Saturday, June 12, 2010

Consumers Disappoint!

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By Mike Conlon | June 11, 2010

Well so much for that.  US retail sales figures disappointed this morning, coming in at a loss of 1.2% vs. an expected gain of .2%.  While these numbers show that economic recovery is still fragile here in the US, much of this can be attributed to the lack of hiring by businesses.  In addition, this also shows that households are saving more which may not be a bad thing, and much of the decline was in big ticket items as the economy prepares for the retraction of stimulus measures.

Across the pond, the UK reported worse than expected industrial production figures, sending the Pound lower across the board.  This further adds to the fears that the UK may be facing a protracted slowdown as they attempt to control their budget deficits.

On a somewhat related note, US Treasury Secretary Geithner has turned up the heat on China.  He has come out and said that the Chinese exchange-rate policy (and Yuan peg to the dollar) is preventing a balanced global recovery and causing inflation in China.   Official reports showed an increase of 3.1% in consumer prices, the fastest rise in 19 months.  In addition, Chinese workers are striking demanding higher wages as inflation heats up.

So this morning we are seeing some mild risk-aversion, as the Friday “unwind” occurs as traders are still hesitant to go into the weekend holding risk assets, with potential Euro landmines the primary fear driver.

In the forex market:

Aussie (AUD):  The Aussie is lower this morning on risk aversion and a technical pullback after yesterday’s good economic news from the Pac Rim countries.  Uncertainty over whether or not China will do anything to cool inflation has contributed to Aussie selling.

Loonie (CAD):  The Loonie is lower on risk aversion, despite the fact that industrial capacity showed the largest increase on record.  The Loonie has been higher lately as oil has been higher, though it is pulling back from $75 this morning.  Oil will be a major factor going forward, as a potential moratorium on drilling offshore in the US is in the works due to the political backlash of the BP oil spill.

Kiwi (NZD):  Despite the risk in the market, the Kiwi is higher across the board due to yesterday’s rate hike, though that could change by session end.  Digestion of the economic reports show that NZ could be in for a series of rate hikes through the rest of the year as accelerating growth could push inflation much higher.

Euro (EUR):  The Euro is lower also on risk themes, and the “Friday unwind” may be still be causing investors to ditch Euros over the weekend as risk fears still permeate the market.  However, policy-makers in Germany raised their economic outlook for GDP higher.  Still the looming threat of debt problems keeps investor cautious for now.

Pound (GBP):   The pound is lower across the board as manufacturing weakened in the UK and fears that the economy may not be on sound enough footing to handle expected government fiscal belt-tightening.  This comes even as a UK survey of consumer’s inflation expectations reached its highest levels in over 6 months.  This may be a case of, “the consumer is not always right”.

Dollar (USD):   Disappointing US retail sales figures have sent the dollar higher as risk aversion has picked up going into the weekend.  However, the decrease wasn’t broad-based.  The largest decreases were in building materials stores and auto sales.  This comes ahead of the end of the home buyer tax credit, so it probably should have been expected.  Households are saving more as the employment picture is still grim, and unless the government does something to encourage private business to start hiring, the retraction may continue.

Yen (JPY):  Good gains in the Asian stock markets overnight pushed the Yen lower, though it is rebounding and has gained strength due to the unwind of carry trades as traders dump their risk assets for the weekend in favor of the safe haven the Yen provides.  The Dollar and Yen are just about flat today vs. one another.

Today is an example of how bad government policy can distort economic figures and get everyone “drinking the Kool-Aid”.   It should come as no surprise that retail sales are down as government stimulus measures are retracted, yet they fall for it every time.

The bottom line is jobs.  Period.  Not temporary census workers, not more bloated government bureaucracy, but jobs from the private sector.  American consumers have finally woken up to the fact that you shouldn’t be spending money you don’t have, especially if you can’t get a job to afford stuff.

That game had gone on for way too long, and it is amazing to me to see some the debt levels people carry.

So what does the government do to help create jobs?  Nothing.  They hand out government cheese to keep the masses at bay and create a hostile environment for business through the threat of increased regulation and higher taxes.  If you were an employer, would you be hiring?

Heck no!!!

And until hiring picks up again, expect the economy to drift downward as consumers lose faith in the recovery.  And if consumers, who represent some 70% of US GDP, continue to save and not spend, then we could see a potential deflationary spiral as demand dries up.

This could lead to the dreaded “double-dip”.  Not a pretty picture in my eyes.  The only double-dip I want to see is in an ice cream cone!

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