While the world economy has been moving along led by U.S. strength for many years, it will now be time for the favor to be returned. That is what is so great about globalization. Weakness in one place could be offset by strength somewhere else.
With dollar weakness, demand will no longer have to rely on U.S. consumers. Dollar weakness could easily be what makes the U.S. economy withstand recession and financial market turmoil. Exports are already picking up. Companies outside the financial sector are still generating good income growth. Dollar weakness is not necessarily a bad thing for the U.S.
The tourism sector is just one example...
Check out this Yahoo video about tourism in NY picking up.
Saturday, November 03, 2007
Friday, November 02, 2007
EUR/USD, Back above 1.45
The Eur/Usd is back above 1.45. The job creation data was positive, however, the worries about the financial sector dominate the market.
The SEC investigation into Merrill Lynch possibly delaying write-downs just shows us that there could be lots of losses waiting to be seen in future quarters.
UBS also downgraded Fortis for lack of transparency about their exposure to the U.S. mortgage markets.
The focus is squarely on the financial sector and the problems they could be facing.
The SEC investigation into Merrill Lynch possibly delaying write-downs just shows us that there could be lots of losses waiting to be seen in future quarters.
UBS also downgraded Fortis for lack of transparency about their exposure to the U.S. mortgage markets.
The focus is squarely on the financial sector and the problems they could be facing.
Maybe We Should Question Business Practices and Not The Economy
We could be a little more relaxed about the general economy as the numbers show that although we could be facing a slowdown, a recession could be avoided. Corporate earnings excluding the financial sector still shows solid growth. The labor markets seems fine as well. The situation at the "general" level is not as dire as some make it seem.
What we should question is not the health of the economy but the health of business practices. The whole subprime crisis stems from creditors facilitating high risk loans to unqualified consumers. With the housing market so strong, greedy lenders just kept taking more risks. There was no shortage of investors that would buy bonds backed by these risky mortgages. It really is amazing that risk was not better assessed. But I would say part of the reason is greed. Investors are constantly trying to look for higher and higher yields. Beating the S&P average is clearly not enough. Speculators do a great deal of good to the economy by providing capital but sometimes things get out of hand and there is just too much risk out there. Risky hedge funds, alternative investments, and emerging countries all compete for capital but it seems to me that people easily forget to study their fundamentals.
Why should the individual consumer suffer at the hands of the big institutions? Thankfully, consumers are showing resilience and the reason is basically that the general economy is too big and powerful to fall immediately from problems in one sector. We must be careful with the domino affects. Down the line consumers could still suffer as more and more people are getting their houses foreclosed, which leads to lower consumer confidence, lower consumer spending, etc.
Hopefully the big financial institutions find solutions and not just try to hide their losses. UBS downgraded Fortis for lack of transparency in showing their exposure to the US mortgage market. Today the SEC started investigating Merrill Lynch for perhaps delaying acknowledgement of subprime losses. (see WSJ article). Is this all just an extension of corporate scandals to the likes of Enron?
This does not seem to be a problem with the economy, just a consequence of bad business practices. There will likely be a continued housing correction but hopefully it won't extend too much beyond that.
What we should question is not the health of the economy but the health of business practices. The whole subprime crisis stems from creditors facilitating high risk loans to unqualified consumers. With the housing market so strong, greedy lenders just kept taking more risks. There was no shortage of investors that would buy bonds backed by these risky mortgages. It really is amazing that risk was not better assessed. But I would say part of the reason is greed. Investors are constantly trying to look for higher and higher yields. Beating the S&P average is clearly not enough. Speculators do a great deal of good to the economy by providing capital but sometimes things get out of hand and there is just too much risk out there. Risky hedge funds, alternative investments, and emerging countries all compete for capital but it seems to me that people easily forget to study their fundamentals.
Why should the individual consumer suffer at the hands of the big institutions? Thankfully, consumers are showing resilience and the reason is basically that the general economy is too big and powerful to fall immediately from problems in one sector. We must be careful with the domino affects. Down the line consumers could still suffer as more and more people are getting their houses foreclosed, which leads to lower consumer confidence, lower consumer spending, etc.
Hopefully the big financial institutions find solutions and not just try to hide their losses. UBS downgraded Fortis for lack of transparency in showing their exposure to the US mortgage market. Today the SEC started investigating Merrill Lynch for perhaps delaying acknowledgement of subprime losses. (see WSJ article). Is this all just an extension of corporate scandals to the likes of Enron?
