Wednesday, June 23, 2010

BOE Not Unanimous!

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By Mike Conlon | June 23, 2010

Minutes released from the Bank of England’s rate policy meeting showed that the vote was not unanimous to keep rates unchanged at .5%, for the first time in nearly 7 months.  Inflation concerns were the cause of the dissenting vote, as CPI figures in the UK have been above targets.  While the BOE expects inflation to subside in the ensuing months, that may not necessarily be the case.

This comes a day after the emergency budget which was announced yesterday, calling for a reduction in spending and an increase in taxes.

In the US, the FOMC rate decision is due out later today, so expect to see some volatility in dollar-related pairs.  It is widely held that there will not be a change in policy, but some market participants are betting that we may see a change in the language regarding policy.  This would give credence to the rising sentiment that the Fed may raise rates later this year.  Personally, I don’t see this happening and I think the Fed will be on hold for the remainder of the year.
Yesterday’s abysmal housing data confirmed that deflationary forces in the housing market may be the start of another leg down.

In the Euro zone, German consumer confidence came in slightly better than expected and PMI figures were largely in line.  However, concerns over Greek debt have perked up again.

Overnight, the Yen was higher as the Nikkei was down taking its cues from yesterday’s sell-off in the US stock market.

This morning will bring US new home sales figures as well as Canadian retail sales figures.  Any major deviations could send the respective currencies lower.

But expect volatility going into the FOMC announcement at 2:15 EST.

In the forex market:

Aussie (AUD):  The Aussie is lower as stocks sold-off in the overnight session but it is gaining back some ground heading into the US session.  Risk aversion has driven the Aussie lower, and there is some concern that Chinese demand for metals and energy is causing a rift in the Australian economy.

Kiwi (NZD):  The Kiwi is higher this morning in anticipation of GDP figures which are due out later tonight.  The expectation of .5% growth will likely be exceeded as demand from China for raw materials has the NZ economy picking up steam.  Should the number best expectations, then the likelihood of a rate increase at July’s policy meeting will increase.

Loonie (CAD):  The Loonie is lower this morning as oil prices are pulling back from the $78 level, and retail sales figures came in worse than expected.  Analysts were expecting a decline of .4% and the figure showed a decline of 2.2%, a big miss.  Canada is to the US what Australia and New Zealand are to China.  If recovery here in the US is floundering, then it may not bode well for the Loonie and the Canadian economy in general.

Euro (EUR):   The Euro is a mixed bag this morning, as it is up against the North American currencies but down against the rest.  The EU is considering a bond levy on countries that don’t adhere to debt-to-GDP guidelines which of course brings the Greek debt crisis back to center stage.  In addition, business confidence was down in France, though consumer confidence was higher in Germany.  Go figure.

Pound (GBP):  The Pound is higher across the board, giving a vote of confidence to both the government for their budget and the BOE.  The lone dissenter in the rate policy meeting is concerned about inflation, as growth targets may exceed expectations.  That’s a “nice” problem to have, considering the economic condition of the US.

Dollar (USD):   The Dollar is mostly lower prior to today’s FOMC meeting.  Yesterday’s poor housing data sent stocks lower, and today’s new home sales aren’t expected to be much better.  This should be enough to keep the Fed unchanged in both language and policy, and the market is starting to catch on to the fact that the smoke and mirrors of government spending may not be enough to stoke the economy.  Go back and take a look at my discussion of biflation from a few days ago.

Yen (JPY):  The Yen is mixed as well, trading higher vs. USD and CAD (both showing weakness) and the Euro (debt concerns) but lower vs. GBP, AUD, and NZD.  So today can neither be classified as risk-taking or risk-aversion, but much of the yen strength was derived from weakness in the Nikkei, which sold off following the US stock market decline.

I think today really shows the difference to how the market reacts to different policy pursuits from around the globe heading into this weekend’s G-20 meeting.  On the one hand, you have the EU and the UK who are committed to reducing deficits and trying not to raise taxes too much to discourage business (in fact the corporate tax rate was lowered in the UK), and the policies taken by the US.

The US is going the other way, expanding deficits and throwing good money after bad at our financial problems which can only result in higher taxes when it comes time to pay the piper.  President Obama was rebuffed by Chancellor Merkel of Germany with regard to how to best combat the global financial crisis, and it appears as though the market agrees with the EU.

Weak housing data here in the US show that the stimulative effects of government spending may have slowed a decline in the economy, but have not fixed the problem.  Now taxpayers (and their children and grandchildren) face an enormous burden for what adds up to temporary conditions.

The change people voted for was for less government spending and indeed we’re seeing changeâ€"even more and more spending!  Hopefully this course can be reversed before it’s too late.  I never thought I’d say this but now is the time we should be taking our economic cues from Europe, and not their prior policies that landed them in this mess.

Those who don’t learn from the past are doomed to repeat it.

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