Wednesday, May 4, 2011

Rough Patch Ahead?

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By Mike Conlon | May 4, 2011

The data is starting to get a bit weaker and the market looks as though it is preparing for an economic “rough patch” that may be just around the corner. While we all know that QE2 will officially be coming to an end shortly, how long that lasts is anyone’s guess.

The first indicator of unemployment here in the US came out this morning, with the ADP jobs report showing gains that were les than expected. This comes ahead of tomorrow’s initial jobless which are expected in the low 400K range (which is higher than we had hoped when we reached the 300k range) and then Friday’s all-important Non Farm Payrolls report.

Overnight, the Central Bank of China issued hawkish statements that combating inflation was their number one concern, so the fear of a Chinese slowdown sent the MSCI Pac Rim stock index lower, taking commodities and commodity currencies lower as well.

Yet the Euro and the Pound are holding up well, as tomorrow’s rate policy decisions are expected to produce no change, yet the ECB policy statement could be hawkish. Retail sales figures in the Euro zone came in lower than expected, and home prices declined in the UK.

This all adds up to a global slowdown, which means that the market is convinced that Bernanke will attempt to come back to the rescue and put the training wheels back on the economy through further easing at the first sign of trouble.

In the forex market:

Aussie (AUD): The Aussie started the morning lower but has flipped to higher as the weak Dollar play is back in action.

Kiwi (NZD): The Kiwi is lower across the board as it is very much influenced by what goes on in the Chinese economy. Unemployment figures due out later tonight could put a positive spin on the NZ economy.

Loonie (CAD): The Loonie is mostly lower as oil prices have pulled back to a $110 handle and the dual problem of being so in bed with the US economy has further contributed to weakness. Nevertheless the weakening Dollar has just pushed the Loonie back toward .95 vs. USD. (Click chart to enlarge)


Euro (EUR): Greek debt restructuring. Declining retail sales figures (-1.7% vs. an expected no change). Portuguese and Irish debt costs ballooning. These might seem like major problems to any other currency that is not considered the “anti-Dollar”. The ECB rate decision will keep rates unchanged, but the statement could surprise. (Click chart to enlarge)


Pound (GBP): The Pound is also higher despite home prices that fell more than expected and the notion that the BOE will not change rate policy at tomorrow’s decision. Unlike the ECB, the BOE will not issue a policy statement.

Dollar (USD): The Dollar’s short-lived bounce from risk aversion has reversed and now we are looking at weakness as there is no confidence that a declining US economy will be allowed to function without the intervention of Bernanke and the Fed. The ADP employment change showed a gain of 179K jobs vs. an expectation of 195K.

Yen (JPY): The Yen is weaker as Japanese markets are closed today.

Well it looks like this is going to be a case of bad news is good news for stocks and commodities heading into the end of QE2. The worse the data gets, the higher the expectation that Bernanke will continue some sort of monetary easing.

Whispers of “QE2.5″ are making the rounds, and the artificial conditions that created thanks to this easy money policy are delaying the problem and not fixing it. While these delay tactics might be appropriate if we trying in earnest to get our fiscal act together, the politics of Washington are preventing certainty in the marketplace.

Questions about taxes, regulation, and government spending have not assuaged businesses, and the prevailing notion is that things are getting worse and not better.

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