QE’s Future Course

The course for QE’s not preset
It’s possible we’ll buy more debt
Of course it may be
A taper, we’ll see
We haven’t decided quite yet!

Chairman Ben was in the spotlight again yesterday, testifying before the House Financial Services Committee, and he continued to walk back any signs of imminent tapering of QE. His comments were underscored by the much weaker than expected housing data where Housing Starts fell 10%, to 836K (exp 960K), and Building Permits fell 7.5%, to 911K (exp 1000K). This was especially damaging because the US recovery, such as it is, has been highly dependent on a rebound in housing. If this data is not aberrational, we could be seeing much weaker GDP numbers going forward. Of course, that would be a boon for the stock market as it would imply no end to QE. In fact, once again we were treated to the spectacle of poor economic data and mixed/weak corporate earnings data driving an equity market rally. All markets continue to be completely beholden to US monetary policy, and that situation will obtain for a long time to come. Of course, at some point QE will come to an end as it becomes clear that the risks of inflating the Fed balance sheet further outweigh any possible benefit from modestly lower long term interest rates, and when that starts to happen, we will pine for the simple volatility we saw last month at the first mention of the word ‘taper’.

Amid the G3 currencies, the yen and Aussie dollar were the biggest losers overnight. Looking at the yen, it seems that the market is preparing for an LDP win this weekend in the Upper House elections, and a boost to PM Abe and his fiscal plans. As I have been writing, I believe this will be a catalyst for Abe to take the next step in Abe-nomics and as a result it will weaken the yen further. I expect that a test of the levels reached in late May, at 103.74, will occur. Overnight we saw Japanese Nationwide Department Store Sales rise 7.2%, its second highest increase in the last 10 years (second only to March 2012), and continuing its recent uptrend. It is this type of economic result that will encourage both Abe and Kuroda to keep pushing their easy money policies. And that is why the yen will continue to decline.

As to AUD, the story here continues to be intimately entwined with the Chinese growth story. However, as we continue to see more and more concern over just how slowly China is going to grow in the future, Aussie continues to suffer. Recent IMF comments, noting the risk for slower growth in China, seem to be the latest catalyst for Aussie weakness. And remember, the RBA is the only major central bank that doesn’t have to resort to QE to ease policy. They still have plenty of room to cut interest rates and have indicated a willingness to do so if they deem it necessary. We are still two weeks away from the next RBA meeting, but if we see weaker Chinese (and US) growth data in the interim, I expect that the RBA will be far more inclined to move, and the Aussie will suffer accordingly.

The euro is slightly lower this morning after the Greek Parliament passed legislation putting 25,000 Greek public sector employees on notice that they may be dismissed. So 6 years into the financial crisis and after a 27% decline in GDP and a default on their debt, the Greeks have finally gotten around to dismissing public sector workers. One wonders what their severance packages will be. I’m betting on 3 years at 90% pay. Nothing the Greeks have done has been sufficient to prepare the country to remain effectively within the euro. If it stays, it will be a basket case forever…literally forever. Meanwhile, the Portuguese continue to try to address their domestic problems with a weakened coalition government and a president who insists on a ‘unity’ government to fix things. Talks have been ongoing for 5 days between parties and still no agreement. This, too, is a nation that would benefit from the flexibility of its own currency. Alas its leadership is committed to eurocide (suicide by remaining in the euro).

The pound has had a mildly disappointing day as much better than expected Retail Sales data in the UK did not lead to any strength. It seems that the dollar’s modest general strength has been sufficient to offset the data, and traders are focused elsewhere for now.

This morning we see Initial Claims (exp 345K), Philly Fed (8.0) and Leading Indicators (0.3%), and Chairman Ben testifies to the Senate, so there should be some Q&A around 10:30. However, things are not shaping up to be too interesting, and I remain confident that Bernanke will not say anything that smacks of a taper for now. With no data tomorrow, my guess is the next big thing will be the Japanese elections Saturday night and any potential market moves on Sunday.

Good luck