Monday, May 14, 2007
Trust Us, Everything is Under Control. Maybe
EUR/USD 1.3554 Hi 1.3561 Low 1.3523
USD/JPY 120.32 Hi 120.41 Low 120.02
AUD/USD 0.8334 Hi 0.8354 Low 0.8311
EUR/JPY 163.05 Hi 163.17 Low 162.55
Economic news out in the States has been consistently bad recently. That's no surprise. The U.S. economy had been powering along since 2000 on a wave of Debt Financed Consumer Spending and Rising Residential Housing Prices. That bubble has popped. Now we get the fall out. Regardless, Ben Bernanke has been telling everyone that, bad economic news or no bad economic news, no rate cut is in the pipeline. That message hasn't been bothering the cheerleaders though. Every time we have some really terrible economic news the message goes out: don't worry the FED will cut soon.
Only no-one seems to have told the FED. Don't worry everything is under control just the same. The Bush Administration might not know what a Plan B looks like but the FED sure does. They just haven't told us what it is yet.
Not that the U.S. Treasury market is trading on trust right now. While Stocks bounced Friday, supposedly because the FED will cut because the economy is in trouble and inflation is under control, the U.S. Treasury market is obviously not buying into that idea. Even when inflationary risks appear diminished and the U.S. Consumer Driven Economy looks sick, out there in Treasury Land the buyers are staying away. Actually it's worse than that: as the economy weakens U.S. Treasuries are seeing selling pressure. Though you wouldn't know it from the newswires.
Headlines on the failure of the U.S. to attract new (foreign) capital into the U.S. Treasury market have been few and far between. It's a bit of a no-no issue. Like Karl Rove's 5 million missing e-mails. If you don't talk about it (the "issue") gradually goes away. Let's just hope the Japanese or the Saudis or someone with cash turns up for the next Quarterly Refunding. In the meantime let's not make too much of an issue about this. OK? Let's talk Stocks instead. Stocks look good. New records. Take overs. Mergers and Acquisitions. Stuff like that. Obviously everything is under control.
And the weaker USD is great news too. It makes the U.S. more competitive. Not that being competitive is a problem or anything. Everyone knows that the U.S. is more productive than everyone else anyway. It's just that the U.S. Trade Account doesn't fully express that productivity gap which is so obviously in favour of the United States. The U.S. Trade Deficit INCREASED in March. But that really was all about the price of OIL. Otherwise everything was just fine. Eventually this productivity will combine with the weaker USD and see the U.S. Trade Deficit shoot back into surplus. Though no-one is actually holding their breath and everyone knows that the U.S. can continue to run a Trade Deficit with the rest of the world indefinitely. We think.
Last week the USD seemed to be buying into the Ben Bernanke message: NO RATE CUT. But with a string of bad economic numbers and signs that the U.S. Consumer has just about thrown in the towel, the USD is under pressure again. Sentiment is overwhelmingly USD negative. Oh and JPY negative.
And this could be a problem. For a long time no-one in the U.S. was making rude noises about the Japanese Trade Surplus and the weak JPY. That is no longer the case. Over at Morgan Stanley, Stephen Roach suggests that the pressure which had been largely directed at China and the Chinese currency, is now also being directed at Japan. The U.S. now wants the USD/JPY to weaken along with the Chinese Yuan. So I guess they also want the Japanese to keep their money at home. How they think they will fund the U.S. Government Deficit is beyond me. But then joining the dots is not a U.S. strong point. For now the Carry Trade Crowd continues undaunted. This could get interesting.
But it gets worse. It would seem that productivity, which roughly translates to negative real wages growth, is not enough. Free trade is not enough and a weak USD is not enough. U.S. policy makers have decided that the game is stacked against them and the answer, apart from forcing currency appreciation on Japan and China, is to increase protectionist measures. This will be good for world economic growth. Not. Someone should tell the Stock Market bulls.
OIL 62.96
GOLD 675.40
Commodity markets are struggling with conflicting trends. Do we have growth or a growth recession? Do we have a strong USD or a weak USD? Is the Middle East about to blow up or is the new U.S. strategy to TALK to Iran? And if so why on earth are they sending in Dick Cheney? I mean Cheney?
Welcome to Plan B: making it up as you go along. Well I guess it's better than rigidly holding onto a failed plan. But only just.
