Prague Twin

Friday, August 04, 2006

Economic Report

Both the Bank of England and the European Central Bank raised interest rates yesterday. The BOE shocked the market with their decision, while the ECB's decision was widely expected.

Initial jobless claims in the U.S. came in higher than expected and the Sevice Index showed signs of slowing. This led to the thinking that perhaps the Fed would indeed pause in their rate hike cycle.

Lately all the focus has been on interest rates, so yesterday's drop in the dollar and rise in equities comes as no surprise. The Dow is playing with the 11,300 barrier again, but it will need more bad data today to confirm it's suspicion that the Fed will indeed pause when they meet next week.

Today, non-farm payrolls will be announced at 8:30 EDT. There is quite a lot of ambiguity around this number as usual. It has packed some big surprises of late. The general concensous is for 145K jobs to be added in July. However, some analysts are calling for only 135K. To make matters worse, the currency traders were calling for 155K, but have revised that down to 130K. With all of the data lately showing signs of a slowing economy, I wouldn't be surprised to see a shocker of a number. Something between 110K and 90K is possible, and this would send the Dow soaring. It would also be a feeding frenzy for those who like to short the dollar.

Hold on to your hats kids, this could be a wild ride.

UPDATE: Non-farm payrolls came in at 114K, much lower than expected and unemployment jumped from 4.6% to 4.8%. These were shockers but not as shocking as they could have been. Nevertheless, I had put my money where my mouth was and shorted the dollar. Needless to say, I made a handsome profit. The Dow got a bit of a lift early but has flattened out. I suspect that although everyone now believes the Fed will in fact pause, all this bad economic data is having its effect on buying confidence. Also, that 11,300 resistance level is proving to be tough to overcome with any follow-through.

7 Comments:

  • Jobs numbers came in under, unemployment rate rose, the Fed funds rate dropped to 18%.I haven't seen how the market reacted yet, but I'm sure it's just like last week when the GDP came in much lower than expected: "Hooray!!! The economy is slowing just enough for the Fed to pause!!! Hooray!!!"

    By Blogger reality-based educator, at 4:31 PM  

  • I need not have bothered, good summary.
    I am interested to see how the rising wealth of developing countries - convergence - plays out in all of this.

    By Blogger Cartledge, at 5:31 PM  

  • RBE,

    Pretty much, but fairly muted so far. The dollar is taking a beating though. $1.90 will almost buy you one pound sterling right now.... almost.

    Cartledge,

    When the market comes down off its cocaine frenzy then you will get to see the fallout. Give it about a year.

    By Blogger Praguetwin, at 6:04 PM  

  • Wow - the markets ended down after being up in early trading. I wonder what changed between ten in the morning when the Dow was up 80 and later in the day when it fell 20? Did the higher wage numbers scare them into thinking the Fed won't pause next week?

    By Blogger reality-based educator, at 7:13 AM  

  • You know, I was thinking about it and I break it down like this....

    According to your comment, the economy is slowing enough for the Fed to pause, which gives the market a lift, but this is pure speculation. All of the poor data eventually has to have some negative effect on the market.

    As you point out, the inflation signs are there, so it is not a sure thing that the Fed will pause, especially in light of all the other central bank hikes.

    Essentially, the argument that the economy is slowing and therefore equities should go up, only goes so far.

    By Blogger Praguetwin, at 1:56 PM  

  • There's nothing here that can't be solved by another tax for for the very wealthy. Yes, that's just what we need. Another tax cut for the very wealthly, perhaps coupled with bans on gay marriage and flag burning. These will certainly slow the Fed.

    By Anonymous Papa LeBas, at 5:45 PM  

  • I Get a Kick out of Tax Cuts for the Rich

    My story is much too sad to be told,
    But practically everything leaves me totally cold,
    The only exception I know is like kitsch,
    When I'm out on on a quiet spree,
    Fighting that old ennui,
    Then I suddenly turn and see,
    Tax cuts for the rich.

    I get no kick from champagne,
    Mere alcohol doesn't thrill me at all,
    Sometimes life's just a bitch,
    Except for tax cuts for the rich.

    Some like to rail at the gays,
    I'm told on talk radio that it pays,
    I suppose that it is has found a niche,
    But I like tax cuts for the rich.

    Flag burning lights some peoples' fire,
    Making them angry and nuts in their ire,
    To me it's just more of the glitz,
    But I like tax cuts for the rich.

    I adore Bill Reilly's televised death tax excoriations,
    Although it's obviously just more bloviations.

    I get no kick bashing Dems,
    If not for us, there surely would be no them,
    So tell me why should there be a hitch,
    In granting tax cuts for the rich?

    By Anonymous Papa LeBas, at 6:06 PM  

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