Data Show the US Recovery Isn't Strong
Good day. The dollar maintained its stronger tone yesterday, in spite of durable goods data, which came in slightly lower than predicted. Durable goods orders for February increased 2.2% versus last month’s revised 3.6% drop, and the ex-transportation number was up 1.6% versus a revised drop of 3% last month. Neither of these numbers met economist’s expectations, but the revision of last month’s numbers apparently offset this month’s failure to live up to expectations. MBA mortgage applications were down 2.7%, better than last month’s drop of 7.4%.
I probably misspoke when I said the dollar was stronger in spite of the poor data, since this is the pattern that has developed lately. Good data out of the U.S., showing the economy is getting stronger, lead to dollar weakness, and data that show the U.S. recovery may not be as certain or strong as some believe pushe the dollar higher. The dollar is being used as a “safe haven,” and this thought is supported by the yield on the U.S. 10-year Treasury, which fell again yesterday. As investors worry about the global recovery, they are seeking shelter in the U.S. Treasury market, which causes prices to rise and, conversely, the yields to move lower.
Today, we will get the GDP numbers for the fourth quarter of 2011, which is expected to have remained stable at 3%. The accompanying data, GDP price index, personal consumption and core PCE are all expected to remain unchanged from previous estimates. We will also get the weekly jobs data, which are expected to show another 350,000 filed for first-time unemployment benefits last week. Continuing claims are expected to remain at 3,350,000.
Treasury Secretary Geithner was on Capitol Hill yesterday and told congressmen that the U.S. economy is “regaining strength” but warned the recovery “will depend in part on events beyond our shores.” Sounds as if the Treasury secretary is starting to build up an excuse in case the recovery sputters during this election year. You can believe the administration will point to events in Europe as the reason if our economy doesn’t recover as quickly as they would like.
I give Geithner credit for not painting too rosy of a picture for the House Appropriations subcommittee. “While the economy is regaining strength, we still face significant economic challenges. Unemployment is still far too high, the housing market remains weak and the overall effects of the financial crisis remain an obstacle to growth.” Sounds as if Geithner and Bernanke are both on board for additional stimulus if we see any further deterioration in our recovery.
The Treasury secretary moved over to the Senate to address the Senate Appropriations Committee, and suggested Fannie and Freddie Mac should reduce principal on some home mortgages. “We’ve been encouraging Fannie and Freddie to take another look at the map, at the economics of the finance, because we think there is a strong case in some circumstances to help maximize return of the taxpayer,” Geithner told the committee.
As I reported yesterday, the huge overhang of foreclosed homes and those that are approaching foreclosure are keeping home prices down. Housing remains a vital piece of the U.S. economy, so the Treasury secretary needs to try and figure out how they can try to stop the bleeding. They have already kept interest rates near zero, and are apparently turning to a more-direct approach, having the two largest holders of mortgages (which just happen to be under government conservatorship) institute principal reductions.
Chuck will probably disagree, but there is some logic here, as it is probably cheaper to agree to a $20,000 principal reduction, instead of having to put the home into foreclosure and selling it. The risk is these principal reductions are taken and the homeowners still can’t pay, forcing them right back into default. Short sales are the simplest answer, and should definitely be given a “fast track” with Freddie and Fannie. But enough of the mortgage talk. Let me get back to something I actually know something about: the currencies.
The Japanese yen (JPY) was able to move higher again yesterday after a report showed retail sales rose more than expected in February. Sales increased 3.5% from a year earlier, the biggest advance since August 2010. The increase more than doubled economists’ predictions, who called for an increase of just 1.4%.
The yen also rose on “safe haven” buying, as U.S. data disappointed and an official over at S&P said Greece might have to restructure its debt again. There is also another factor that will probably move the yen higher today and tomorrow, as the Japanese fiscal year ends on March 31. Companies typically repatriate overseas earnings before the end of the year, forcing them to purchase yen.
