US Jobless Claims Hit 500,000

The dollar was still stuck in a rut through most of yesterday’s trading, in spite of a weekly jobs report that showed jobless claims climbed to 500,000. But Bundesbank head Alex Weber dropped a bomb on the markets late yesterday and sent the euro (EUR) running for cover. The euro has fallen over one cent in early trading and is in danger of losing the $1.27 handle for the first time in a month. More on the euro in a sec, but first let’s review the jobs data, which dominated the news yesterday.

As I stated earlier, initial jobless claims in the US were reported at 500,000 last week, and the previous week’s claims were increased to 488,000. Just like previous weeks, the administration blamed temporary census workers for the big increase in claims, and continuing claims actually fell slightly. But the data certainly reflect the fact that if we really are in a recovery here in the states that recovery will be jobless (which definitely calls into question if in fact we are in a recovery!). Chuck spent his first full day at the money show yesterday but took the time to send me his thoughts on the jobs data late last night; so heerrreees Chuck:

Yesterday, the Weekly Jobless Claims came in at 500,000! UGH! That’s awful! This is the highest number of weekly claims since November of last year… So, instead of it getting better, as US Treasury Secretary Geithner would have you believe, the jobless claims are getting worse… And while the number could be goosed by census workers getting pink slips, I find this all to be appropriate in how’s it’s reported, for when the numbers were going up for census workers being hired, you didn’t hear the media hedging the numbers…

This data also doesn’t play well with the monthly number that will be reported in two weeks… HEY! Fed… Are you seeing this? Do you care? I don’t think so! I really don’t think so…

OK… The San Francisco Money Show (SFMS) is always interesting… But the attendance is down, folks… And those that are here are looking for a “hoola-hoop” for their investment portfolios… Those who are more realistic came to my presentation on Thursday. Things have really changed… I used to have rooms where people were sitting on the floor at my feet, but not anymore. I guess everyone understands diversification out of the dollar for their investment portfolios… Yeah, right! Oh well… All I can do is show up, and give people the opportunity to learn…

Thanks to Chuck for sending me those thoughts on the jobs report, and updating us on the San Francisco Money show. Hopefully attendance at today’s talk will be a bit better.

In addition to the jobs numbers, the Philadelphia Fed index and leading indicators were also reported yesterday. The Philly Fed index came in dramatically lower than expected, falling 7.7% versus an expected increase of 7%. But these regional Fed reports can be extremely volatile, and the markets largely shrugged off this number as a “one off.” The leading indicators came in just as expected, showing a 0.1% increase; but last month’s number was revised down to a negative 0.3%. So all in all a pretty poor data day for the US, but as we have reported, the currency markets are caught in a rut and none of this data was dramatic enough to push the dollar.

Late yesterday ECB member and Bundesbank head Axel Weber supplied the markets with the fuel needed to drive them out of this rut. Weber will likely take over the ECB from Jean Claude Trichet, so the markets listen a bit more closely to what he has to say. Bloomberg TV interviewed Weber yesterday, and he said it would be wise to keep the stimulus measures in place through the end of the year. This is a big change from a little over a month ago when the markets felt the ECB would be exiting their “quantitative easing” programs.

“Most of these discussions about the continuation of the exit I think will be focused on the first quarter,” Weber said in the Bloomberg interview. “It is clear that we need to re-embark on a normalization procedure.” Weber also suggested there are no inflation risks in sight, indicating that his traditionally hawkish tone is being toned down a bit.

The euro dropped by over a cent, and has finally broken out of the tight range it has been in over the past seven trading days. Chuck has been warning everyone that the euro was in danger of falling, and Weber’s interview seems to have given traders the go ahead to take it lower. But there still doesn’t seem to be a clear consensus on the short-term path of the single currency unit. UBS issued a report to their investors yesterday that predicted the euro would climb to $1.328 in the short term before sliding back down to $1.15 in three months. The currency strategists at UBS believe the US will be forced into further QE programs, forcing the value of the dollar down short-term. But Weber certainly caught them off-guard with his call for the ECB to do the same, and I’m sure the boys over at UBS are sorry they ever issued this report. It just shows how difficult it can be to try and predict the short-term fluctuations of the currency markets; and really drives home the fact that investors should be focused on a longer time horizon.

In a piece of good news for the EU, Greek budget cuts look to be sufficient to qualify them for the next round of support. The EU released a report on its website which stated, “The fiscal measures adopted by Greece so far appear sufficient to reach the 2010 budgetary deficit ceiling targets.” The European Commission will likely approve their share of a 9 billion euro loan to Greece at their meeting on September 9. Another step toward putting the whole European sovereign debt crisis behind them.

The US looks like it will also be increasing their reliance on foreign funding. The US Congressional Budget Office predicted that the budget deficit for fiscal year 2011 would be over 1 trillion dollars ($1.066 trillion to be exact). This is an increase from predictions in March, which pegged the deficit at (just) $996 billion. This would equate to 7% of our GDP in 2011. The US is unfortunately the leader in this category, as our 7% deficit/GDP compares to a predicted 2% deficit/GDP for the Eurozone and 2.7% deficit/GDP for Japan. Which developed countries have the best surplus/GDP numbers? Norway is by far the best at an astounding 19.93% surplus/GDP, and Singapore is second with a surplus/GDP of 8.12%.

Both the Norwegian krone (NOK) and the Singapore dollar (SGD) continue to be favorites of our trading desk. Both countries have tremendous economic fundamentals, which will support higher currency levels in the coming months/years.

The Australian dollar (AUD) is headed for its second weekly loss as investors have begun to increase their concerns regarding the global recovery. The high-yielding currencies have suffered recently as data showed that the US is not recovering as fast as the rest of the globe. Many investors are still convinced that the rest of the world will not be able to sustain a recovery without the help of the US consumer, and they could be right. But I think the new Asian consumers will step in to replace some of the purchases lost in the US. Both China and India continue to increase the size of the middle classes, and these “new” consumers will be able to step in and create new markets for both goods and services. This is why I still believe the long-term prospects of the “high yielders” is good; but short-term they will probably remain under some pressure.

Another high yielder that could be coming under some selling pressure is the Brazilian real (BRL). Brazilian Central Bank President Henrique Meirelles has recently signaled that slower growth in his country will likely be enough to curb inflation. Mirelles raised interest rates less than traders had expected a few weeks ago, giving some concern to some that inflation would quicken and force policymakers to accelerate future increases. But consumer prices posted their smallest two-month increase since 2006, and the slower growth in the US has quieted warnings of future inflationary pressures.

China’s remninbi (CNY) is headed for a weekly gain as a report showed that China’s current account surplus increased in the second quarter. The surplus rose 30% from a year earlier after a drop in the first quarter. Many have predicted that China’s central bank will allow the renminbi to appreciate at a faster pace in order to offset this growing current account surplus. But instead of trying to decrease exports, China is working to push the import side of the equation. “It’s the government’s first priority to boost domestic demand to sustain economic growth,” Ministry of Commerce spokesman Yao Jian said at a briefing in Beijing. Part of the maturing of the Chinese financial system will be a widening of the trading band the government has established for the renminbi. Look for bigger two-way fluctuations for the renminbi in the coming months.

To recap: US jobless claims hit 500,000, Axel Weber tossed a bomb and the euro fell over one cent. The US budget deficit is over $1 trillion, and our debt/GDP is one of the worst at over 7% while Norway leads the globe on the positive side. The high yielders are coming under some selling pressures and Brazil is looking to slow rate increases. And finally, the Chinese will probably let the reminbi fluctuate a bit more.

Chris Gaffney
for The Daily Reckoning

The Daily Reckoning