European Debt Problems...Again

Well, it’s another week to mark down in the history books and there won’t be any stars or special characters to make it stand out. It was fairly quiet in the economic department worldwide and things fell in place pretty much as expected. There was the obligatory curve ball here and there to keep us on our toes, but most of the week stayed right over home plate.

As I mentioned yesterday, all of the gains we saw from Wednesday were wiped out and then some as Asia and Europe took over the reins. It’s almost as if Wednesday didn’t even happen and we went directly from Tuesday over to Thursday. The currencies and metals are pretty much trading in the same range, but there are several currencies that have gotten roughed up a bit.

The dollar received its initial boost in Asian trading as we saw some disappointment with Australian jobs, but European traders pushed it to the top of the pile mainly as a result of the on again/off again debt fears; and the rumors about Weber didn’t help any. Before I get into the whole currency picture, I’ll touch on the data that had US traders carrying the dollar-buying torch.

We finally saw the report that everyone was waiting for this week, which was the weekly jobs figure, and they didn’t disappoint. The initial claims and the continuing claims both fell more than expected. The initial claims fell by 36K down to 383K and represents the lowest figure since July 2008. While this is definitely welcomed news and hopefully we keep seeing this type of improvement, there is still a lot of tunnel left before the light is bright enough to make an appreciable and sustainable difference.

The number of continuing claims decreased as well by falling 47K to 3.89 million. However, the story is a bit different here. While this info lags a week, the number of those who have used up their traditional benefits and are now collecting emergency or extended payments increased by 84K to 4.64 million. While the number of initial claims may continue to moderate due to lean staffing, the number of extended benefit recipients may continue to grow as companies remain reluctant to hire.

We also saw December wholesale inventories increase by 1%, compared with the expected rise of 0.7%, and an upward revision to the November figure from -0.2% to 0.0%. At the current sales pace, wholesalers had enough goods on hand to last 1.16 months, which is very close to the record low of 1.13 months from last April. The January budget of -$49.8 billion came out worse than December and is better than the initial estimate, but we were still $50 billion in the hole.

There are only two items on the docket today in the way of US data, which includes the December trade balance and the U. of Michigan confidence report. The trade deficit is expected to widen to a $40.5 billion shortfall in December, from the previous month of $38.3 billion, as a result of higher oil prices. Economists also see higher import numbers as inventories are replenished from holiday shopping.

The consumer confidence report is the preliminary or initial peek at this month’s number, which is expected to show an increase from January’s unexpected small drop. I guess they don’t interview the unemployed on these types of reports, because if they did, I would think figures would be coming in lower. Looking ahead to Monday, we have a full day with empire manufacturing, the import price index, retail sales, TIC flows, and business inventories. Looks to be a busy day indeed.

Moving into the currency world, there really weren’t any that could climb out of the hole from early trading. The Mexican peso (MXN) and Canadian dollar (CAD) were very close to breaking even, and oddly enough, the pound sterling (GBP) didn’t see the kind of selling pressure that other European currencies experienced. The worst performers were the Norwegian krone (NOK) and Swiss franc (CHF), both posting about 1.25% losses, with the others coming in somewhere between 0.5% and 1% shortfalls.

As I touched upon at the beginning, European traders did a number on the euro (EUR) before we were even sitting down with our morning coffee. They ran the euro down a full cent on growing concerns that Portugal’s funding costs were rising beyond sustainability. In fact, yields on 10-year Portuguese debt reached 7.64%, the highest since the euro introduction. The whole stir here is that if speculation keeps rising, Portugal will need to be bailed out if yields remain above 7%.

There were several other market disappointments so we definitely saw risk aversion grab a hold of trading and flow into the perceived safe haven of the US dollar. Asian and European stocks were soft as well so we had overall broad based dollar strength with no offsetting positive data elsewhere.

Immediately following the weekly jobs numbers here in the US, the euro fell down to 1.3577 but clawed its way back to the 1.36 handle for the better part of the day. The ECB reiterating the fact that the current interest rate environment still remains appropriate, coupled with the most hawkish member apparently calling it quits, have all but squashed any thoughts of a rate hike this year or early next year, at least for the moment.

