In England excitement still reigns
As Princess Kate went to great pains
To finally apply
A name to her guy
We’re glad its not John Maynard Keynes
Meanwhile for the rest of her nation
The news was of growth and reflation
The GDP there
Has gone on a tear
Compared to the euro’s stagnation
Dull continues to be the watchword in the FX markets as we passed yet another session of minimal movement in the dollar. Right now we see the dollar modestly stronger vs. most currencies, but the movements have not been very large. The data overnight showed UK GDP growth of 0.6% in Q2, as expected, but confirming a much better number than we are likely to see anywhere else in the G10. However, the pound, in a classic sell the news response, is lower by almost 70 pips as I type. The contrast between the better data in the UK and the still weak data throughout the Eurozone continues to be a daily occurrence. For instance, Spanish unemployment (non-seasonally adjusted) fell to 26.3%, from its Q1 level of 27.2%. While that is certainly good news on a relative basis, it remains absolutely horrible! More than one-quarter of the Spanish workforce cannot find a job, and it appears the decline in joblessness is a result of temporary work in the leisure industry. So while the Spanish are trying to spin the improvement as important, it seems to me Spain remains a disaster. German IFO data was mixed with the Current Assessment slightly better but the Expectations slightly worse. Again, it is hard to get excited about Europe’s rebound, although certainly yesterday’s PMI data was almost uniformly positive. No matter what happens in the next several months on the continent, it seems clear that the ECB is going to keep short-term rates at their current level for quite a while yet in stark contrast to the US situation. It will be interesting to see how they respond if inflation in the Eurozone starts to pick up given their sole inflation mandate, although that doesn’t seem to be a worry for now.
At the same time, the US data continues to be mixed with yesterday’s New Home Sales numbers a bit stronger than expected, but that followed weaker than expected Existing Home Sales and Housing Starts data in the past week. We saw Philly Fed numbers the strongest in more than 2 years, but Richmond’s corresponding numbers fell back to their weakest in a year. In other words, the US situation is one of an economy transitioning from weakness to stability, and then hopefully stronger growth. At the end of the day, however, all eyes remain on Bernanke and his brethren on the Fed as the prime movers of both policy and markets. And so, the question remains, what will the Fed do when they meet next week? Certainly there will be no rate change, and it doesn’t appear there will be any change in the QE program right now, but the statement will almost certainly have to address the taper, as that concept has received so much attention during the past two months. My guess is they will mention the idea and maintain it remains a future endeavor based on the economic data. Given the pretty violent response by the markets to the idea, I am sure they will want to be as benign as possible and despite Bernanke’s ‘efforts’ to enhance clarity, I think the statement will go in for a little Greenspanian obfuscation. Until then, I think the dollar remains on better footing for lack of alternatives.
Today we see Initial Claims (exp 340K) and Durable Goods (1.4%; 0.5% ex transport), neither of which is likely to move the FX market but both of which will add to the overall discussion. However, the equity markets may see a bit more movement based on the numbers. Yesterday I wrote that I expected the equity markets to suffer based on the idea that stronger EU growth would result in the end of QE sooner rather than later. I was only marginally right yesterday, but equity markets have fallen further overnight and with the better UK data confirming this mini-trend, I would expect a strong Durable Goods number this morning to result in even worse equity performance. In addition, the earnings numbers have not been stellar, further weighing on the equity market and the entire endeavor continues to appear untenable to me. Remember, my thesis is that the equity market (and by extension most markets) is supported entirely by the concept of QE going on forever. Talk of the taper confirmed that hypothesis, especially as the Fed walked back the message. But if growth starts to pick up, we are in for a much more intense dialog on monetary policy, which can really only get tighter from here. And as I have written many times in the past, tighter monetary policy will lead to a stronger currency and weaker equities. I think in the current situation, this is especially true, so future USD strength (and equity weakness) remains on the cards.
There will be no poetry tomorrow morning, but I will be back on Monday to see if I have learned anything new (at all?) about the markets.
Good luck and good weekend