All eyes are on Washington today to see whether the administration and lawmakers can reach an agreement on the budget as the USD plummets close to its post-financial crisis low. Meanwhile, the JPY is weaker still as EURJPY touches new 11-month high. What’s in store for the week ahead?
US Shutdown? Maybe – but not for long
A potential US government shutdown looms over the market today as the administration and lawmakers have until midnight to strike a deal or risk having to go into “shutdown”, a situation that will have a wide array of consequences, though none of them immediately critical for the likes of air traffic control or entitlement spending. While tdhese consequences could certainly creep into the real economic growth numbers rather quickly if the shutdown were to continue for more than a week or two (many federal lending programs would be immediately affected), it is hard to imagine the government shutting down for more than a few days. The political risks are enormous here in the first place and we can almost guarantee that the government will open for business before any retiree risks failing to receive a social security check or any Medicare payment risks not being disbursed or treatment refused, etc.
A potential US government shutdown looms over the market today as the administration and lawmakers have until midnight to strike a deal or risk having to go into “shutdown”, a situation that will have a wide array of consequences, though none of them immediately critical for the likes of air traffic control or entitlement spending. While tdhese consequences could certainly creep into the real economic growth numbers rather quickly if the shutdown were to continue for more than a week or two (many federal lending programs would be immediately affected), it is hard to imagine the government shutting down for more than a few days. The political risks are enormous here in the first place and we can almost guarantee that the government will open for business before any retiree risks failing to receive a social security check or any Medicare payment risks not being disbursed or treatment refused, etc.
I would suggest better than 50/50 odds that a deal is struck tonight before the midnight deadline. If not, then early next week as the news early next week features coverage of families turned away at the gates of National Parks and Joe Smith unable to get his loan approved by the FHA so he can’t move his family for his new trucking job in Everytown, USA.
Further along, the budget and fiscal fight gets more interesting as the debt ceiling approaches by mid-May. The Tea Party faction of the Republican party will make as much noise as possible around that time as it was voted into office almost precisely for the occasion.
Odds and Ends
After failing to move much yesterday in the wake of the Trichet press conference, the yields at the front end of the yield curve in Europe headed higher today, supporting the tack-on rally we saw in EURUSD overnight. Also possibly supportive of the EURUSD move is the additional spike in crude prices and the idea that petro-states are recycling some portion of their petro-dollars into Euros.
After failing to move much yesterday in the wake of the Trichet press conference, the yields at the front end of the yield curve in Europe headed higher today, supporting the tack-on rally we saw in EURUSD overnight. Also possibly supportive of the EURUSD move is the additional spike in crude prices and the idea that petro-states are recycling some portion of their petro-dollars into Euros.
UK PPI levels can’t be particularly comforting for the BoE, which is trying to sweat out this round of inflation like it has already tried to do over the last couple of years of uncomfortably high inflation levels. Note the awful margin compression implications of PPI Input prices at 14.6% YoY vs. PPI Output at 5.4% YoY
Canadian employment data today was more than a bit confusing. The unemployment rate dropped due to a drop in the participation rate (not strong news) and the overall payrolls number was very slightly lower versus the robust growth expected, but the internals of that number were more than a bit confusing, with a whopping 90.6k increase in full-time gains and a -92.1 decrease in part time payrolls (one has to wonder if categories are being shifted around here statistically.) Meanwhile, the never-say-die Canadian housing bubble is percolating along without any firmer signs of a correction, though the strong March Housing Starts numbers may have been affected by pent-up demand from the nasty winter weather.
Japans Eco Watchers Survey of current conditions and the forward outlook dropped by a record amount in March as one might expect, from what were close to multi-year highs to only a couple of points above the lows during the financial crisis of ’08-’09.
Looking ahead
Besides the US government shutdown potential for the weekend, we have an interesting week ahead for the US as next week sees the first batch of major companies reporting their Q1 earnings, where the degree of margin compression from spiking input prices is squarely in focus. At least one major US brokerage house suggested that earnings for Q1 will disappoint and that there have been surprisingly few preannouncements ahead of this earnings season. An ominous sign? Could risk appetite actually focus for once on the fundamentals underlying the prices it has mindless boosted of late even as input prices have been spiking out of control and interest rates head sharply higher?
