Sunday, May 22, 2011

Lower Your Expectations!

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By Mike Conlon | May 20, 2011

This is what Central Banks are effectively saying to the marketplace. Recent actions and comments are starting to show what some of us already knowâ€" that Central banks alone cannot manage the global economy and the artificial conditions they create only impede and prevent the real economy finding its way.

Overnight, the Bank of Japan did not ease monetary conditions as some had expected in order to attempt to jump start the Japanese economy after yesterday’s report that Japan had slipped into recession.

Earlier this morning, the German Bundesbank said that growth in Germany would likely slow which would mean that the ECB would likely hold interest rates steady and not raise them again for some time.

In Canada, CPI data came in lower than expected, prompting the Loonie to sell-off and the expectation for rate hikes to lessen. In addition, retail sales figures have come in lower than expected which also shows a potential weakening in the Canadian economy.

So what is the world going to do? After all, tomorrow is “the rapture”â€"for those of you unaware there is a doomsday prediction floating around the internet claiming the world is going to end and I apologize in advance for giving it more press than it deserves.

That said, as QE2 comes to an end, where is the growth going to come from? Most countries have so much debt on their books that governments are looking to reduce spending, not increase it. And rightfully so. Yet the idea that here in the US taxes should go up on businesses that provide jobs makes no sense in the face of declining economic growth.

Hot money will still seek yield and will buy commodities, even if demand slows which could foster stagflation. It will be interesting to see if the US Fed will just continue to throw money at the problem, rather than demanding that the structural problems be fixed. This fight in Washington over raising the debt ceiling is just a start.

So this morning is starting out with a bit of risk-aversion, with stocks lower but commodities trading slightly higher. Risk in the market is still high, from the Euro debt crisis to unrest in the Middle East (Obama is not helping this at all with his recent speech on Israel), so maybe this doomsday prediction isn’t too far off the mark. (Just kidding)

In the forex market:

Aussie (AUD): The Aussie is mixed this morning as Australia’s small exporter predict that the Aussie will go the 1.16 vs. USD this year, even though there is mild risk in the market this morning.

Kiwi (NZD): The Kiwi is higher across the board on rate differentials after a combination of better than expected news this week for the NZ economy and lowered rate expectation for Canada have shifted money flows to the Kiwi.

Loonie (CAD): The Loonie is lower across the board after CPI data came in lower than expected, reducing the sentiment for a future BOC rate hike. CPI came in showing 3.3% vs. an expectation of 3.4%, and retail sales figures came in way worse than expected, showing no change vs. an expected gain of .9%. (Click chart to enlarge)


Euro (EUR): The Euro is lower across the board after the Bundesbank came out and said that German economic growth would slow. In addition, the debt crisis still remains unresolved as the IMF is side-tracked attempting to find a new Chief. (Click chart to enlarge)


Pound (GBP): The Pound is higher, mostly the result of Euro weakness and the fact that there is no negative news today out of the UK to reduce demand.

Dollar (USD): The Dollar is also mixed as it looks like risk appetite wants to increase, yet fundamental data and risk is still present in the marketplace. There is no news from the US today so expect the Dollar to trade on risk themes.

Yen (JPY): The Yen is mostly lower even after the BOJ declined to ease monetary policy at last night’s rate decision. This may be a sign of things to come, as yesterday’s report that Japan is in recession was ignored by the BOJ who may be starting to realize that further monetary easing may be futile at this point.

Well things are definitely changing, though I can’t say it is for the better. The recent actions of Central banks have not improved global growth, but merely encouraged bubble in areas that are unintended.

Commodity price inflation is not good for growth, and consumer expectations are so low right now that it will be a long time before there is any faith in government’s ability to fix the problems that ail us.

I see stagflation coming as the likely outcome of all of this meddling, with no apparent end in sight. Until we can get the politics out of the economics, we will be doomed to mediocrity. For as much as I bash Central banks, I also realize that their hands are tied if they can’t get cooperation on the fiscal side of things, as monetary policy alone cannot fix out problems.

How this all ends is anyone’s guessâ€"I’m just hoping to make it through the weekend!

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