This does not seem to be a problem with the economy, just a consequence of bad business practices. There will likely be a continued housing correction but hopefully it won't extend too much beyond that.
Thursday, November 01, 2007
"Much of the recent dollar weakness has been the result of the currency market pricing in just such a dour scenario [possible US recession]."
This article by DailyFx gives some support to my argument below. A U.S. recession might not be so imminent and this could be very optimistic for the USD.
Dollar Bounces as Relief Rally Takes Hold
Tomorrow we have the important Employment Report and a good reading could produce a tremendous USD rally.
Dollar Bounces as Relief Rally Takes Hold
Tomorrow we have the important Employment Report and a good reading could produce a tremendous USD rally.
FED Rate Cut... Has a Balance Been Reached?
According to yesterday's FOMC statement...
"The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. "
The tone taken by the FOMC statement seems to have a very neutral stance. Could it be that things have balanced out?
We must also remind ourselves that there was actually one vote in favor of keeping the rate unchanged (9-1). The Committee judged that some inflation risk remains which does not seem like an overwhelming concern, especially when they decided to the cut the rate. They also cited economic growth as solid, so why lower rates? This along with a successful earnings season (for the most part) means that the credit crisis could be overdone. The FED must believe the economy could easily weather the storm and that is why they changed their stance in the statement to a more neutral tone.
In short, it looks like the Fed is hinting that it has realized two rate cuts as a 'momentary' measure to ease recovery from housing and the credit crisis. I would go on to state that perhaps other members wanted to keep the rate unchanged but a strong signal would have been needed to go against expectations. A signal like the turbulent money markets that sparked a 50bp cut in September.
Not withstanding future macroeconomic indications, I would say things look relatively optimistic for the U.S. economy in that the crisis will be limited to housing and credit markets. There appears to be a good chance that there will be strong corrections to the housing bubble, the eur/usd, and commodities looking out to end of 2007 and first half 2008. The focus might then return to inflationary pressures when dollar weakness and oil strength resumes its trend.
"The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. "
The tone taken by the FOMC statement seems to have a very neutral stance. Could it be that things have balanced out?
We must also remind ourselves that there was actually one vote in favor of keeping the rate unchanged (9-1). The Committee judged that some inflation risk remains which does not seem like an overwhelming concern, especially when they decided to the cut the rate. They also cited economic growth as solid, so why lower rates? This along with a successful earnings season (for the most part) means that the credit crisis could be overdone. The FED must believe the economy could easily weather the storm and that is why they changed their stance in the statement to a more neutral tone.
In short, it looks like the Fed is hinting that it has realized two rate cuts as a 'momentary' measure to ease recovery from housing and the credit crisis. I would go on to state that perhaps other members wanted to keep the rate unchanged but a strong signal would have been needed to go against expectations. A signal like the turbulent money markets that sparked a 50bp cut in September.
Not withstanding future macroeconomic indications, I would say things look relatively optimistic for the U.S. economy in that the crisis will be limited to housing and credit markets. There appears to be a good chance that there will be strong corrections to the housing bubble, the eur/usd, and commodities looking out to end of 2007 and first half 2008. The focus might then return to inflationary pressures when dollar weakness and oil strength resumes its trend.
Wednesday, October 31, 2007
FED CUTS RATE TO 4.5%
The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent.
View the FED's press release
Several Positive Economic Readings In The United States
Just as Europe revealed some negative indicators, the U.S. motivates with encouraging numbers.
To summarize:
Q3 GDP = 3.9% vs. expected 3.1%
GDP Price Index = 0.8% vs. expected 2%
ADP = +106k new jobs vs. expected +60k
Job cost index: +0.8% quarterly vs. expected +0.9%
Europe indicated higher inflation and slower growth while the U.S. shows the reverse with controlled (more than expected) inflation and better than expected growth.
The positive news concerning the U.S. economy could be seen by the USD recovering positions in the crosses right after the GDP data. The move was limited however and we must conclude that had it not been for the highly anticipated FED interest rate decision the move would be greater.
Even though some say that an interest rate cut is discounted by the market, the potential for some wild volatility is certainly there.