Besides the US government shutdown potential for the weekend, we have an interesting week ahead for the US as next week sees the first batch of major companies reporting their Q1 earnings, where the degree of margin compression from spiking input prices is squarely in focus. At least one major US brokerage house suggested that earnings for Q1 will disappoint and that there have been surprisingly few preannouncements ahead of this earnings season. An ominous sign? Could risk appetite actually focus for once on the fundamentals underlying the prices it has mindless boosted of late even as input prices have been spiking out of control and interest rates head sharply higher?
A paradigm for what is going on here may be as follows (articulated far better in yesterday’s Steen’s Chronicle. It seems that before the Japanese tragedy struck on March 11, the market was getting a bit cautious on the risk appetite side of the equation, but that the new liquidity train that the BoJ has brought to the table might be one of the drivers for the violent turnaround back to the upside in asset prices as the market continues to drive the theme of currency debasement.
Chart: EURJPY
The rally in JPY crosses has continued into today, as the currency debasement theme rages hotly and the market continues to seek out value in hard assets versus the currencies most bent on providing liquidity to their economies. Early today we are seeing a small rally in US treasuries and we have a heavy auction schedule of US treasuries next week (3-, 10-, and 30-year). Will these apply the brakes to the yen’s downhill run or encourage it?
The rally in JPY crosses has continued into today, as the currency debasement theme rages hotly and the market continues to seek out value in hard assets versus the currencies most bent on providing liquidity to their economies. Early today we are seeing a small rally in US treasuries and we have a heavy auction schedule of US treasuries next week (3-, 10-, and 30-year). Will these apply the brakes to the yen’s downhill run or encourage it?
The key point here is that (since the bond market is so manipulated by the world’s central banks, the only adjustment mechanism at present is directly in the currency market. The only chance we will have of knowing the true strength or weakness of the bond market is once the Fed steps away at the end of QE2 and doesn’t come back for a while. Even then, the overhanging fear will be that if things go too far south for the economy or the bond market, the bank is likely to rush to the rescue once more, so why not stick to expressing a view through the currency market instead?
Be careful out there – we’re in near-parabolic mode in a number of markets - JPY and commodities. While the action could get even more spectacular, it is likely to dramatically increase the risk of volatility both ways as this kind of action continues, as the end usually comes with spectacular reversals.
Economic Data Highlights
- US Feb. Consumer Credit out at +$7.6B vs. +$4.7B expected and $4.4 in Jan.
- Japan Feb. Adjusted Current Account Total out at ¥1210B vs. ¥1329B expected and ¥1089B in Jan.
- China Q1 Business Climate Index out at 133.8 vs. 138 in Q4
- Japan Mar. Eco Watchers Survey Current/Outlook out at 27.7/26.6 vs. 48.4/47.2 in Feb.
- Switzerland Mar. Unemployment Rate out at 3.3% as expected and vs. 3.4% in Feb.
- Germany Feb. Trade Balance out at 12.1B vs. 13.0B expected and 10.1B in Jan.
- Sweden Feb. Industrial Production out at +1.1% MoM and +16.9% YoY vs. 0.0%/+14.6% expected, respectively and vs. +15.3% YoY in Jan.
- Sweden Feb. Industrial Orders out at +0.2% MoM and +13.7% YoY vs. +12.2% YoY in Jan.
- UK Mar. PPI Input out at +3.7% MoM and +14.6% YoY vs. +2.1%/+12.5% expected, respectively and vs. +14.9% YoY in Feb.
- UK Mar. PPI Output out at +0.9% MoM and +5.4% YoY vs. +0.6%/+5.1% expected, respectively and vs. +5.3% YoY in Feb.
- UK Mar. PPI Output Core out at +0.4% MoM and +3.0% YoY vs. +0.3%/+2.9% expected, respectively and vs. +3.1% YoY in Feb.
- Canada Mar. Net Change in Employment out at -1.5K vs. +28k expected and +15.1k in Feb.
- Canada Mar. Unemployment rate dropped to 7.7% from 7.8% in Feb. as expected
- Canada Mar. Housing Starts out at 188.8k vs. 181k expected and 183.7k in Fe.
Upcoming Economic Calendar Highlights (all times GMT)
- US Feb. Wholesale Inventories (1400)
- US Fed’s Fisher to Speak (1415)
- UK BoE’s Haldane to Speak (Sat 1800)
- US Fed’s Yellen to Speak (Sat 1800)
- China Mar. Trade Balance (Sun 0200)
- New Zealand Mar. Credit Card Spending (Sun 2245)
- Japan Feb. Machine Orders (Sun 2350)
No comments:
Post a Comment