China's GDP Moderates

The currencies are in rally mode again this morning, after a strong, but not as strong GDP report from China last night. Chinese second quarter GDP printed at 10.3%, which is quite a drop from the 11.9% they printed in the first quarter of this year… But, I’ve got two things to say about this…

1. This is exactly what the Chinese government was attempting to do with its rate hikes, and reining in of bank reserves? There was also a printing of the latest inflation report, which showed a decline from 3.3% to 2.9%… AGAIN, this is what the Chinese government was attempting to do! So… All those people who said China’s economy was going to overheat and collapse… Well… They were plain wrong!

2. 10.3% from 11.9% is what I call “moderating”, not “collapsing”… When you’re talking about numbers this large, a 1.6% move isn’t that big of a deal, compared with smaller numbers falling 1.6%! I prefer to look at China’s GDP like this… For the first half of 2010, it grew 11.1%!!!

So, I’m somewhat surprised by the reaction of the markets to the Chinese GDP number… So far, it’s been positive! WOW! Maybe they get it! Of course we have the boys and girls here in the US this morning to impress, and you never know what direction they will go!

The euro (EUR) has traded over 1.28 this morning on the Chinese GDP news, and there was a successful bond sale in Spain this morning. The Spanish bond sale attracted greater demand, and the markets have taken that as an indication that countries like Spain, in the Eurozone, might not have problems funding their deficits.

The European currencies are all hanging on to the euro’s coattails this morning, while the Asian and Pan-Asian currencies are softer… Aussie (AUD) and kiwi (NZD) are softer this morning, but Norway is screaming higher.

Yesterday the currencies got a lift, and wasn’t it nice to see a fundamental reaction to the data? US retail sales disappointed, and the Fed’s FOMC minutes were even more disappointing… Here are my thoughts on these two…

Well… The BHI (Butler Household Index) was bang on again for the June print of retail sales… Here’s what I said yesterday in case you missed class… “The BHI (Butler Household Index) tells me the report will be weak…. And will not reverse the -1.2% decline in May that printed last month.”

Retail sales for June showed a decline of -0.5%… The second quarter was still positive, but given the -1.1% decline in May, and the -0.5% in June, I would have to say that things just are not as “rosy” as the government would have you believe. Maybe, just maybe, the labor problems are beginning to show up in retail sales… I say that because the biggest losers for May were vehicle sales and gasoline stations…. Building material stores also were negative for the month… No money for a car, or the gas to put in the old car, and no money to make home renovations… It’s just not a very good thing folks, and I don’t like the trend.

Well… I participated in a planning call for my “paid subscriber newsletter,” The Currency Capitalist, yesterday. And while talking to the other participants, I explained my thoughts about a double-dip, and soon we would hear the Fed talking about additional stimuli… And about twenty minutes after the call was over, the Fed’s FOMC meeting minutes printed, and guess what?

Let me read the words of The Wall Street Journal… “Federal Reserve policy makers raised the possibility at last month’s rate-setting meeting that further monetary stimulus may be needed if the economy shows more serious signs of slowing, according to meeting minutes.

Meanwhile, Fed officials rolled back their US economic outlook for the first time in more than a year, saying a soft job market will restrain growth.”

Now… I bet you are sitting there saying to yourself, “Self, how did Chuck know that we were going to need more stimuli when the government and President kept telling us how well we were doing?”

Well… I knew because I don’t believe the government’s lies and cooked books! All you have to do is look around, and see what’s really happening…

As if that’s not enough to make you lock the drawer that contains the sharp objects, here’s something that probably will!

I’ve said over and over again that home prices are going to drop another 10% this year, and that the housing meltdown is not over… Well check this out… The total number of vacant dwellings in the US increased to a record 19 million in the first quarter of the year, up from 18.9 million in the fourth quarter of 2009. As new homes continued to be constructed, inventory rose last year by 1.14 million to 130.9 million.

And demand for homes? It has circled the bowl folks… Absent the government’s  tax credit, the demand has gone away and can’t be found. Do you know what “shadow inventory” is? After a lender forecloses on a home, he or she now owns it. But he or she doesn’t always list a newly foreclosed home for sale immediately… That home is now a part of the lender’s “shadow inventory”…  There are estimates out there that say shadow inventory could reach seven million homes…

There you have it… It’s not a pretty picture, and the rot on housing’s vine goes deeper than what I just told you about… And people question by call that we’ll see a double dip… Pretty amazing!

Well, it’s Thursday, so that means we’ll see the color of the weekly initial jobless claims this morning… In addition, PPI for June will print, and then two of my faves, industrial production and capacity utilization. These two faves have shown some nice increases in recent months; unfortunately, I believe that June’s numbers won’t be so kind to them, as the writing on the economy’s wall began to show up in June…

Then there was this… Just about the time you think I can’t bring you any additional gloomy news, there was this story in USA TODAY…  Keep in mind that I only tell you these things to point out our useless governement spending…

“US spending on unemployment benefits soared to an annual rate of $145 billion in the first quarter, more than double what was spent in any previous recession, a USA TODAY analysis found. Despite this level of spending, more than 3 million workers could lose their benefits by the end of the month.”

Don’t get me wrong here, folks… I was unemployed at one time, and I called it my retirement. I understand the problems of being unemployed, but having the government go two years and still be paying unemployment benefits? That’s another story… And don’t let all this gloomy stuff get you down… If you’ve been a Pfennig reader for a while, then you know that I’ve been telling you all that these kinds of things would happen as the “wall of debt” hangs over us like the Sword of Damocles!

To recap… China’s GDP moderated in the second quarter to 10.3%, but the markets’ reaction has been positive, as it should have been! Spain had a successful bond auction this morning, and those two things have the euro hopping higher past 1.28 this morning. Retail sales and the Fed’s FOMC minutes disappointed yesterday, and the fundamental reaction to that was bang on for a change… The dollar was sold!

Chuck Butler
for The Daily Reckoning