Chris Gaffney

The European leaders were battling a pretty major storm that the ratings agencies helped create late last week when S&P cut the ratings on 9 euro-region countries. The most dramatic move was the loss of France’s AAA rating, leaving Germany as the sole AAA rated country in the currency union. Austria also lost its AAA rating while Italy and Spain fell by two notches and Portugal’s debt was cut to junk status. The ratings of Malta, Cyprus, Slovakia, and Slovenia were also lowered.

At least S&P did a good job of telegraphing their moves, having placed nearly all of the Eurozone countries on credit watch. The moves still had a negative impact on the currency with the euro (EUR) losing more than 1% versus the US dollar over the weekend. But as usual, the downgrades didn’t contain any new information, so they alone won’t cause a lengthy slide in the euro. Just look how quickly the US shrugged off S&P’s downgrade of our debt last year. ECB President Mario Draghi went as far as to question why investors rely so heavily on the ratings agencies, as these agencies are typically ‘late to the game’. This may sound like sour grapes, but Chuck and I have been questioning the timeliness of the rating agencies’ calls since they missed the housing debacle which spurred the US credit crisis of a few years ago.

But the downgrades do make it clear who is running things in Europe. France wanted to believe they wielded as much power as Germany when it came to setting policy in the EU, but the downgrade by S&P will definitely be a blow to their ego. We will get to see if there are any major changes in the power dynamic when European leaders hold a summit at the end of the month.

As predicted, the euro was able to shake off the negative moves below $1.265 following the rate cuts and rebounded to trade above $1.28 this morning. The euro rose after Spanish and Greek borrowing costs fell at auctions, easing concerns these nations would struggle to fund their deficits. Spain has a plethora of debt to refinance, but they have had a surprisingly easy time finding buyers for their auctions. Greece is in a bit more precarious position as they continue to try and negotiate better terms with their creditors. These ‘discussions’ stalled last week as investors don’t want to accept large losses on a proposed debt swap. The debt crisis in Europe is definitely not over, and there could certainly be many more negative moves by the euro. It will definitely continue to be a volatile currency market in 2012, but EU leaders have to hope investors’ attention is distracted by the US elections. Just maybe the competition for the top job here in the US will give EU leaders enough breathing room to try and work on a more permanent solution to the European crisis.

Moving back across the pond, the big news last Friday here in the US was the US trade deficit which ballooned by over 10% in November. The gap expanded to $47.8 billion, the widest since June, from a $43.3 billion shortfall in October according to Commerce department figures. At $47.8 billion, the gap was wider than any of the guesses submitted by dozens of economists to Bloomberg, and it’s the first time in five months the trade deficit grew. Higher oil prices are to blame for the increase in imports, and the European debt crisis has hurt US exports to that region. It is also a sign that domestic demand here in the US is outpacing demand elsewhere, perhaps a silver lining for the US.

Global demand will continue to falter according to the latest predictions by the IMF. The International Monetary Fund cut its global economic growth estimate for 2012 according to First Deputy Managing Director David Lipton. Lipton wouldn’t share any numbers, and the official forecast will be released next week, but the IMF’s chief economist said earlier this month that European growth would be “close to zero” and would cause a ‘substantial’ cut to the most recent 2012 global expansion estimate of 4 percent. Lipton said the bright spot of the global economy would be China, which he predicts will grow at a ‘reasonable rate’.

Several economists have predicted a hard landing for China, but both Chuck and I have consistently told readers that China’s slowdown would be controlled. The ‘soft landing’ which Chinese officials are trying to maintain seems to be continuing, as GDP in the fourth quarter rose 8.9% during the 4th quarter. Economists had predicted growth would slow to 8.7%, and any reading above 8% signals the soft landing is continuing. China seems to have been able to tap the brakes without sending their economy into a sharp downward spiral. This is good news for the global economy, as China will continue to be the world’s growth engine and help to push the global economy through the rough waters caused by the European debt crisis.

We won’t get any big data releases today, but Chuck will have plenty of economic data to report to all of you as there is an absolute ton of releases shoved into the final 3 trading days of this week.

Mike Meyer and several others on the desk came in on their day off yesterday to enter some trades into our new test system. Between transaction entry, Mike and I discussed last week’s economic data and what it may mean for the US going forward. Mike made the point that the spike in weekly jobless claims was blamed mostly on part time holiday help. But couldn’t the same be said about the reports showing improvement over the past month or so? I walked through a mall with my daughter over the weekend and couldn’t help but notice all of the ‘temporary’ stores which had shuttered. Apparently retailers are figuring out that a large percentage of consumer purchases occur around the holiday months, and have taken to just opening stores for a few months. This would definitely have an impact on employment, since these stores are only open for a few months.

