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Insight, patience and persistence

Tue, Apr 14 2009, 15:29 GMT
by Andrew Wilkinson

Interactive Brokers LLC  |  View company's profile

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Those attributes are the just tonic for the emergence of the U.S. economy and its people from the worst recession on record according to Fed Chairman, Ben Bernanke today. Mr. Bernanke sees a slowing in the ‘sharp decline’ in economic activity, which is a ‘first step’ towards recovery. He noted in an editorial piece in USA Today that, ‘the U.S. economy faces no problem that cannot be overcome by insight, patience and persistence.’ Possibly very true, but the comments are a far-cry from the earlier ‘green shoots’ that Mr. Bernanke thought he’d seen. But then again, economists have been pretty dire in their recent projections of bigger picture data and it’s only fair that Mr. Bernanke is allowed to get it slightly wrong from time to time.

The dollar is stronger today as economists once again botched the very data in which Mr. Bernanke harbors such hope. He noted that home sales, home building, consumer spending and sales of new autos had led him to be more optimistic about the plateau for activity. Economists had expected a 0.3% monthly gain for retail sales in March, but instead were treated to a 1.1% decline, while excluding autos, sales still fell 0.9%.

Producer prices were equally out of line with predictions of no change. Instead prices paid by producers fell 1.2% in March, while so-called core-prices, which excludes food and energy costs, were unchanged. It would seem that the economy is first of all not quite out of the woods. Auto sales, electronic store sales and restaurants led the declines in consumer spending last month. Second, there is a rather worrisome and persistent trend towards deflation that the world and its mother appears more willing to overlook on account of the massive quantitative easing further down the road than admit its current presence.

So the dollar rose against just about everything but the British pound today as investors sought sanctity from risk. The dollar gained against the euro to $1.3263 as dealers brace for a potential eighth consecutive monthly decline in the wholesale prices paid by producers in the Eurozone. Once again, the falling cost of energy inputs is weighing heavily on prices. However, before you start to believe that this is totally great news, consider the side effects of other manufactured or semi-finished products such as steel whose price has fallen. Recently steel producer Nucor warned over profits slumping into losses for the quarter as a result. Deflation is pervasive and difficult to remove once within a system, arguably more so than inflation.

Speaking of inflation, economists currently predict a monthly CPI decline of 0.1% to be announced Wednesday morning. Taking their recent track record, investors should pick any number they want to choose instead.

We noted in yesterday’s commentary that the yen might face a decline given the return of deflation within its economy. Today, however, it is flexing its muscles and has risen to ¥99.39 against the dollar and ¥131.68 against the euro. This despite the notion that the popularity of the carry-trade might be returning given the potential for a growth rebound in Asian, Pacific and commodity-sensitive emerging markets. It’s hard to make the claim that, given the dead-end nature of the route to safety in buying the Japanese yen in the heyday of the economic turmoil, its safe haven status has now returned.

Investors are searching for reasons for the continued rally in the British pound. The linkage between over sized earnings at Goldman’s is spurious other than to support the overall rebound in equity markets, which apparently bolsters the appeal of riskier assets, such as that of the near-bankrupt British economy. However, the reality is that the Bank of England and the government are well into the process of quantitative easing, unlike the mainland continent, which is mulling its plans as to whether or not to adopt such a remedy.

Today the Bank announced the purchase of £3 billion in government gilts, which will take this week’s total to £6.5 billion exceeding last week’s £6 billion. Overall the Bank has so far bought £28 billion of the £75 billion in corporate and government debt that it set out to buy. Investors can see a slow thawing of credit markets as the house is slowly rebuilt and so appear to have more faith in the pound than either the dollar or euro. The pound is pushing £1.8469 today against the dollar while the euro buys just 89.13 pennies from 90.10 yesterday.

Elsewhere the Canadian and Australian dollars face different outcomes from similar forces. The Canadian dollar has been very slow to latch on to the recovery theme, far less so than the playful Aussie dollar, which is pushing on resistance. Today the Canadian dollar has risen and buys 82.34 U.S. cents, while the Aussie is down to 72.68 cents as the U.S. stock market recoils from the afterburn of the weak retail sales data.

Published on  Tue, Apr 14 2009, 15:47 GMT

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