Who Will Be Fleeced

The latest news from the Far East
Shows China has slowly decreased
The pace that it grows
Which just might expose
Investors who’re sure to get fleeced

As we head into the dog days of summer, market activity continues to show periodic bursts of excitement. Given the constant refrain from the world’s Central Banks that they are focused on the data, it only makes sense that market participants follow suit. So the latest data we saw was Chinese GDP last night, which showed Q2 at 7.5%, in line with the (reduced) expectations and down from Q1’s 7.7%. Perhaps more importantly, we continue to see economists around the world cutting their forecasts for Chinese growth with the 2013 number approaching 7.0%, the slowest in more than 2 decades, and 2014 showing only a modest rebound. Given the recent comments from Chinese Premier Li Keqiang about numbers as low as 6.5% being acceptable, my sense is we are going to see a continued reduction in the pace of Chinese growth. Especially because the PBoC is showing no signs of loosening monetary policy in response to the cash crunch that continues to manifest itself there. And on top of this, Chinese home prices remain robust, so the housing market continues to approach bubble territory while the rest of the economy suffers. In other words, the Chinese have some difficult policy issues to address, and it seems that slowing GDP is one of their preferred solutions. This doesn’t bode well for either commodities or countries that export them; notably Australia, Brazil and South Africa; as well as for the Asian nations that export components to China like Korea and Taiwan. While Aussie is a tiny bit higher this morning, the trend remains firmly lower with a breech of 0.90 likely as soon as this week in my view. Calling all receivables hedgers in AUD, the 1yr forward is barely more than 2 cents, so all-in sales are near 0.88. That will look good in one year’s time with spot near 0.80!

Looking elsewhere, the ongoing saga in Europe continues to garner headlines as the periphery struggles to figure out how to break the cycle of despair while the Germans remain reluctant to advance any action that smacks of financing the PIGS ahead of the election in September. On that note, I couldn’t help but laugh at the following comment from the folks at the IMF: “The Greek program may still achieve its ultimate goal of keeping Greece in the euro area and of making it able to recover and grow,” the report said. The IMF and the EU “have had to commit many more resources and for a much longer period than initially envisaged and results remain deeply disappointing and the ultimate outcome uncertain.” So after 6 years and a 27% decline in economic activity, those in charge of the Greek “rescue” program are disappointed and uncertain as to how things will wind up. I can tell them, Greece will ultimately fall out of the euro because at some point, the internal politics will shift sufficiently to toss out the grand coalition led by PM Samaras, and the opposition platform of euro exit will be enacted. It is the only viable long-term solution. Freed from the shackles of German prudence, Greece will be able to revert to its former position; modestly corrupt, somewhat inflationary but sovereign in its decisions. I guess the greatest conundrum continues to be the fact that despite the ongoing problems in the Eurozone and the currency’s inherent failings, the euro remains near 1.30. While I continue to see further depreciation, it seems that we will need something much more dramatic to change the broad valuation matrix. If the Fed does begin to taper, I expect the euro to suffer somewhat, but I guess that buyers remain in place who will prevent any collapse for now. As Lord Keynes famously said, “Markets can remain wrong far longer than you or I can remain solvent.”

The data for this week could be of real interest to the FX markets, even though there is no employment data (save the weekly Initial Claims number). Here is what is coming:

Today Empire Mfg 5.0
Retail Sales 0.8%
– ex Autos 0.5%
Business Inventories 0.0%
Tuesday CPI 0.3%
-ex Food & Energy 0.2%
TIC Flows -$40.0B
IP 0.3%
Capacity Utilization 77.7%
Wednesday Housing Starts 960K
Building Permits 974K
Beige Book
Thursday Initial Claims 341K
Continuing Claims 2959K
Philly Fed 7.8
Leading Indicators 0.3%

So first thing this morning we start to get a better idea of how things are going in the US and, more importantly, whether we think that Bernanke will start to consider that taper more seriously. Keep an eye on the CPI tomorrow, for any surprise on the high side will likely see bonds suffer and the dollar rise.

Good luck
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