Looking at the outcast of the day, the story in Norway was all about interest rates and the notion that they won’t increase as quickly as previously hoped for. The smudge came from the fact that the inflation rate dropped more than anticipated. The annual underlying inflation figure, which excludes energy and taxes, slowed to 0.7% in January from the previous 1% mark. This pretty much rules out hopes of a rate hike before the previously anticipated June hike that many economists were looking for and could give Norges Bank even more scope for a longer pause.

This inflation report was sort of a double whammy as the day before policymakers had downplayed the effects of the hot property market and higher credit levels. They basically acknowledged these higher levels and just said they weren’t alarming just yet. Norway doesn’t want to stray too far from euro zone monetary policy much like Canada to the US. I think the market reaction was a bit exaggerated but just gives us an opportunity to buy at cheaper levels.

We saw the same type of scenario out of Australia, only it was jobs that have some re-evaluating the interest rate path. There wasn’t any type of collapse in the employment figures, and in fact, they added 24K jobs in January and the unemployment rate held at 5%. The focus was placed on the fact that 8K full time jobs were lost. The preliminary estimate was a gain of 17.5K, so it beat that, but the full time loss is the disappointment.

Traders saw that news and ran with it in terms of causing delays to any future rate hikes. The RBA said last week that businesses are reporting that the labor market has tightened, and looking ahead, a gradual increase in wage growth is expected if labor does tighten more. They also said the flooding should have short-lived economic effects, so we’ll see if parity presents any area of resistance.

Chuck sent me some much-appreciated thoughts to share with you today, so here you go:

What I have for you today is a thought on Singapore dollars (SGD) – one of our fave currencies, and of the money show!

My two presentations today were standing room only and doors closed on people trying to show up late! WOW! Everyone likes to hear the facts…the truth…and “Chuck speak” I guess! I was beat when the day was over… Two down and two more presentations tomorrow! Friday’s presentations won’t be as “hard hitting” as the two today… One other thought on the show… This is the most people I’ve seen here in years! And the vendors are back too! I guess Big Ben is doing his job well, propping up the stock market…

So… Here’s my two cents regarding Singapore dollars… First of all, we can all agree that the Singapore government does things quite well, eh? So… This is what I imagined today… The Singapore government is watching the riots going on and the political upheaval that food inflation has caused around the world… And they think, “What if that were to happen in Singapore?” OK, being the good government types that they are, they go into preventive mode…

And what could they do to prevent food inflation from triggering upheaval in their country? Well… They prevent food inflation from happening! And what can they do to prevent that? They can allow the Singapore dollar to continue to get strong… Don’t I always tell you that a strong currency goes a long way toward fighting off inflation? Then I saw this…

The Monetary Authority of Singapore (MAS) announced that they would further strengthen the Singapore dollar if necessary to limit the effect of rising food prices. The government announced that they were keeping a close watch on inflation, and that the new budget would include measures to help Singaporeans cope with accelerating consumer prices…

I don’t see how any of that hurts the Singapore dollar, dear reader… Do you?

As I came in this morning, I saw a carbon copy of yesterday where the European traders have remained in the selling mood and have sent every currency, except the dollar, even lower. The fact that Egyptian President Mubarak is refusing to step down immediately is feeding into more safe haven trading.

This time is a bit different, though. The other so-called safe haven beneficiaries, yen (JPY) and Swiss francs, are getting sold along with the other risk assets. Gold and silver are even down some. At this point, it just looks like an excuse to prop the dollar so things don’t get out of hand too quickly in terms of the prior dollar selling.

To recap… The US dollar had a strong rebound and wiped out all of the gains and then some from Wednesday’s trading. The weekly jobs numbers and wholesale inventories showed improvement while the budget deficit widened. This morning we’ll see a consumer confidence report along with the trade deficit. European debt woes again resurfaced causing a selloff and spillover into the currency market. And traders were worried Norway and Australia would delay any rate hikes due to recent soft data.

Mike Meyer
for The Daily Reckoning

The Daily Reckoning