The market has found something new
Upon which its traders can chew
Will Chinese growth slow
To levels below
The 7% hitherto?
It seems that my time away has been marked by dollar disgust as the greenback has fallen against all the G10 currencies and most of the key EMG ones since I wrote Thursday morning. The US data since then has been mixed, with Initial Claims pretty much as expected, Durable Goods better as a whole, but led by the transport sector with the ex-transport result much worse than expected. Michigan Confidence printed higher than expected, so on the whole I believe this would have been more dollar supportive. However, it seems the market continues to look elsewhere for its cues with concerns over Japanese Fiscal policies evident as well as questions about the state of growth in Europe and China. I also believe that we have seen some position unwinding as the market prepares for this week’s onslaught of new information. Not only do we get the employment situation on Friday (with ADP on Wednesday), we have the FOMC meeting tomorrow and announcing any new policies on Wednesday afternoon. We also will see the first look at Q2 GDP Wednesday morning, so plenty to work with this week.
|Core PCE (Q2)||1.1%|
|FOMC Rate Decision||0.25%|
|ISM Prices Paid||54.0|
|Avg Hourly Earnings||0.2%|
Aside from the data we have to look forward to, the key market stories seem to be from both China and Japan. In the former, the announcement of an audit of local government debt has led to further concern over the growth trajectory there. Remember, the Chinese goal for 2013 is 7.5%, and for the decade as a whole it is 7.0%. We have already seen a number of economists release estimates below those numbers and last night we got the newest thoughts, with some scenarios pointing out a decline to 3% could be possible with correspondingly significant impacts on other economies as well as on commodity prices. (While this is not the baseline case, it was given a 1/3 probability, not insignificant.) Concerns over the pace of growth in leverage there have led to worries over ratings cuts as well as an overall destabilization of the country. Not in the sense of revolution, but more in the sense of an increase in protests and more pressure on President Hu and Premier Li to make changes forced by circumstance rather than ideology. It seems that even the Chinese central planners cannot control human nature and all its foibles. The significance here is that a much slower growing China will lead to much slower growth in most of the commodity exporting nations (Australia, Brazil, South Africa, Chile, etc) and corresponding financial concerns alongside likely currency weakness. It will also impact the global growth situation, one of the features highlighted by both the Fed and the ECB in their policy guidance (not to mention the RBA which features it prominently). In my view, this is the type of thing that will lead to longer term USD strength as the US finds itself far less reliant on the Chinese market for growth than almost every other nation around the world.
The Japanese story is also of keen interest to traders with comments from BOJ Governor Kuroda last night indicating that Japan can withstand the Sales Tax increase that is planned for next April. Remember, this has been a background issue as Japan finds itself caught between encouraging growth, which the tax rise will not help, and raising money to rein in the growth in the debt/GDP ratio, which is already the highest in the developed world at over 220%. While there has been much discussion in Japan over whether or not to delay implementation, it seems that with the BOJ on board, nothing will stop the tax increase. You can expect a significant increase in GDP in Q1 of next year as purchases will be brought forward ahead of the hike. The real question will be how the country handles more fiscal drag over time, and given the delicate nature of the current growth path, it is not clear all will work out well, especially if the situation in China lives down to the worst expectations. Right now, the market continues to buy yen on the prospects, but I see no reason to believe that the longer term path in the yen is anything but lower. The realities of a massive money supply expansion will continue to undermine any yen strength. And if anything, tighter fiscal policy will only lead to looser monetary policy, a combination which historically leads directly to currency weakness.
All this has left the euro as the least interesting place to be right now, and while it is marginally stronger over the past several sessions, it feels more like it is heading to the top of its trading range at 1.34, than preparing to break out to new highs for the year. Nothing has changed my view here either about eventual weakness, but I have a feeling that we may have another 1% or so of strength before bringing out the sellers.