* Waiting on G20 and the ECB...
* US home prices plunge...
* What will come from G20...
* ECB to cut rates, but no quantitative easing...
And Now... Today's Analysis!
The waiting game...
Good day... The markets will play a waiting game today, and
I expect the currencies to trade in a pretty flat range. The focus will
be on the G20 which starts tomorrow, and the ECB announcement which will also
be released tomorrow. So today I will share my views on both of these
topics, but first I will report on what occurred yesterday and overnight in the
currency markets.
The dollar climbed yesterday morning as data released showed US home prices
plunged at a record pace and consumer confidence continues to bottom. US
home prices fell nearly 19% in January according to the S&P Case Shiller
index. This was even worse than economists had predicted, and December's
numbers were revised down.
With housing continuing down, and employment prospects dim, it is no surprise
that the US consumer confidence numbers remained near record lows in
March. The Obama administration has been making an all out effort to try
and cheerlead US consumers back into the old 'borrow and spend' mentality, but
the bad economic data are making his efforts futile. US consumers
continue to be hit with bad news, and are going to need much more convincing
before they start to rush out and spend again. I know this probably won't
be popular with many, but is it really so bad for US consumers to be tightening
their belts? Yes, I know it may extend the recession, but I feel the US
consumer will come out of this much healthier if we can permanently break the
borrow and spend mentality.
The global imbalances, which contributed greatly to the situation we now find
ourselves in need to be reversed. The Chinese need to increase their
consumption, and the US needs to increase our savings. This is the only
way the world economy can move back toward equilibrium. So a depressed
and scared US consumer may be just what we need to correct these problems in
the long run. I think it is foolish and shortsighted to try and encourage
the US consumers to start their old borrow and spend habits; that is what
helped get us into this in the first place! (I doubt if you will see that spin
on things anywhere else!!)
Recent economic reports in the US had shown an indication of a pickup in
consumer spending, and a rebound in durable goods orders, causing a selloff in
the dollar and a nice rally on Wall Street. But yesterday's Chicago
purchasing managers index threw cold water on these nascent signs of
recovery. Today I expect to see additional indications the economic
slowdown will continue as we get the ISM manufacturing index, construction
spending, pending home sales, and US vehicle sales numbers.
We will also see our first indication of the monthly employment picture with
the release of the Challenger job cuts number and the ADP employment change
report for March. The Challenger number has already been released, and
showed the number of job cuts jumped 180% in March YoY. The ADP number is
expected to show another 663k jobs were lost in March, slightly lower than
February's 697k but still bad news for the economy.
But employment is falling everywhere. The European unemployment rate
increased to 8.5% in February according to a report released this
morning. This is the highest since May 2006, and was above
expectations. Japan also announced their unemployment rate yesterday,
which rose to 4.4% in February compared to 4.1% the month before. The
WorldBank and OECD released a report yesterday which warned surging
unemployment will cause the current economic downturn to deepen and
extend. The Organization for Economic Cooperation and Development (this
is why they just go by OECD!) predicted that global GDP will contract by 4.3%
this year as unemployment continues to grow. The WorldBank lowered its
growth forecasts for developing countries this year by more than half to just
2.1%. In this environment, countries such as China, India, Brazil and
Australia, which are predicted to beat these growth projections will continue
to be attractive targets for investment.
The deteriorating world economy adds to the urgency surrounding tomorrow's G20
meeting in London. The news media has set expectations unreasonably high,
with looking for a solution to the global economic slowdown to emerge.
Unfortunately I don't believe we will see much come out of this meeting.
The main focus of the meetings will be the establishment of new regulations for
the global financial system. Treasury Secretary Geithner laid out his
design plans over the past few days, which include greater regulation of hedge
funds and the extension of federal regulations into the currently unregulated
world of exotic financial instruments such as credit default swaps. It
would also impose tougher standards on financial institutions judged to be so
big that their failure would represent a risk to the entire system.
