G-7 Meeting Thoughts
The Central Banks in review as
the Aussie held rates as did the ECB — but the Brits raised to 4%
Friday is the unemployment
number and some of its thunder stolen by the speech of Ben Bernanke,
Fed Governor
This weekend brings the G-7
meeting and all ears will be tuned in to the enigmatic communiqué
We had several key central banks meet
and assess their rate policies this week. As anticipated, the
Aussies held their rates steady as did the European Central Bank.
The Europeans failed to deliver a needed rate cut before the G-7
meeting which could have bought them some goodwill from the global
community. Trichet and company keep repeating the mantra that
global expansion is preventing Europe from needing to cut rates.
The Europeans don’t seem to understand that the global financial
system needs Europe to enhance the economic recovery, not just be a
parasite on the host. With a tight fiscal policy and high
unemployment, there is just one thing to do — CUT THE RATES NOW!
England needed to raise rates due to
increased credit expansion and a roaring housing market. The
U.K. has gotten ahead of the curve and moved to slow their expansion
before suffering the pains of over-extended credit. The yield
curve in the U.K. has turned almost flat and this should continue to
bode well for the British Pound. There will be political
setbacks to the popularity of the “Sterling†– but economically, I
believe that it will outperform other currencies over the near and
medium term. The British have responded well to their economic
conditions, as have the Aussies, and the financial community should
continue to respond favorably. As long as that yield curve stays
fairly flat, the Pound should provide a good investment vehicle,
especially on the cross-rates.
Tomorrow brings the potentially
explosive unemployment number. Consensus seems to be non-farm
payroll growth of 180,000 jobs with average earnings up .2%. The
manufacturing jobs data should be watched closely since the number has
been declining for so long that any increase would be deemed as the
start of a jobs rebound. The currency and interest markets were
roiled today by the esteemed Fed Governor, Ben Bernanke. It has
been Bernanke that has set the deflation tone at the Fed and today it
appeared as if he was beginning to read from a new song sheet.
Although he reconfirmed that the Fed could remain patient because of
the lack of inflation, he said that the economy should see some
employment growth. “The exact timing of that is difficult to
tell, but I am confident we will see some big numbers fairly soon.â€
This statement sent the interest rate futures down and the Dollar
rallied to new highs on the day. The market wants to believe
that “Old Ben†knows something so it is now set up for a big number
tomorrow. I believe that, until Bernanke’s remark, the market
would have been content to see that 180,000 non-farm payroll but will
be disappointed if there is not a 200 handle. The market will
need a robust job number just for the Dollar to hold ahead of the G-7
meeting. If the number is below 100,000, with a weak negative
manufacturing number, and no large adjustments to last month’s
release, the U.S. asset group will struggle badly.
Now on to this weekend’s G-7 meeting in
Florida. To understand the significance of this meeting, let’s
review the communiqué from the last meeting in Dubai. In regards
to currencies, the statement said:
“We reaffirm that exchange rates should
reflect economic fundamentals. We continue to monitor exchange
markets closely and cooperate as appropriate. In this context,
we emphasize (sic) that more flexibility in exchange rates is
desirable for major countries or economic areas to promote smooth and
widespread adjustments in the international financial system, based on
market mechanisms.â€
The phrase “more flexibility” was
pushed for by the Europeans and Americans, but for different reasons.
The Americans wanted a lower Dollar, while the Europeans were more
concerned about Asian Central Bank intervention in the markets.
The Americans, led by Treasury Secretary Snow, certainly succeeded in
the quest for a lower Dollar while the Europeans failed. The Yen
initially appreciated against all currencies but since that initial
reaction, the Euro currency has gained about 4% versus the Yen.
The sell off in the Dollar against all currencies has led to great
volatility which the Europeans like to eradicate. When Europeans
speak of volatility, they mean rapid appreciation of the Euro.
Look for a phrase about volatility to appear in the final communiqué
if the Europeans are to come away with any success at this meeting.
I would caution though, that the Japanese (read Asian Central Banks)
hold all the cards coming in to this forum. Japanese and Chinese
intervention techniques are keeping U.S. long rates down and the
Americans will not want to disrupt this game. Any disruption to
the U.S. Treasury market could place the equity market in jeopardy as
well as calling even more attention to the growing budget deficit.
End result: without an interest rate cut from the European
Central Bank, the Euro currency will continue as the vehicle of least
resistance!
Be patient and focused,
Yra
yra53@aol.com