A Dose Of Reality!

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By Mike Conlon | March 10, 2011

With all of the talk about inflation and I am as guilty of it as the next guy, the structural problems that face the global economy may be far more important. The problem that I have is that nobody seems to be doing anything about these structural issues, and are content to sit back and hopefully inflate away the problem. That is a pipe dream.

Yesterday, the RBNZ lowered interest rates as expected, but surprised the market with a 50 bp cut rather than the 25 bp the market was expecting citing the damage caused by the earthquake. Overnight In Australia, the employment change came in worse than expected, though the unemployment rate remained the same. In Japan, GDP declined slightly more than expected and in China trade balance figures came in much worse than expected as exports grew at only 2.4% vs. an expectation of 27.1% pushing the Chinese trade balance to a deficit of 7.3 billion vs. an expectation of a surplus of 4.9 billion. Whoa.

With so much going on, it seems almost comical that the BOE rate decision may not be the most important news of the morning as they decided to leave monetary policy unchanged despite all of the inflation gauges ticking higher.

In the Euro zone, Moody’s was at it again, this time downgrading Spanish debt on banking concerns.

And finally, US Initial Jobless claims came in worse than expected, showed 397K losses vs. an expectation of 378K.

This all adds up to risk aversion in the markets, with stocks and commodities lower and Dollar showing strength.

In the forex market:

Aussie (AUD): The Aussie is trading lower this morning after employment change figures showed that there was a loss of 10K jobs vs. an expected gain and overall risk aversion in the market has the Aussie flirting with parity against USD. (Click chart to enlarge)

Kiwi (NZD): The Kiwi is lower as yesterday the RBNZ lower interest rates .5% to 2.5% which was a greater reduction than the market had expected. However, they did maintain that there would not be any further cuts this year, so the Kiwi is rebounding some. Bear in mind that global economic conditions can obviously change making that pledge irrelevant.

Loonie (CAD): The Loonie is mixed this morning as fundamental weakness from around the globe is sending some loot Canada’s way, but lower oil prices despite Libyan bombing of oil infrastructure and overall risk aversion is weighing on the currency.

Euro (EUR): The Euro is mostly weaker as Moody’s downgraded Spanish debt and the German trade surplus came in less than expected as exports decreased 1% vs. an expectation of a gain of .7%. Dollar strength today is also weighing on the Euro.

Pound (GBP): The Pound is lower across the board as the BOE decided to leave both rates and the asset purchase program unchanged despite inflationary forces they are seeing. However on the plus side, both industrial and manufacturing production figures came in better than expected. (Click chart to enlarge)

Dollar (USD): The Dollar is catching that safe haven bid this morning despite worse than expected Initial Jobless claims figures. The US trade balance came in worse than expected, but lower oil prices likely due to China’s slowdown in the face of the Libyan unrest are driving Dollar strength.

Yen (JPY): The Yen is mixed today as the balance between safe haven currency and a fundamentally weak economy is being tested. GDP figures showed a decline of 1.3%, which was slightly worse than expected and highlight a contracting economy and not a growing one.

The global economic data pouring in doesn’t look so swell today and it is about time the markets responded accordingly! The level of risk in the market place is elevated, with Libyan unrest, inflation fears, and the European debt crisis all piling up.

Tomorrow there will be protests in Saudi Arabia which could be very disastrous should they go the way of Egypt or Libya.

Meanwhile, Central bankers will be able to use this weaker economic data to justify their monetary policy stances, and if they wait long enough perhaps they just might be proven right.

It is no secret that the global economy is structurally weak, and so far monetary policy has allowed it to go unfixed. But this will not continue forever. For when that day of reckoning does come, and it will, you want to make sure you are on the right side of that economic tidal wave!

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