US Budget Deficit Forecast Increases

Did you hear on Friday that the Federal Budget Office has updated their forecast for the budget deficit this year? What was originally a forecasted deficit of $1.6 trillion has been improved to $1.47 trillion… While that might be considered an improvement it would still be worse than last year’s $1.4 trillion deficit, and looking further out, the forecasts get darker and darker.

Yes… I read that Friday night in my hotel room, the last room the hotel had available! Not that I wasn’t already at the boiling point, but then came across that story, and I immediately headed to the bar! (Not really… I called room service!)

The one day sell-off of the currencies and commodities, ended up being just that! A one-day sell-off! The currencies look pretty flat so far this morning, with nothing staring at me and saying, “Look at me!”

The BIG news on Friday was the results of the bank stress tests from the Eurozone, and just like I told you… They were pretty much worthless, much like the ones performed here in the US last year. Basically, in the end, the stress tests revealed that banks need to raise 3.5 billion euros of capital, which ends up being about 1/10th of the lowest analyst estimate… Which means… Now there are questions about whether or not the stress tests were tough enough… Ain’t that tough enough?

I have to think that eventually this week, we’ll see the markets begin to feel better about the stress tests, and return to risk assets… I see that Goldman Sachs, which has been beating the drum for the euro for a couple of months now, have raised their estimates for the euro (EUR), joining Wells Fargo, HSBC and Deutsche Bank, in predicting a stronger euro…

But just because these guys think the euro will get stronger, doesn’t mean it will… Look at Morgan Stanley, which told their clients to sell kiwi and buy dollars… They’ve now retreated, called off the trade, and booked losses… So… The BIG BOYS aren’t always on the ball, eh?

You have to take in all thoughts and weed out the ones that don’t make sense… Like owning dollars and Treasuries… But, we’ve been through all that, eh?

Since I just spent a week in Canada, talking about the Canadian dollar/loonie (CAD) seems appropriate, I would think… The loonie has been up and down like a ROTC soldier doing push-ups for every point my beloved Missouri Tigers score! (It’s a Mizzou thing.) I would have to think that rising oil prices would push the loonie higher this week, especially after the stress tests are now a thing of the past.

Yes, the Eurozone stress tests had far reaching tentacles, and if they had shown bad stuff, the risk assets all over the world would have felt the pain. But they didn’t, so… We carry on!

The higher yielding currencies are about to be dealt a minor blow, as Japanese regulations begin to control the amount of debt used to boost trading leverage… For years, and we talked about this before, Japanese housewives would supplement the family’s income stream by doing her own “carry trades”… The government now allows a 50 times leverage for committed cash… But, when we turn the page on 2010 to 2011, the leverage will be cut to 25 times committed cash….

One would think this to be a good thing for Japanese yen (JPY)… Which makes you go HMMMM! Because I believed that the Japanese government didn’t want a stronger yen. Well… They implemented this regulation, and the unintended consequence will be a stronger yen! DOLTS!

I always tell you that there are these unintended consequences when things are done and not thought out first!

In Australia… This is a BIG week… No wait, next week is the BIG week… No… They both are Big Weeks! First of all… This week, we’ll see the color of Australia’s latest CPI (consumer inflation) if it prints as badly, then I would have to say that my call for an August 3rd meeting rate hike would look to be on terra firma… I would say that a CPI print of greater than 0.8% for the second quarter would signal a rate hike.. So, look for that on Wednesday!

Across the Tasman, the Reserve Bank of New Zealand (RBNZ) will meet this week (Thursday) and I truly believe that they will raise rates by 25 BPS (1/4%)… But, the benefit that kiwi (NZD) will receive will be held by the statement following the rate announcement. Here, I think the RBNZ will try to water down the rate hike and talk dovish. If they do that, kiwi will drift… If they have a hawkish tone, kiwi will rise… Or least, that’s how I see the cards falling for kiwi this week…

Back here in the US, the data cupboard is chock-full-o-data this week… Today we’ll see New Home Sales data for June… Tomorrow it will be the S&P/CaseShiller Home Price Index, and consumer confidence. Wednesday, durable goods, and the Fed’s Beige Book prints. Thursday we’ll see the usual Initial Jobless Claim, and second quarter GDP (preliminary), along with personal consumption… So, a hot and heavy week with data…

Then there was this… I read this weekend that the number of US Banks that have failed so far this year reached 100! So much for our “bank stress tests?!” The real kicker, though, is that the number of banks on the FDIC’s list of “problem banks” is up to 775… You may recall that three months ago, the number was around 700… So, there’s been quite a few added, eh?

But not to worry… My employer, EverBank, is not among those “problem banks”! We just finished booking another impressive quarter, and, we’re rising like a bullet on the hit parade charts!

To recap… The currencies are pretty much flat this morning, awaiting the NY trading desks to open. The Eurozone stress tests revealed that about 3.5 billion euros need to be raised in capital, which was far less than forecast, and that fact should light a fire under the risk assets this week. The RBNZ meets this Thursday, and should be raising rates 25 BPS, and if Australia’s CPI that prints on Wednesday, is greater than 0.8% (second quarter) then we could see a rate hike there, too.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning