

So in an interview on Tuesday, Reuters asked Rosengren what he thought of Kocherlakota’s plan. Here’s what he had to say:

This post was based on reporting by Leika Kihara in Tokyo

Japan has crossed the monetary rubicon: the government is actively intervening in the affairs of the central bank, pressuring it to more aggressively tackle a prolonged bout of deflation and economic stagnation. The Bank of Japan is expected to discuss raising its inflation target from the current 1 percent level during its next rate decision on January 21-22.

Overnight, a Japanese newspaper reported the finance ministry and the central bank were considering signing a policy accord that would set as a common goal not just achieving 2 percent inflation but also steady job growth.

Key Japanese policymakers played down the prospect of making the BOJ responsible for stable employment like the U.S. Federal Reserve, but said a 2 percent inflation target will be at the heart of a new policy accord with the central bank.

After a “significantly better than expected” ADP employment report, Goldman Sachs has raised its estimate to 200,000 for the U.S. Labor Department’s December nonfarm payroll report due Friday, the firm’s team of economists said. Separately, initial jobless claims were higher than expected for the most recent week, but the Labor Department reported some holiday distortions, the economists noted. “Overall, the data since our preliminary estimate last Friday have been strong enough to prompt us to revise up our forecast for nonfarm payrolls to 200,000,” the economists concluded.

Goldman wasn’t the only firm to revise its estimates. Jeoff Hall, Thomson Reuters’ resident economist, counted as many as five, though not all of the forecast changes hinged solely on ADP.

The ADP report showed private payrolls expanded by 215,000 jobs in December, easily topping a median forecast of 140,000. Initial jobless claims totaled 372,000 in the week ended December 29, slightly more than expected.

The U.S. jobless rate, currently at 7.7 percent, remains elevated by historical standards. But it has fallen sharply from a peak of 10 percent in October 2009. However, that decline could soon grind to a halt, according to a recent paper from the San Francisco Federal Reserve.

Its authors argue that, because the slow but steady decline in the jobless rate has been in part due to slippage in the labor participation rate that is more a product of the business cycle than long-run demographic trends, as the Bureau of Labor Statistics presumes.

In January, the U.S. Bureau of Labor Statistics significantly reduced its projections for medium-term labor force participation. The revision implies that recent participation declines have largely been due to long-term trends rather than business-cycle effects. However, as the economy recovers, some discouraged workers may return to the labor force, boosting participation beyond the Bureau’s forecast. Given current job creation rates, if workers who want a job but are not actively looking join the labor force, the unemployment rate could stop falling in the short term.

Updates with Fed decision

The Federal Reserve on Wednesday took the unprecedented step of tying its low rate policy directly to unemployment, saying it will keep rates near rock bottom until the jobless rate falls to 6.5 percent. That’s as long as inflation, the other key parameter of policy, does not exceed 2.5 percent.

Jan Hatzius, chief economist at Goldman Sachs, however, said in a research note published ahead of the decision that the shift may not be very effective.

Would such a move be a good idea? We’re not so sure. Calendar guidance may be theoretically flawed, but it is working reasonably well in practice. Fed officials have managed to keep expectations for the funds rate in the next few years pinned near zero, and the market now understands that this is more of a commitment to the promotion of future economic recovery than an expectation of future economic weakness.

As Federal Reserve officials debate whether to use thresholds for inflation and joblessness to guide monetary policy, Friday’s jobs report may be a cautionary tale.  The idea of thresholds is to pick markers for potential policy change – an unemployment rate of 6.5 percent, for instance, as a guidepost for when the central bank might begin to raise rates – so that the market has a better idea of where Fed policy is headed. As the unemployment rate nears that level, the theory goes, investors will gradually start to price in tightening; if the unemployment rate rises again, they’ll price it out.

But some Fed officials, notably the hawkish heads of the Richmond, Philadelphia and Dallas regional Fed banks, oppose the idea. One reason: the unemployment rate alone cannot capture the state of the labor market. Friday’s report show why.

Unemployment in November fell to 7.7 percent, the lowest in nearly four years. But the decline was not a sign of labor market strength – far from it. People were giving up looking for jobs, signaling hopelessness, not hope.