But leaders from Germany and France don't believe these plans go far
enough. In fact, President Sarkozy threatened to walk out of the meetings
if the G20 doesn't put more teeth in the regulations proposed by the US and the
UK.
But US financial firms still dominate the global system, and the job of
regulating these firms falls to Geithner and the US. So while the rest of
G20 may want to try and demand tougher regulations, the political landscape in
the US won't allow it, and Geithner's plan will probably end up
Meanwhile President Obama will join the host of the event, Prime Minister
Gordon Brown to try and convince others in Europe to follow their lead and put
together sizable economic stimulus programs to jump-start global growth.
The US has taken the lead on deficit spending (no surprise there!) with the
administration spending $12.8 trillion in their stimulus efforts, close to the
total GDP of the US for 2008.
But leaders from Europe worry about the inflationary consequences of these huge
stimulus projects, and are hesitant to load up more debt onto the backs of
their citizens. They don't want to risk the long term health of their
economies for a quick path out of the current economic quagmire. Can you
blame them? I know Obama is an excellent orator, but he is going to have
to be at his all time smoothest to convince these other leaders to follow his
lead. The UK and US economies aren't a picture of health right now, and
the quantitative easing measures they are pushing others to emulate are mostly
untested.
While global financial regulation will certainly be a topic addressed during
the summit, I can tell you a topic which won't get any traction: a move
toward a global currency to replace the dollar. For all of the press
China and Russia have garnered with their proposals the past few days, the US
will block any serious attempts to discuss an alternative to the US$.
Much of the damage to the credibility of US$ as a reserve currency has already
occurred. And regardless of whether an official alternative to the US$ is
found, foreign countries will continue to diversify their reserves out of the
dollar. Data from the IMF released yesterday showed the dollar's share of
official foreign exchange reserves fell last year, while the yen and euro
gained. The dollar accounted for 64% of the reserves, down slightly from
the month prior. As with financial regulation, each country has its own
agenda with regard to its reserves, and the trend away from US$ will likely
continue, no matter what is or is not decided over the next few days in London.
Basically, each leader to the G20 summit is showing up with their own set of
problems, and the US and UK's problems are some of the worst. To think
these leaders will be able to unveil a solution to all of these diverse
problems in just 8 days is ludicrous. While the meeting will hopefully
start us on the path toward global financial reforms, I am expecting the global
markets to be disappointed with the lack of progress after G20.
The ECB will be announcing their rate decision tomorrow, and are expected to
make a 50 basis point cut in their main lending rate. The main topic of
discussion on the currency trade desks is the question of quantitative easing
and whether the ECB will look to follow the US, UK, and Japanese central banks.
The media's inflation/deflation pendulum has started to swing back toward
inflation again benefiting commodities. Gold gained almost $10 overnight
as investors moved back into this inflation hedge. While the US and UK
are encouraging others to ignore the future consequences of pumping huge
amounts of liquidity into their financial systems. Commodities prices
benefit in two different ways from this quantitative easing. First, some
of the huge amounts of stimulus will be spent on infrastructure projects which
will increase demand for commodities. Also, if the stimulus works as
planned, the economies will start growing again which will cause demand for
commodities to increase. Finally, the liquidity which is being pumped
into the system will likely spur inflation, with commodity prices again moving
higher. So commodities, and those countries which produce/export them
will likely be some of the best performers going forward.
Went a little long today, so I'll end it here.
Currencies today 4/1/2009: A$ .6946, kiwi .5628, C$ .7913, euro 1.3269,
sterling 1.4416, Swiss .8777, rand 9.418, krone 6.7161, SEK 8.2415, forint
230.01, zloty 3.4397, koruna 20.4272, yen 98.85, sing 1.5215, HKD 7.7504, INR
50.73, China 6.8343, pesos 14.0859, BRL 2.3228, dollar index 85.43, Oil $48.52,
Silver $13.025, and Gold... 926.80
