Friday May 30, 2008 - 16:20:16 GMT
Share This Story
Foreign Exchange Analytics - www.fxa.com
Forex Blog - Markets Misread Strength of US Economy?
Markets Misread Strength
of US Economy?
Looking at markets this week
there is an unmistaken theme resonating â€“ the US and hence global slowdown is
much less a risk than previously believed and inflation is on the move up and
demanding higher rates here and everywhere.
Well I am not buying
it. If any misread is happening it is in market participants
overestimating the strength of the US economy and its corollary â€“ overstating the
The idea that Q1 GDP growing
at a 0.9% pace against 0.6% in the advance release is somehow a confirmation of
the economy averting a recession and prepped for a significant acceleration is
preposterous. Home prices are falling at a rate faster than the worst
decline of the Great Depression based on the latest data from Case-Shiller for
home prices in March (down 14% y/y for top 20 metropolitan areas).
Incomes after inflation are not rising as the latest data on personal income
and consumption show. This is a consumer based economy and without a consumer
beset on spending and borrowing, no amount of export growth can offset a
consumer heading for the hills when it come to GDP. Be patient â€“
consumers have become accustomed to all sorts of cheap credit to finance
current consumption. Habits are hard to break. But tighter lending
standards (credit crunch), a (move to) shutting off of the home ATM machines
(HELOCS), surging food and energy prices (cutting into disposable income) and
falling home values tell me that the consumer has lots more adjusting to
go. Poof is what comes to mind when I think of the impact of the
Bush/Congress $600 per person economic stimulus for those earning under
$200K. Suspect this is the equivalent of offsetting higher food and
gasoline bills for about 5-6 weeks. Retailers are not reporting much in
the way of accelerated sales now that government tax rebates have been sent
out. High debt levels and low morale suggest other uses for the $600 than
putting it towards a Nintendo Wii and Guitar Hero.
My guess is that what is
happening in commodity prices that helped explain some of Thursdayâ€™s move in
fixed income (higher rates) was more about deleveraging in the oil market and
not related to some major turn in macro environment favoring growth, equities
and the dollar. Yes oil prices fell, stocks and the dollar rallied and
Treasuries sank. And lower oil prices will translate into greater
disposable incomeâ€¦but the real damage to disposable income from rising oil
prices is in the run up from $100 a barrel in oil not the difference between
$135 and $125 oil. I think this is more a case of the slippery end of the
tail wagging the dog.
The US economy is the most
challenged it has been in my memory since getting involved in markets in 1987,
ahead of the stock market crash. To lose sight of where the risks are
because the full burden of proof of a deep recession has yet to materialize at
month 10 of the credit crisis is no reason to bail on hard-landing view.
Fed easing is having little to no affect on real economic activity, not with banks
in lockdown behind soaring write downs and risk of more to come. Even the
Fedâ€™s updated economic forecasts for April released earlier this month have
unemployment rising ahead.
Plenty of easing and a surge
in commodity-generated inflation warrant a Fed-on-hold message, not a Fed
tightening message. Dallas Fed President Fisher is not Chairman Bernanke
when it comes to inflation and early rate hikes (like October) are all bark and
no bite from the likes of Fisher who voted against the last three rate
cuts. My read on the Dow Chemical CEOâ€™s dire warning of
pass-through inflation from his input costs surging was a call for government
action â€“ a real energy policy that addresses soaring oil. His concern is
that the consumer is going to fold in the face of soaring finished goods
prices, an anything but a message of confidence in future earnings.
Dell computer posted some
impressive earnings numbers after Thursdayâ€™s close. Foreign sales and
cost cutting were the drivers in the performance. The weak dollar and
demand holding up in advanced developing nations are supporting PC sales.
But foreign demand is at risk if I am right about a much slower US economy and
no amount of cost cutting will support PC sales if unemployment is rising and
I think government bonds
(global bonds â€“ Gilts especially) are undervalued in wake of the recent
sell-off. I think stocks are overvalued, though also recognize that even
letting the air out of oil will draw funds to this market in light of heavy cash
holdings and market participants showing greater capacity for taking risk
(non-bank participants that is). On the dollar I think we are getting
closer to a bottom but I am not quite ready to throw in the towel on the notion
the dollar will put in a new low versus the euro, CHF and Aussie â€“ lows are in
place versus sterling, NZD and CAD.
If I have any concession to
make on the markets it is that the eye of the hurricane is proving much larger
than I thought possibleâ€¦credit officials with restoring elements of confidence
to an otherwise hopeless situation. But no amount of Fed easing,
liquidity operations or stock market euphoria can prevent the back side of the
financial and economic hurricane from hitting asset prices and economic growth
And next week? I think
the euro will likely retrace more of this weekâ€™s downside versus the dollar in
light of what seems unavoidable â€“ ECB contemplating rate increase at next
Thursdayâ€™s Governing Council meeting â€“ which should see the light of day in the
post-meeting press conference. Donâ€™t get me wrong, I am not forecasting
an ECB rate hike, just the consideration of a hike in light of 3.6% HICP in May
for the Euro Zone and the single mandate of price stability.
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."