Tuesday, October 10, 2006

Lies, Lies and Damned Statistics

EUR/USD 1.2561 Hi 1.2615 Low 1.2553
USD/JPY 119.45 Hi 119.53 Low 118.89
AUD/USD 0.7445 Hi 0.7464 Low 0.7435
EUR/JPY 150.04 Hi 150.24 Low 149.78

One set of statistics and suddenly there is no need to worry: the U.S. economy is doing just fine. The FED may be in PAUSE mode but there is no need to ease. The guys who work in the Statistics Department just found an extra 810,000 jobs. Not in September mind you. No, those came out at about 80,000 below expectations. But the real exciting news is that all the previous numbers were wrong anyway so actually things are looking pretty good. We think. Not that anyone really understands what is going on. All the explanations released have been opaque at best. And no-one is too clear about what Non Farm Payrolls are anyway. Except they are important. We think. And they give a good idea about what is happening to the economy. Maybe. Oh and employment is a lagging indicator anyway, which means that you can't really gauge what is going on in the economy by watching employment numbers. What you have to watch are the leading indicators. Things like credit growth. No matter.

The only thing the market knows is that BEFORE this data was released the whole world was waiting for the FED to announce a move towards monetary policy easing. Well not really but still the general idea was that an EASE was reasonable response to falling housing sales and prices, falling leading economic indicators, and a Philly Fed index which had the first negative reading in three years. Not to mention that the American consumer is already up to his eyeballs in debt, that online and newspaper advertising revenue are down, the Help Wanted Index is down. Oh and Factory Orders look weak, the yield curve is still negative and the word RECESSION is starting to make the rounds.

So armed with the NEW VIEW that rates in the States are on HOLD, the USD was bid Friday. And it remains reasonably bid. Now we have the big test. Can the market push on with the USD rally in the face of an overall outlook for the U.S. economy which has not changed? Even with an election on November 7, little more than happy window dressing is likely. For now the answer is yes. Yes buy Stocks, buy the USD and sell BONDS. The big new trend is the BOND market bear story. This one should be watched.

Meanwhile back in EuroZone Land on Thursday last week Trichet pretty much ruled out anything more than another 25 point hike in interest rates for 2006. Trichet suggested that monetary policy in the EuroZone remains accommodative but that longer term risks to economic growth are all to the downside. And those risks are ALL EXTERNAL.

Risk N°1: the OIL price. Risk N°2: the risk to international trade from protectionism. Risk N°3: existing current account imbalances. So, according to Trichet, growth in Europe could dive on another hike in OIL prices. Nothing new there. The other risk, according to Trichet, is that some countries will attempt to address their trade problems and current account imbalances in some unfortunate manner. And the country at the centre of these "Trade and Current Account Imbalances" is the United States which could, presumably, either attempt to close its markets to international trade or try to address the problem by engineering a USD devaluation.

Otherwise Trichet was fairly nonchalant about the impact of a possible U.S. economic recession on European economic growth. A 1% fall in economic activity in the USA would, according to his calculations, only reduce European growth by 0.2% or so. So right now there doesn't appear to be a huge concern in the EuroZone about the possibility that the U.S.A. slides into recession. Provided, of course, that it does not make ugly policy choices as a result. Trichet even joked that what happens in the U.K. is more significant for the EuroZone than what happens in the States. So for now the ECB is happy to go with another rate hike by the end of the year, though not at the next meeting, which would take short term rates to 3.5%. After that it's approach will be: wait and see. And what they will be waiting and seeing for will be the global economic environment.

The ECB certainly seems to have lost its hawkish tone. And, indeed, Trichet suggested that inflation could fall sharply at year end. So, although the reality on the ground remains pretty much unchanged, the fact that the ECB is no longer talking extreme vigilance and rate hikes into 2007 represents the news the market is happy to trade on.

GOLD 582.80
OIL 59.95

GOLD hasn't seen much in the way of selling pressure following the NFP numbers released Friday, despite the USD rally which followed. Buying interest remains solid.

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