Economic Data Fails to Move the Markets

But luckily for me, economic data is what ruled the markets yesterday. We had a plethora of data released in the US, but the markets seemed to be focused on the release of CPI and the weekly jobs numbers. CPI led off Thursday morning’s data showing that prices in the US were unchanged for the month in February from the 0.2% gains we saw at the start of the year. The core number was up 0.1% offsetting a 0.1% dip in January. The YOY (year on year) number showed a drop in the inflation rate to 2.2% from 2.7%. We all know how manipulated this data is, and our friends over at ShadowStats reported the non-seasonally adjusted number was actually just over 5%, which is certainly more realistic. But while this number is higher than the ‘official’ number, it showed a similar decline, diffusing a rumor which swirled around the markets yesterday afternoon.

Predictions of another ‘surprise’ move in the discount rate began making the rounds of the trading desks as we approached the close yesterday. A month ago the Fed shocked the market with a 0.25% move in the discount rate; a move designed to pull back some of the liquidity pumped into the market to stimulate recovery. But bank borrowing at the discount window has been unchanged since the last increase, so many now believe we will see another surprise move by the Fed. “Another increase in the discount rate could be coming soon,” Laurence Meyer, vice chairman of Macroeconomic Advisers in Washington said in a recent interview. I always pay attention to Mr. Meyer’s comments, not only because he was a former Fed governor, but he was also one of my favorite economics professors at Wash U.

We didn’t get a surprise move last night, but it shows the markets continue to be volatile as the Fed continues to try and exit the stimulus measures. The CPI data quieted those calling for an early move up by the FOMC but in spite of this data, the overall market is still fairly hawkish on Fed expectations. Economists are now predicting three interest rate hikes in the next year with a 13.5% probability of a hike in June. As I wrote earlier this week, I don’t think we will see the FOMC move to increase the Fed Funds rate until later in the year (if at all).

The jobs data certainly didn’t calls for higher interest rates. The weekly data showed a 6,000 dip in unemployment claims versus last week, but they remained high at 457K. Continuing claims were up again, climbing 12,000 to 4.579 million. The ‘official’ unemployment rate was unchanged at 3.5%. But we all know the actual numbers are much worse, and referring back to ShadowStatistics, I see the un-government corrupted employment rate remains above 20%. The numbers show that while the US economy may be recovering, it is a jobless one.

The data kept rolling in yesterday, with the current account deficit showing an increase of over $13 billion during the fourth quarter to a figure of $115.6 billion. This equals 3.2% of GDP, the largest deficit since the fourth quarter of 2008. The leading indicators of the US economy for February were the last piece of data released yesterday, and showed a minuscule increase of just 0.1%. While the number did move up a bit, underlying details show continued weakness in many of the components. A stubbornly weak housing market and poor employment prospects kept consumer expectations at low levels; pulling down the leading indicators.

This data seemed to be far from supportive for the US dollar as it showed the US economy may be slipping back toward a slowdown. And while you would think this combination of poor data would have caused a move lower by the greenback, the dollar actually moved higher in the past 24 hours.

It seems traders are willing to ignore the poor economic fundamentals of the US and continue to purchase the dollar as a ‘safe haven’. And the continued questions over the Greek bailout or non-bailout by the EU sent fear back into the markets. There was no real news on the Greek crisis overnight, and the major EU members seem to be at a stalemate on the issue. France is backing the announcement earlier this week that the EU would stand behind Greece, but Germany continues to call for Greece to ask the International Monetary Fund for help. The split has caused over a 1-cent drop in the euro (EUR) which will close the week with the largest 5-day drop since the crisis raised its ugly head in February.

The euro was the major currency story this morning on the newswires, but there were a couple of other stories that caught my eye. James Rogers, who continues to be a long-term bull on the commodity markets, announced yesterday that he is again a seller of the pound sterling (GBP). Rogers co-founded the Quantum Fund with George Soros, who made $1 billion betting against the pound in 1992. “I doubt that I will own sterling in my lifetime,” said Rogers in an interview on Bloomberg TV. He said continuing deficits in the UK will sink the sterling.

While he is jumping on the bandwagon with this call for a lower pound, he is going against the grain concerning the euro. He believes the EU should let Greece go bankrupt, and not bail them out. If this occurred, the euro ‘would go through the roof’ as investors would now look at it as a hard currency. But he says there is probably a good chance the Europeans will reach an agreement and ‘paper this crisis over’ which will probably increase the value of the euro in the short run. He continues to believe gold will go ‘much higher’ in the next decade and remains bullish in general on commodities. He also believes the Chinese economy will continue growing, and said he isn’t worried about asset ‘bubbles’ in China.

The US congress continues to push Treasury Secretary Tim Geithner to brand China as a currency manipulator, and is threatening to take measures aimed at forcing the Chinese to let their currency appreciate. Chinese Premier Wen continues to say the currency is not undervalued, and Goldman Sachs (GS) Chief Economist Jim O’Neill announced this week that he agrees. O’Neill told reporters that the currency “actually isn’t particularly undervalued anymore” and “it’s unfortunate that we have so much political angst around this. The key thing is that post-crisis, China is importing a lot.”

Goldman’s stamp of approval is big, as we all know the influence they enjoy in our nation’s capital. Other big NY banks are also warning congress against pushing China too hard. Stephen Roach captured many headlines in the financial news sections today when he said, “We should take out the baseball bat on Paul Krugman” who has been beating on congress to step up pressure on China for keeping its exchange rate unchanged versus the US dollar. Krugman has called on congress to get more aggressive with China by instituting duties and escalating a trade war.

Overall, the dollar enjoyed a bit of strength yesterday, and with no data due to be released this morning, we will probably see further increase today. Continued worries over the Greek crisis, and the possibility of sanctions against China will keep investors worried. Recent history shows these worried investors continue to be most comfortable parked in US treasuries, which will probably keep the dollar stronger for a while.

By Chris Gaffney

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