Safe haven flows will probably continue this morning, as there was more bad news out of Europe. European economic confidence unexpectedly declined in March, according to a report released by the European Commission. An index of executive and consumer sentiment fell to 94.4, from a revised 94.5 figure in February. Economists had predicted a reading of 94.5, which would have been a slight gain, but a revision to last month’s figure caused the drop. First-quarter growth in the U.K. was revised lower, and another report showed disposable income in the U.K. declined, putting additional pressure on the BOE to increase their quantitative easing.
There was a bit of good news in the data released in Europe this morning as a report showed German unemployment fell more than forecast in March. The number of people out of work fell a seasonally adjusted 18,000 versus economists’ predictions of a drop of 10,000. The adjusted jobless rate in Germany dropped to 6.7%, the lowest in two decades. The German economy definitely looks resilient, and unemployment could continue to decline as the pace of economic growth accelerates. The big problem is that the debt crisis will undoubtedly return, possibly derailing the recovery in Europe’s largest economy.
Australian Treasurer Wayne Swan is trying to deliver the nation’s first budget surplus since the global economic crisis began; but he has voiced concerns that the global recovery may not be enough to generate an increase in revenue. “When it comes to the structural underpinnings of the revenue base, we are in a tough new world,” Swan said. “This is a crucial point: Even if we were to witness an enduring global recover, we should not expect to see a similar recovery in revenues.”
Swan’s cautionary tone caused the Aussie dollar (AUD) to drop as investors increased predictions that the Australian central bank would cut interest rates. Continued concern over the Chinese slowdown is also keeping downward pressure on the Aussie dollar, which has fallen just over 1% versus the U.S. dollar over the past two days.
The South African rand (ZAR) was the worst performer versus the U.S. dollar, falling over 1.6%. The rand had benefitted from a renewed interest in the carry trade, and has retreated as the markets have become concerned about global growth and investors have been in a “risk-off” mode. As global equity markets fall, the rand and other carry trade currencies will also probably fall.
Oil was down a couple dollars last night, falling to the lowest level in a week after stockpiles surged in the U.S. There was also some discussion regarding the tapping of emergency reserves in order to offset the recent price increases in the cost of fuel. The U.S. and Europe discussed an agreement on using strategic stockpiles to reduce the price of oil. Apparently, President Obama and U.K. Prime Minister David Cameron discussed the move earlier this month.
The drop in oil prices will probably have a negative impact on the Norwegian krone (NOK), Norway being a major exporter of crude. A report released yesterday said Norway’s jobless rate fell in March as record petroleum investments boosted economic growth and demand for labor. The unemployment rate in Norway dropped to 2.6% from 2.7% in February. Norway continues to be very popular with currency investors, as the country continues to have some of the strongest underlying economic fundamentals of any developed nation.
Chuck has mentioned the BRIC nations were looking to set up a multilateral bank to finance projects in the developing world. India had proposed the new supranational bank after worrying the European debt crisis and other Western financial demands are keeping the existing world banks from concentrating on the developing world. The BRIC nations will be holding a summit tomorrow to discuss the establishment of this new ‘world bank,’ along with further discussions on ways to spur trade and investment in their countries. Brazil, Russia, India, China and South Africa have been working toward more cooperation in policies. This is just another sign of how economic power is slowly shifting away from the developed world and toward the developing nations.
I will share another improvement the new WorldMarkets system will bring next week. Investors who use the Online Financial Center to enter transactions will see these transactions on a real-time basis. These transactions will now appear in a pending status as soon as they are received by the WorldMarkets trade desk. Currently, investors have to wait until the next day to see these transactions, which has been a source of some duplicate transactions and concerns regarding if, in fact, we received the transaction. The new system should go a long way toward solving this problem. In addition, WorldMarkets investors will be able to see their portfolio holdings graphed in a pie chart or bar graph, making it easier to view just how diversified your current holdings are.