US Data Comes in Stronger Than Expected
Well, it is tax day, which is not usually a happy day for the 51% of the folks who have to pay the taxman. Chuck would take the opportunity to break into the Beatles song right now, but I’m not as good with lyrics, so you will just have to hum it in your head. The dollar was down in trading yesterday, as most of the data released was positive and emboldened traders to move money out of safe havens. But overnight the Asian markets decided to take the dollar higher, and the Europeans are continuing to buy greenbacks. I’ll get to what caused the big change in a second, but first I will review all of the data we got yesterday morning.
Consumer inflation, as reported by the government, stayed relatively subdued during the month of March, rising just 0.1%. The core number came in right where it was expected, which was unchanged. The YOY numbers showed a bit more of a pickup with the overall number rising 2.3% and the Ex Food and Energy figure rising 1.1%. While these ‘official’ numbers show inflation remained at bay, our friends over at ShadowStats reported that the number was substantially higher if the Pre-Clinton era methodology was used. The YOY CPI as reported on ShadowStats, not seasonally adjusted, was well over 5%.
But the markets just want to believe what the government is feeding them, so inflation wasn’t seen as a problem and the focus moved to the retail sales numbers. Retail sales increased 1.6% last month, the largest increase in four months. Last month’s figure was also revised upwards by the Commerce Department. The numbers beat estimates and the stock markets surged after the reports. Earnings for a couple of big companies also came in higher than estimated which gave even more confidence to investors.
With all of the positive news out of the US, risk was back on. Global investors moved funds out of the dollar, pushing higher yielding currencies up. But the Fed Beige book started to cool things off a bit when it was released late in the trading day. The Fed’s assessment of the US economy was a bit less optimistic than the data released earlier yesterday morning. “Overall economic activity increased somewhat since the last report across all Federal Reserve Districts except St. Louis, which reported ‘softened’ economic conditions,” the Fed’s Beige Book reported. So maybe that is why we are a bit more pessimistic about the economic recovery here on the trading desk in St. Louis; our area’s recovery just isn’t going as well as the rest of the country. Or maybe we just are just living up to our state motto; our license plates used to have ‘Show Me State’ across the bottom. Folks in these parts aren’t easily convinced; we tend to want to see it for ourselves. So it is not really surprising that we are the only Fed District that is still looking for the recovery, which is mostly just hope and hype.
Fed Chairman Ben Bernanke didn’t sound too excited about the economic recovery during remarks yesterday. He told lawmakers there are ‘significant restraints’ on a recovery that he said would be ‘moderate’ over the coming quarters. The labor markets will probably stay weak for a while, and with no worries on inflation there is no reason for the FOMC to change a pledge to keep interest rates low for an ‘extended period’.
So the dollar stayed lower throughout the trading day, but renewed worries over the Greek bailout reversed the markets and sent the dollar higher. Yield premiums on Greek 10-year debt rose above 400 basis points in trading this morning, reflecting investor concerns regarding the EU-led rescue plan. A German newspaper reported that the EU aid package for Greece would likely total over 90 billion euros over three years, triple the 30 billion euro amount previously pledged. The parliaments of Germany, France, and Ireland must vote on whether to contribute their share of the loans to Greece, so the rescue package will continue to be called into question until these votes are over.
Concern also increased that Greece’s fiscal woes could spread to other euro-area countries. The EU said Portugal might need further budget measures this year to meet its deficit cutting targets, as the pace of economic growth stalls. The Greek crisis isn’t going away quietly, and will continue to give investors reason to short the euro.
China’s growth actually topped estimates, accelerating to the fastest pace in almost three years during the first quarter. Gross domestic product in China rose 11.9% from a year earlier, even higher than the estimates of 11.7%. Other reports showed consumer price gains were lower than estimated while property prices continued to climb. Talk of a onetime currency revaluation have died down somewhat, with most now believing we will see a resumption of the ‘slow and steady’ appreciation we saw from 2005 through 2008. This is what we have been saying in the Pfennig for a while now, so it is nice to see most of the ‘experts’ starting to agree with us. Regardless of predictions of the currency valuation, growth in the Chinese region continues to be robust. This strong growth will support commodity prices and keep a floor under the currencies of countries that supply China with their much-needed raw materials.
While the euro (EUR) was one of the worst performing currencies over the past 24 hours, the good news out of China enabled commodity currencies to hold their ground versus the US dollar. The Canadian dollar (CAD) held on to parity and actually reached a 22-month high versus the US dollar before trading back off. Higher oil prices and continued strength in the Canadian economy have encouraged investors to add to their positions in the loonie. Goldman Sachs helped the Canadian dollar, raising its forecasts for Canada’s dollar during the next three to 12 months. Goldman expects the Bank of Canada to raise rates in the third quarter, with some risk of a hike at the end of the second quarter. Higher rates, and higher commodity prices will combine to boost the Canadian dollar over the next 3 to 6 months.
Brazil’s real (BRL) advanced for a fifth straight day as investors poured funds into the higher yields available in Latin America’s largest economy. Like Canada, interest rates will be moved higher by the central bank, as the economy continues to grow. Commodity inflation continues to increase price pressures in the Brazilian economy and rates will be moving higher to combat inflation. While the central bank has tried to sell Brazilian reals to keep the appreciation down, they will not be able to continue to fight the flow of funds, and will be forced to allow the real to gain.
Data released this morning in Australia led some to believe the RBA will pause their aggressive monetary tightening. Data compiled by Bloomberg show a widening spread between the RBA’s cash target rate and the average mortgage rate charged by the nation’s four biggest lenders. It also shows retail sales and home-loan approvals declining as that gap surged. The higher mortgage costs may force consumers in Australia to pull back on their spending, which the data indicate is beginning to happen. This data could force the RBA to delay their next rate hike until later in 2010. But like Canada and Brazil, commodity prices and growth in China will continue to increase inflationary pressures. I still believe Governor Glenn Stevens will keep his aggressive stance on inflation, and rates will be going higher.
We will have another busy data day, with the weekly jobless claims and the TIC flows. We will also see reports of Industrial Production, Capacity Utilization, and the Philly Fed index. If these numbers come in strong, we could see this dollar rally stall out, as investors regain their confidence.