The Banks Get Back to Work

Good day… And a happy Monday to all… First off, I would like to thank Chuck for allowing me to fill in while he is on vacation and express what a great honor this is for me. Alright… Enough of the sappy stuff. Here you go for today…

As Chris mentioned on Friday, the markets were very thin and the currencies traded in a tight range with a slight bias for selling the dollar. Without any economic reports released on Friday and things fairly quiet, there really wasn’t anything moving the markets, so a well needed breather was the result. This week appears to be a busy one in the data department, as we will see multiple economic reports released that could send the dollar back down, as most aren’t expected to show a pickup in the economy.

The only data out today will be February’s existing home sales. The general consensus among economists is for a drop to 4.85 million, which would be lower than January’s record low figure of 4.89 million. Existing home sales account for about 85% of the housing market, so the tighter credit standards and the fact that buyers still anticipate lower prices should continue to feed the fire and cause the market to keep taking on water.

Tuesday will bring us a couple of consumer confidence reports along with the Richmond Fed manufacturing index, both of which are not expected to be positive, and Wednesday will show some durable goods figures, new home sales numbers, and mortgage applications. Again, improvement in the housing market isn’t expected but durable goods are estimated to rise a bit, spurred by a rebound in commercial aircraft orders. Durable goods excluding transportation are expected to show a negative figure for a second consecutive month.

Both Thursday and Friday should be interesting as we will see the colors of some influential data. Fourth quarter GDP, personal consumption, and core PCE will be released on Thursday along with last week’s initial jobless claims. The markets may concentrate on Friday’s numbers as we will find out how effective the Fed’s moves have been with a gauge of February’s inflation via core PCE and consumer spending.

With the holiday on Friday, there really weren’t many news stories, but I found this one interesting. There is beginning to be speculation that the G7 may consider a coordinated intervention effort as a result of the dollar’s free fall. Deutsche Bank AG in Frankfurt says the dollar is likely to fall to $1.60 against the euro (EUR) on heightened concerns of a U.S. recession. Royal Bank of Scotland Group Plc. said the risk of intervention is increasing and would become severe if the dollar fell below $1.60.

The G7 said during its last meeting in February that excess volatility and disorderly movements in exchange rates are undesirable. With the G7’s criticism over the past few years on Chinese government intervention of its currency, some feel it would be difficult for them to change horses in the middle of the stream. The group meets next on April 12-13, so we’ll stay on top of this one.

The Financial Times ran a story that cited the Fed as being in talks with other central banks such as the BOE and the ECB about using taxpayer money to buy mortgage backed securities instead of financial institutions taking on all of the burden in order to restore confidence. These reports were quickly denied but they did acknowledge taking part of broader talks about how to ease turmoil in global markets.

Central banks from 16 Asian nations may invest more of their $1 trillion of foreign reserves in the region’s debt, as I saw a headline this morning saying that the Fed interest rate cuts reduced returns in the US. This is definitely not good news for the dollar if this actually materialized, as Asian investment in U.S. treasuries is what has kept our ship afloat. The looming U.S. recession means the world’s biggest economy may no longer be the best place for the region to invest those funds. Makes sense to me…why invest in a money pit.

I guess we’ll see if investors use last week’s sell off in both commodities and currencies to purchase at cheaper levels, and encourage those on the sidelines to jump in.

Currencies today: A$ .9050, kiwi .7937, C$ .9739, euro 1.5440, sterling 1.9845, Swiss .9851, ISK 78.82, rand 8.1592, krone 5.2664, SEK 6.1069, forint 166.80, zloty 2.2878, koruna 16.4850, yen 99.84, baht 31.48, sing 1.3925, HKD 7.7801, INR 40.2825, China 7.0553, pesos 10.7085, BRL 1.7319, dollar index 72.861, Oil $101.14, Silver $17.1550, and Gold… $919.40

That’s it for today…Well, the beginning of spring looked more like the beginning of winter here in St. Louis this weekend as we had a pretty good shot of flurries on Easter Sunday. It’s hard to believe our Cardinals home opener is only one week away…Game on! It was a tough weekend for me in our college basketball pool as all four of my teams lost, oh well. Anyway, it looks to be a busy day here on the desk, so gotta run. Have a Marvelous Monday.

Mike Meyer
March 24, 2008

The Daily Reckoning