To summarize:
Q3 GDP = 3.9% vs. expected 3.1%
GDP Price Index = 0.8% vs. expected 2%
ADP = +106k new jobs vs. expected +60k
Job cost index: +0.8% quarterly vs. expected +0.9%
Europe indicated higher inflation and slower growth while the U.S. shows the reverse with controlled (more than expected) inflation and better than expected growth.
The positive news concerning the U.S. economy could be seen by the USD recovering positions in the crosses right after the GDP data. The move was limited however and we must conclude that had it not been for the highly anticipated FED interest rate decision the move would be greater.
Even though some say that an interest rate cut is discounted by the market, the potential for some wild volatility is certainly there.
Several Negative Economic Readings In Europe
With hours away from the FED interest rate decision, several unfavorable economic indicators were released in Europe. As such, inflation figures are starting to reflect what seemed inevitable with the higher food and commodity prices. Not only has the CPI in Spain and Italy recently been higher than expected, but the overall annual CPI estimate for the Euro Zone was 2.6% when 2.3% was expected. Furthermore, Euro Zone economic confidence also came in less than expected. Finally, the busy morning includes an unemployment rate that is worse than expected.
Increasing inflation along with a slowing economy is a mix that greatly complicates things for the central banks and their monetary policies. As such, the question at hand when looking at the Eur/Usd for the medium-term might be, "Which of the two economies is in the least worst shape?" and "Which economy will recover first?."
The European economy was starting to prove very resilient and might have been the cause to the recent Euro rally. The important exports were resisting the higher euro, and high energy prices weren't being passed to the consumer just yet. Today's data could start to question all this although we still need more concrete indicators.
The inflation pressures could incite the bank to increase rates but could it really afford to do so and further hamper economic growth with a Euro that is already so high and turbulent money markets?
Increasing inflation along with a slowing economy is a mix that greatly complicates things for the central banks and their monetary policies. As such, the question at hand when looking at the Eur/Usd for the medium-term might be, "Which of the two economies is in the least worst shape?" and "Which economy will recover first?."
The European economy was starting to prove very resilient and might have been the cause to the recent Euro rally. The important exports were resisting the higher euro, and high energy prices weren't being passed to the consumer just yet. Today's data could start to question all this although we still need more concrete indicators.
The inflation pressures could incite the bank to increase rates but could it really afford to do so and further hamper economic growth with a Euro that is already so high and turbulent money markets?
Tuesday, October 30, 2007
Correlation between U.S. interest rates and oil price
An article on CNN Money correlates lower US interest rates with higher crude oil prices.
How a Fed rate cut raises oil prices
The reason is that lower interest rates spurs economic growth which in turn means higher demand for energy. In addition, since oil is priced in dollars, the cheaper dollar (which is implied with lower rates) means that oil will be cheaper for foreign consumers and thus incites demand as well.
According to CNN Money, "The real question is this: Is a rate cut already priced into the cost of a barrel and, if not, how much higher is crude expected to go?"
How a Fed rate cut raises oil prices
The reason is that lower interest rates spurs economic growth which in turn means higher demand for energy. In addition, since oil is priced in dollars, the cheaper dollar (which is implied with lower rates) means that oil will be cheaper for foreign consumers and thus incites demand as well.
According to CNN Money, "The real question is this: Is a rate cut already priced into the cost of a barrel and, if not, how much higher is crude expected to go?"
Sweden (Riksbank) Raises Interest Rate
The Riksbank has decided to increase the interest rate by 0.25% today and states that it is probable that it will raise them further in the future. The bank already forecasts the rate to be 4.25% in the first half of 2008. The entity cites increased cost pressures.
Sweden repo rate at 4%
Sweden sees its economy still going strong, however, it can not ignore the slowdown and financial turbulence that is being faced by the gigantic U.S. and European economies. The bank continues its plan of curbing inflation by raising rates as the aforementioned economies would have done had it not been for the troubled financial markets. The rising oil and food prices is an ongoing concern as well as the tightening labor market. Therefore, Sweden will undoubtedly keep a close eye on international markets.
Sweden repo rate at 4%
Sweden sees its economy still going strong, however, it can not ignore the slowdown and financial turbulence that is being faced by the gigantic U.S. and European economies. The bank continues its plan of curbing inflation by raising rates as the aforementioned economies would have done had it not been for the troubled financial markets. The rising oil and food prices is an ongoing concern as well as the tightening labor market. Therefore, Sweden will undoubtedly keep a close eye on international markets.
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