USD/JPY 120.32 Hi 120.41 Low 120.02
AUD/USD 0.8334 Hi 0.8354 Low 0.8311
EUR/JPY 163.05 Hi 163.17 Low 162.55
Economic news out in the States has been consistently bad recently. That's no surprise. The U.S. economy had been powering along since 2000 on a wave of Debt Financed Consumer Spending and Rising Residential Housing Prices. That bubble has popped. Now we get the fall out. Regardless, Ben Bernanke has been telling everyone that, bad economic news or no bad economic news, no rate cut is in the pipeline. That message hasn't been bothering the cheerleaders though. Every time we have some really terrible economic news the message goes out: don't worry the FED will cut soon.
Only no-one seems to have told the FED. Don't worry everything is under control just the same. The Bush Administration might not know what a Plan B looks like but the FED sure does. They just haven't told us what it is yet.
Not that the U.S. Treasury market is trading on trust right now. While Stocks bounced Friday, supposedly because the FED will cut because the economy is in trouble and inflation is under control, the U.S. Treasury market is obviously not buying into that idea. Even when inflationary risks appear diminished and the U.S. Consumer Driven Economy looks sick, out there in Treasury Land the buyers are staying away. Actually it's worse than that: as the economy weakens U.S. Treasuries are seeing selling pressure. Though you wouldn't know it from the newswires.
Headlines on the failure of the U.S. to attract new (foreign) capital into the U.S. Treasury market have been few and far between. It's a bit of a no-no issue. Like Karl Rove's 5 million missing e-mails. If you don't talk about it (the "issue") gradually goes away. Let's just hope the Japanese or the Saudis or someone with cash turns up for the next Quarterly Refunding. In the meantime let's not make too much of an issue about this. OK? Let's talk Stocks instead. Stocks look good. New records. Take overs. Mergers and Acquisitions. Stuff like that. Obviously everything is under control.
And the weaker USD is great news too. It makes the U.S. more competitive. Not that being competitive is a problem or anything. Everyone knows that the U.S. is more productive than everyone else anyway. It's just that the U.S. Trade Account doesn't fully express that productivity gap which is so obviously in favour of the United States. The U.S. Trade Deficit INCREASED in March. But that really was all about the price of OIL. Otherwise everything was just fine. Eventually this productivity will combine with the weaker USD and see the U.S. Trade Deficit shoot back into surplus. Though no-one is actually holding their breath and everyone knows that the U.S. can continue to run a Trade Deficit with the rest of the world indefinitely. We think.
Last week the USD seemed to be buying into the Ben Bernanke message: NO RATE CUT. But with a string of bad economic numbers and signs that the U.S. Consumer has just about thrown in the towel, the USD is under pressure again. Sentiment is overwhelmingly USD negative. Oh and JPY negative.
And this could be a problem. For a long time no-one in the U.S. was making rude noises about the Japanese Trade Surplus and the weak JPY. That is no longer the case. Over at Morgan Stanley, Stephen Roach suggests that the pressure which had been largely directed at China and the Chinese currency, is now also being directed at Japan. The U.S. now wants the USD/JPY to weaken along with the Chinese Yuan. So I guess they also want the Japanese to keep their money at home. How they think they will fund the U.S. Government Deficit is beyond me. But then joining the dots is not a U.S. strong point. For now the Carry Trade Crowd continues undaunted. This could get interesting.
But it gets worse. It would seem that productivity, which roughly translates to negative real wages growth, is not enough. Free trade is not enough and a weak USD is not enough. U.S. policy makers have decided that the game is stacked against them and the answer, apart from forcing currency appreciation on Japan and China, is to increase protectionist measures. This will be good for world economic growth. Not. Someone should tell the Stock Market bulls.
OIL 62.96
GOLD 675.40
Commodity markets are struggling with conflicting trends. Do we have growth or a growth recession? Do we have a strong USD or a weak USD? Is the Middle East about to blow up or is the new U.S. strategy to TALK to Iran? And if so why on earth are they sending in Dick Cheney? I mean Cheney?
Welcome to Plan B: making it up as you go along. Well I guess it's better than rigidly holding onto a failed plan. But only just.
Labels: Japan is the New China, Sentiment Remains USD Negative, U.S. Treasury Sell Off Continues