Another telling piece of data released last week was the advance figures for December retail sales, which disappointed. The big shopping spree in December was supposed to be a sure sign that the US economy had turned the corner. But as I reported Friday, retail sales only showed a 0.1% gain. In fact, Mike Meyer pointed out that the number was actually negative if you look at the adjusted sales figure less autos. It looks as though the record-setting Black Friday sales were exactly what Chuck and I feared — one-and-done, with no follow through during the rest of the shopping season.

Here is more from Mike Meyer: “We’ll get more revisions down the road for December sales, so who knows where they will end up; but it doesn’t look good right out of the starter blocks. Consumer confidence in the US has risen sharply, but let’s see how confident everybody feels when the credit card statements begin to arrive. By the way… Consumer credit shot through the roof, so it looks like a good portion of those holiday gifts were purchased on plastic.”

Moving back to the currency markets, risk trades seemed to be back on following the positive debt auctions in Europe and the positive news on China’s GDP. The Australian dollar (AUD) was one of the best performers overnight, advancing to the highest level since the end of October. Aussie dollars are approaching $1.05 on the positive news. The Australian dollar also benefited from their AAA rating, one of only 12 countries that can claim the highest rating from all three rating agencies. Australia also has the developed world’s second smallest debt burden. The New Zealand dollar (NZD) also advanced as all commodity-based currencies benefited from a more positive global growth outlook.

Bank of Canada Governor Mark Carney is expected to leave interest rates unchanged today because of the economic risks posed by Europe’s debt crisis. Monetary policy has been held stable by Governor Carney for the past 16 months. Interest rates are still slightly higher than here in the US, and the Canadian dollar (CAD) continued a three-day rally versus the US dollar. The Mexican peso (MXN) has been performing well versus the euro and even the US dollar. The Mexican peso is the second best performing currency in the short year, moving 3.41% higher versus the US dollar. The number one performing currency during 2012 is the Brazilian real (BRL) which is up over 5% versus the US dollar. Brazil’s President, Dilma Rousseff is now pushing for smaller budget cuts in order to achieve the goal of a budget surplus before interest payments.

Then there was this… A story in The New York Times caught my attention, and raised my ire this weekend. The FOMC release transcripts of their meetings with a 5-year delay, and the Times reported on a Fed meeting that occurred back in 2006 — about a year before the subprime mortgage crisis rocked the financial markets. Here is an excerpt from the Times:

“The officials…gave little credence to the possibility that the faltering housing market would weigh on the broader economy. ‘We just don’t see troubling signs yet of collateral damage, and we are not expecting much,’ said New York Fed chief Tim Geithner, who now afflicts us as Treasury Secretary. ‘The transcripts of the 2006 meetings, released after a standard five-year delay, clearly show some of the nation’s pre-eminent economic minds did not fully understand the basic mechanics of the economy that they were charged with shepherding. The problem was not a lack of information; it was a lack of comprehension, born in part of their deep confidence in economic forecasting models that turned out to be broken.”

I rarely agree with much of what I read in the Times editorial section, but even they had to call out our Treasury Secretary and the FOMC for wearing rose-colored glasses. What makes us believe Treasury Secretary Geithner and his comrades are any better at steering our economy now?

To recap. France lost its AAA rating, and 8 other euro-area countries were downgraded by S&P, causing a selloff in the euro. But a positive debt auction in Spain has the euro retracing some of its previous losses. The IMF lowered their economic growth prediction for 2012, but we won’t get the actual numbers until next week. Good news regarding China’s GDP has investors moving back into risk currencies. The Brazilian real is the best performer in 2012, followed by the Mexican peso and commodity currencies of Australia and New Zealand. BOC Governor Carney is expected to leave interest rates unchanged, and finally, our esteemed Treasury Secretary was totally caught off guard by the subprime debacle of 2007.

Chris Gaffney
for The Daily Reckoning

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Chris Gaffney

Chris Gaffney is vice president of EverBank World Markets and the alternate author of the popular Daily Pfenning newsletter. Mr. Gaffney has been involved in the global marketplace since 1987, and is director of sales for EverBank World Markets. The Daily Pfennig is delivered via e-mail to tens of thousands of market watchers globally, providing commentary that allows them to stay on top of economic, currency, and market happenings. He is a Chartered Financial Analyst and holds degrees in accounting and finance from Washington University in St. Louis.

  • frans durobinet

    The most dramatic move was the loss of France’s AAA rating, leaving Germany as the sole AAA rated country in the currency union.

    I don’t think this is right Chris. Also the Netherlands and Luxembourg kept their AAA rating! And what about Finland?
    Salut, Frans

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