Prague Twin

Friday, July 07, 2006

Economic Report

I'm not calling it a weekly report since it has been weeks since I reported.

Suffice to say, my predictions have been pretty good so far, especially vis a vis EUR/USD which nearly no one cares about.... but they should.

I had said that the EUR/USD would stay between 1.26 and 1.30 for quite some time. It stayed there for a few weeks. Then I said we could see a correction to 1.25. Well, the correction came and went, and now I see the all clear for a run past 1.30, maybe even a new record in a few months time. Of course, the ECB will do everything in it's power not to let that happen becasue it is bad for exports. Evidence? They kept rates on hold at 2.75% as expected and yet the Euro still strengthened mildly on that news. They hinted that they could raise the rate at any time, not just at the meetings. Do they think they can slip a rate hike in and no one will notice?

I had also said that I expected to see a bounce in U.S. equities by the end of the week (on June 10th). We did see that. It has been topsy-turvey since then with no real direction until last Thursday. I had mentioned on June 10th that Bernanke had all but promised a hike to 5.25% with his comments. I had never doubted that the rate would go to 5.25% but the market had. However, by last Thursday, Wall Street had priced in the hike (the currency traders priced in the hike shortly after the June Fed meeting which is why we saw the correction in the EUR/USD down to 1.25).

As a result, there was little reaction to the rate hike, but Bernanke's statements sparked a fresh round of enthusiasm on Wall Street, and a fresh round of dollar selling. His comments were interpreted as less hawkish which has the markets speculating that there will be a pause in the rate hike cycle. I still think it is 50/50 at least (favoring another hike if I had to pick now).

This focus on rate decisions leaves us in a funny spot where bad data from the US is good for Wall Street. For example, later today the jobs report comes out. This used to be THE major piece of data, but in recent years it has lost much of it's significance. Nevertheless, a bad number will tell the market that the Fed will indeed pause. There are other signals (like slumping ISM data and a negative number for construction spending this week) that indicate the U.S. economy is slowing. However, if Wall Street interprets this as a sign that the Fed will pause, we could see a rally on Wall Street, and more dollar weakness.

Initial Jobless Claims came in yesterday near expected (313K). I will update this post after the Non-Farm Payrolls and inflation number come out in a couple of hours. I'm not expecting any huge surprises (but there are some rumors that we could see an abysmal number just like in 2004). The forcast is for less than average. If it is much lower than expected, look for exuberance from Wall Street and a sharp drop on the dollar index as traders rejoice in the belief that the Fed will pause to stimulate growth.

Oh, did I mention that Oil has set a new record twice this week? It now hovers around $75 a barrel. How the U.S. economy continues to shrug this off is beyond me. It just goes to prove how resiliant the U.S. economy really is.

UPDATE: Non-Farm Payrolls came in at 121K about 40K less than expected. The dollar took about a 1% hit as I expected. Let's see what Wall Street does in reaction to the news. (Side note, average hourly earnings were up .5% which will have the market worried about inflation. One think I hate about Wall Street is that a rise in hourly earnings is bad news for Wall Street. Remeber that the next time someone tells you that the economy is doing really good. Yea, it is doing great except for that damn raise in hourly earnings.) Read about the news here.

UPDATE 2: No, Walll Street did not like that news at all. DJIA is down nearl 135 points or 1.2% for the day. At one point it looked to be one of the worst days in the last 3 years. We will see lots of those with increased volatiltiy: best and worst day in years. The point is that bad corporate news (especially from 3M), inflation worries (3.9% year on year increase in wages), and slow growth indicators (lagging ISM data, robust initial jobless claims and two months of disappointing job creation) are indicating a period of stagflation dead ahead. A recession at least. Nevermind the inverted yield curve (yea, arch look that up).

For all the clamoring about how great the "Bush Economy" is, let us look at where we are. 5% growth with very little appreciation in working class incomes. The moment that wages start to increase (i.e. when the working man starts to get his very small piece of the pie) the whole thing threatens to come crashing down. What a great system!


  • Jobs: This used to be THE major piece of data, but in recent years it has lost much of it's significance.
    Who drives the significance of the various factors? For eg, if it is analysts, does that change the thinking on the streets?
    I’m still toying with those Aust indicators - unemployment rate, inflation and interest rates
    Bearing in mind that the ordinary Joe is not market sophisticated, those more traditional factors might well talk to him still.

    By Blogger Cartledge, at 6:04 PM  

  • All I know is, I don't get it and I am glad you can explain it to me..thanks Mike :)

    I am one of the following: What do you mean my bank account is empty..I still have blank checks. :p

    By Blogger dusty, at 6:44 PM  

  • The volatility in the markets is pretty scary. Last week after the Fed meeting, the Dow went up 217. It's been following a pattern of large ups and downs since. The AP Business Wire put the market outlook this way:

    "The early losses illustrated the acute balance investors, perhaps unrealistically, are seeking. On the one hand, a strong economy could spark inflation, but a weak economy would eat into corporate profits and send stocks lower. While the Federal Reserve seeks to maintain that balance, the selloff reflects investors' chronic worries that the balance will shift, or has already.

    'You got people wondering here if the Fed has already overshot on rates,' pushing them too high and halting economic growth, said Bill Groenveld, head trader for vFinance Investments. 'And that fear has the market jumping over every little thing right now.'"

    It won't take much to really spook the markets. That's why I just rolled my eyes last Thursday when the markets went on a splurge and the CNBC talking heads were sounding as if Wall Street was headed for a big rally. Things are just too volatile right now for any lasting rally. Instead the Dow keeps treading between 10,900 and 11,200.

    By Blogger reality-based educator, at 5:04 PM  

  • C,

    One thing that really infuriates me is that there is no answer to your question. It is sort of like whatever the analysts decide is significant is significant. There was a Yen rally about a year ago before the Chinese revaluation where the Yen was being given strength as a proxy currrency for the Yaun. Why then? No one knows. Right now it seems to be all about interest rate decisions. The Fed cycle, the Eureopean resistance to hike, and the biggest story of all: when the BOJ starts to tighten. That is when things will really start to move.


    You have hit it on the head. I once gave myself some credit for sparking your interest in this field but now I can see that we have shared this interest for some time. Very perceptive.

    On the one hand the market looks for balance, and yet at the first sign of smoke (last Thursday) they wax exuberant. Let us not forget that the exuberance that led to the 11,700 spike was caused by a belief that the fed would pause at 5%. You and I (and everyone in the currency trading world I might add) new for a a fact that they would not pause. Wall Street guys are not that stupid (and one could argue they are a lot smarter than you or I) which begs the question, what is up?

    I see a lot of guys talk bullish all of the time. They want people to buy in on what they are already in on and then when they hit their target, they sell without remorse. Trust me, I feel no guilt getting out of a trade when I know everyone is still long on it. I'm sure guys on Wall Street feel less.

    One silver lining: if you look at the 3 month Dow chart, the down trend has been broken twice on a technical analysis. It is stretching and that turtle market you spoke of is starting to really take shape. We just call it sideways trading. Also, last week, before bernanke's statements, 11,100 provided a cap for 3 strait days. Now, that level looks to be providing some support.

    Look for a bounce on Monday.

    By Blogger Praguetwin, at 6:31 PM  

  • This comment has been removed by a blog administrator.

    By Blogger Cartledge, at 10:25 PM  

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