Mixed US Data Keeps the Dollar in a Tight Range
Chuck headed on a multi stop cross-country trek to get out to San Francisco today, so he left the Pfennig to me. I think he said he had to fly through Dallas to get over to San Francisco; just one of the joys of no longer being a ‘hub’ airport.
There was a plethora of data releases here in the US yesterday, but the numbers offset each other keeping the markets fairly stable. Surprisingly strong industrial production data was offset by weak housing starts. Other data showed that wholesale costs in the US increased in July for the first time in four months, throwing cold water on those warning of deflation. Commodity prices were the main driver of the increases of 4.2% versus last year. The core price index (ex food and energy) was still up 1.5%, slightly higher than economists’ projections. The data will quiet those who are warning about falling prices and will likely keep the boys and girls over at the FOMC on a “steady as she goes” course.
Output from US factories jumped 1% in July and the important capacity utilization number ticked up a bit to 74.8%. Chuck has always told us to keep a keen eye on the capacity numbers, as they are a good predictor of economic expansion. The number illustrates what percentage of available output is being used. When the economy is humming, this number tops out around 85%; and any number above 80% is encouraging.
A year ago the capacity utilization fell to a low of 68.3 and has been steadily climbing since, a good sign for the US economy. But after digging a bit deeper into the industrial production numbers I found most of the increases have been due to higher spending by businesses and the US government. The US consumer really hasn’t been participating in this expansion yet, so there will be less of a need to restock inventories and this manufacturing data will probably see a drop in the coming quarter.
Offsetting the positive production and PPI numbers were the housing data, which showed a further reduction in new home starts. Building permits fell to the lowest level in a year and housing starts showed a smaller increase than what economists had predicted. The housing market is in need of another government stimulus, as mounting foreclosures increase inventory and continue to keep a lid on prices.
A final piece of data released yesterday showed that American households continue to have a better grip on reality than the folks in Washington. US household debt shrank by 1.5% in the second quarter and is now down 6.5% from the peak at the end of 2008. Consumers continue to build up savings and hold down spending as a record level of unemployment has them worried about the future. While this is great for the long-term health of the economy, Congress is more worried about the upcoming elections, and our administration desperately needs our consumers to start spending.
The euro (EUR) climbed back toward $1.30 after successful auctions of government debt by Spain and Ireland. I was reading through The Financial Times yesterday, and was shocked by the number of stories and editorials warning of another sovereign debt crisis. It seems many in Europe believe the debt crisis is far from over, but both Spain and Ireland were able to sell bonds at lower yields than the previous sales in July.
We continue to see a “risk on/risk off” pattern for the currency markets, with worries over the global economic recovery forcing investors into safe haven currencies of Japan, Switzerland, and the US. But recent data confirm that the global economic recovery isn’t really global. We continue to see a split recovery, with Asia and the emerging markets climbing out of the downturn much more quickly than either Europe or America. A strong Asian economy will support the commodity countries and will also help some of the big industrial exporting countries like Germany and Sweden.
This split has begun to re-focus currency traders on interest rate differentials instead of “safe havens.” Higher inflation rates in the emerging markets will force rates higher, encouraging investments into these countries. Safe haven flows into the US and Japan will decrease, causing a drop in these currencies.
But for now the yen (JPY) continues to attract investors and has approached a 15-year high. There has been a lot of speculation that Japan’s policymakers will be intervening to slow the currency’s appreciation. The yen has appreciated nearly 9% against the dollar this year, and Japan’s government will start debating on steps to curb the appreciation next week. Lawmakers from the ruling part urged Prime Minister Naoto Kan last week to consider intervening in the currency market for the first time since 2004. Japan has had a history of intervention, and certainly has the deep pockets to try and combat the currency markets. But intervention only has a short-term impact; Chuck has always told us that you can’t successfully fight the currency markets over the longer term. I question if the BOJ will want to try and take the markets on alone, and I don’t think they will find the US has any interest in helping to strengthen the dollar versus the yen. Europe will not be too keen on increasing the value of the euro either, leaving the BOJ to intervene on their own.
Gold held fairly steady yesterday as safe have flows were offset by those looking to lock in some gains. An article that appeared in Investment News yesterday detailed some pretty big bets being waged on the shiny metal’s appreciation. Hedge funds have become very bullish on precious metals and have made some huge bets on gold funds and mining shares. “Hedge fund managers have been investing in bullion and gold miners after the worst financial crisis since the Great Depression shook confidence in equities and currencies, and as increased government spending fanned speculation inflation may accelerate.”
We think precious metals investments should be a part of everyone’s portfolios. Gold provides an excellent ‘uncertainty hedge’ and also protects against future inflation. Gold has had a good run, but with all of the uncertainty in the markets I wouldn’t be surprised to see further gains in the precious metals.