Bloodletting

So the bloodletting seems to be continuing in the equities market. The Dow closed down 80 points yestere day and is down almost 30 today, but the key will be the resistance turned support level of 11,300.

I've been missing my favorite currency analyst as she was away in Asia doing a seminar, but now she is back and has some choice words about the U.S. economy this morning. In the words of the demi-god Ms. Kathy Lein....

The US dollar is much weaker today against its counterparts. Having just returned from giving seminars in Asia, I am surprised to see the positive take on yesterday’s FOMC statement. Even though the Federal Reserve repeated that inflation risks remain, they probably only did so to temper the more bearish change that they made to the statement which was to say that they no longer see the slowdown in the housing market as gradual. Any hopes that the Fed will resume its rate hikes this year is probably wishful thinking. Their true inflation concerns should be relatively moderate because in the third paragraph of their statement, they said that “inflation pressures seem likely to moderate over time” thanks to “reduced impetus from energy prices” and the effects of their past interest rate hikes. Oil prices have fallen significantly over the past few weeks driving gasoline prices lower as well, which should keep inflationary pressures well contained. Economic data has been lackluster at best. We did see a strong retail sales report last week, but every other piece of data released in recent weeks was either in line or worst than expected. There is actually further evidence of slowing in the housing market. However it took today’s reports to remind traders of the tough times to come in the US economy. Both leading indicators and the Philadelphia Fed survey of manufacturing conditions came in negative, signaling slower growth ahead. For the second month in a row, leading indicators fell by 0.2 percent in the month of August while the Philly Fed survey came in negative for the first time in over three years. Even though the outlook for the US economy is grim, the sharp fall in energy prices should keep consumers happy for the time being. Prices at the pump have already fallen and we may even see discounts pop up in other industries if oil prices continue to remain low. Therefore any dollar weakness could be capped by the prior lows of 1.2945 against the Euro and 115.50 against the Japanese Yen, especially since there is no US economic data scheduled for release tomorrow.

The real test is in Europe: can European markets survive a U.S. slowdown? Probably not, but if they manage to somehow, it will mark the beginning of a new era where the saying, "as goes the U.S. economy, so goes the world economy" will be put to rest.

I'm not holding my breath though.

As a side note, the public debt almost crested the $8.5 trillion mark the day before yesterday. Despite Bush's promise to cut the deficit in half, the yearly shortfall is still coming in at about 850 billion. That means the debt is increasing by 10% per year. That is a lot.