Let The Debate Begin!

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By Mike Conlon | April 14, 2011

Yesterday President Obama came out with a speech regarding the debate that is about to heat up in Washington DC and define the economic course that the US will pursue moving forward. The obvious problem is the US Federal deficit, which is going to bankrupt this country (worse than it already is!) if nothing is done about it.

House Republicans have put forth a comprehensive plan that has both plusses and minuses, and will likely serve as a starting point for negotiations. However, nothing in yesterday’s speech outlined a credible plan to move tackle our problems, so the markets have become fearful of what could happen.

The near-term debate is going to be over what to do about the debt ceiling; if it is not raised or if cut-backs aren’t made, then we could be facing a funding problem. The timing of this essentially coincides with the end of QE2, which has pushed markets higher since its inception at the end of last year.

How the markets will react to both situations is uncertain at this point in time, but the markets are a discounting mechanism so at some point this all needs to be factored in. Perhaps that’s what we’ve been seeing over the last few days of selling.

This morning, both stocks and commodities are lower to start the day as we await the initial jobless claims numbers and the PPI data.

In the forex market:

Aussie (AUD): The Aussie is mostly lower on risk aversion though not by much as it is protected from shorting by its interest rate differential which makes it cost prohibitive to do so.

Kiwi (NZD): The Kiwi moved to a 5-month high after a successful bond auction increased demand for the currency. The Kiwi is tracking slightly higher despite the early risk aversion in the market. (Click chart to enlarge)

Loonie (CAD): The Loonie is mostly lower as its close ties to the US and a declining oil price to start the day have induced selling.

Euro (EUR): There’s no appreciable news out of the Euro zone this morning, so it is trading on its anti-Dollar sentiment which weakened it to start the day though it may reverse as US stocks open. (Click chart to enlarge)

Pound (GBP): The Pound is trading mostly higher after consumer confidence figures came in higher than expected after reaching record lows.

Dollar (USD): The Dollar is mixed as it is receiving the benefit of the flight to safety trade, despite PPI data which just came in at .7% and initial jobless claims that came in higher than expected at 412K. Not a good sign for the economy, but perhaps good for Fed watchers.

Yen (JPY): The Yen is stronger across the board as the Dollar shed some of its safe haven status and the nuclear threat is still a major problem. Yet there are still estimates coming in that predict an economic rebound.

Today’s data in the US shows economic weakness which the Fed is praying may just be an anomaly and a re-start of an economic downturn. The road to stagflation is one the Fed was hoping to avoid, though misguided policies and unintended consequences may be both the cause and the effect.

This bring us back to the fiscal policy debateâ€"if we don’t do something about fiscal policy, then the Fed will attempt to smooth things over with monetary policy. Let’s face it: 100% of the people enjoy a free lunch.

Until we get some real leadership out of Washington DC, we are going to continue to head closer to the cliff at warp speed. I hope you have a parachute!

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