imageFMX | Connect – www.fmxconnect.com - (Reported 10/05/2010)

 

 

 

 

 

 

 

Excerpt from MARKET MUSINGS & DATA DECIPHERING

 

IN A WORD, SURREAL


The U.S. dollar has weakened off again, which is one reason why the equity markets are on a more even keel today; however, we should be on a lookout for a countertrend rally in the greenback. The long euro trade has become quite crowded and it got a boost this morning from the service sector PMI, which came in at 54.1 in September from an earlier reading of 53.6. Make no mistake, the continent, together with the U.K., are every bit prone to a renewed economic contraction. Just look at Ireland and their banking systems, which are even more of a basket case than in the U.S.A.


A lot of attention is being placed on the Fed’s strong hints of QE2, but very quietly the ECB was in buying a huge $730 million of bonds last week — ostensibly the only backstop out there for Irish and Portuguese debt. Now, in a sign of desperation — soon to come America’s way, so it seems — the Bank of Japan cut its policy rate the grand total of 10 basis point to zero on the nose and at the same time said it would establish a $60 billion facility to buy JGBs and other assets. So this helped trigger a rally today in both the Nikkei (up 1.5%) and the JGB market (10-year yield down to 90bps).


At the same time, there were more verbal hints of additional FX intervention to weaken the yen, and a sign that no country wants a strong currency today. The Reserve Bank of Australia refrained from raising Aussie rates today at the policy meeting — the Aussie dollar slipped sharply (by over a cent) on the no-move. The Bank of Canada has followed suit in shifting its rhetoric from “hawkish” to “dovish” in a bid to clip the loonie’s wings, especially given the sudden slowing in the domestic economy.


All sorts of efforts are either being announced or contemplated to resist currency appreciation from India to Korea to Taiwan and now Brazil as well (the latter just doubled its tax on foreign bond holders, to 4%). Hence the allure of gold and silver as currency surrogates with a more inelastic supply curve (we could probably even include platinum in there).


QUOTE OF THE DAY GOES TO …


Lakshman Achuthan, the managing director of the ECRI (Economic Cycle Research Institute), in today’s Investor’s Business Daily: “The deflation risk, near-term, has moved off the table.”


Come again? Someone obviously forgot to notify Mr. Bond, who will undoubtedly be both shaken and stirred on this news.

 

TARGETING ASSET VALUES ... AGAIN?


Brian Sack, a senior official at the New York Fed, delivered a speech about the powers of quantitative easing and I just love that one comment to the effect that QE “adds to household wealth by keeping asset prices higher than they otherwise would be.” When will these guys ever learn that maybe, just maybe, these Fed policies aimed at targeting asset prices at levels above their intrinsic values is probably not in the best interests of the nation? As our friend Marc Faber likes to say, the “Bernanke put” is cut from the same cloth as the fabled “Greenspan put” — only the strike price is different.


DON’T PLAY BY THE OLD RULES


It is becoming obvious with each and every passing day that we have entered an entirely new and challenging environment of debt deleveraging and rising savings rates as it pertains to the household sector — home to over 70% of GDP. The outlook for employment growth, in particular, is quite ominous in this post-bubble cycle of expunging all the dramatic debt and asset excesses of the prior mania.


SECULAR CHANGE ... CAR SWEET CAR


No wonder the U.S. housing market can’t be revived even with all the government support; in this new frugal backdrop, a growing number of folks are deciding to live in their cars! This, in turn, is leading to overcrowded RV beach lots in California. See When Home Has No Place to Park on page A9 of yesterday’s NYT. This only happens in depressions, by the way.


SOME ADDED GREAT READS


Yes, there a few more articles we caught from yesterday’s press clippings worth mentioning. The first was The Trade and Tax Doomsday Clocks in the op-ed section (page A25) of the WSJ. Arithmetically, it is going to be difficult to avoid another contraction in GDP if the looming fiscal drag comes to fruition — and on top of that, trade wars with China. Second, Tony Jackson’s column in the FT (In Puzzling Times, US Profits Do Not Predict Recovery) also resonated with us.


PENDING HOME SALES: DRIVEN BY FORECLOSURE SALES


Pending home sales jumped 4.3% MoM in August, better than the 2.5% expected by analysts. The headline was marred a bit by the fact that the prior month’s 5.2% gain was taken down by a few notches to 4.5%. Regionally, most areas reported an increase, with the expectation of the Northeast, which saw sales decline by just over 2%. Generally, pending home sales tend to lead existing home sales by a couple months, so we would expect to see positive prints out of the next few existing home sales reports.

 

David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919

 

Source: Market Musings & Data Deciphering

 

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