The dollar moved lower throughout the trading day on Thursday, as investors felt more confident with the global recovery and the US stock market climbed back above 10,000. Yesterday’s weekly jobs numbers were slightly better than expected, and set the market up for this mornings monthly jobs report which will probably show fewer job losses in October compared to September. But there will still be job losses, not gains; and the ‘official’ unemployment number will inch closer to double digits. We all know if you count those individuals who are underemployed (part time workers who would like full time jobs) and those that have given up on their job search, the actual unemployment number is more like 16%.
Another number that was encouraging for economists was the large jump in non-farm productivity. US worker productivity spiked up an annualized 9.5% in October as employers found ways to squeeze more work out of existing employees instead of hiring new ones. This jump demonstrates one of the positive aspects of a severe economic slowdown. Contrary to what some reader’s of the Pfennig seem to believe, neither Chuck nor I are happy that the US continues to be mired in this economic recession. But business cycles are inevitable, and the more we ‘spend to extend’ the longer it will take for the recovery to take hold. The jump in productivity is one positive that comes out of an economic downturn. In the good times, companies become fat and happy, with many companies becoming very inefficient. The severe slowdown causes companies to rethink all of the processes, and worker productivity increases. This need for higher efficiency also encourages innovations to the manufacturing and service sectors.
Another piece of data due out this morning will illustrate another positive aspect of the economic slowdown. US consumer credit is expected to show another $10 billion drop. The highly leveraged US consumer is continuing to draw in their purse strings, ignoring calls from the administration to resume their old borrow and spend attitudes. While some of this belt tightening has been forced on consumers by the credit crunch, hopefully we will see this adjustment continue. This isn’t good news for retailers as we approach the holiday season, but if the global imbalances are to be corrected, US consumers are going to have to continue to increase their savings rate and decrease debt.
So there are a few silver linings to the economic cloud hanging over the US. The United States will eventually emerge from this economic storm with a leaner and meaner manufacturing sector and a much weaker dollar enabling it to better compete in the global arena.
Both the ECB and BOE kept rates unchanged. Officials at the Bank of England slowed the pace of bond purchases, but still approved the additional purchase of £200 billion. A rebound in factory output, which rose 1.7% (the largest gain in seven years) combined with a 0.2% increase in UK producer prices, caused the change of direction by the BOE.
ECB President Jean-Claude Trichet signaled the beginning of the end of emergency stimulus measures in Europe. Trichet said next month’s offer of 12-month loans would be the last. Data released yesterday was unable to paint a clear picture of the economic recovery in the Euro-area. German factory orders rose for a seventh month in September, as exports helped the recovery. But another report showed European retail sales fell for a 16th month, declining more than economists had predicted.
The euro (EUR) rallied a bit after the ECB decision, but Citigroup is predicting an even larger rally. A report by Citigroup stated that the technical trading patterns predict the euro will climb to $1.5064 short term, and move up to $1.5285 over time. It continues to look like Europe will recover, and the euro will move higher versus the US dollar.
The Norwegian krone (NOK) also moved higher as Norway’s central bank Deputy Governor Jan Qvigstad said it is ‘most probable’ the deposit rate will be moved another quarter-point higher by the beginning of 2010. Officials of the Norges Bank are attempting to hold down some of the appreciation of the krone as Norway continues to increase interest rates to combat rising inflation. Norway’s oil rich economy was one of the first to emerge from recession, so the central bank is also taking the lead on increasing interest rates. Yield differentials, along with a strong economy should keep the NOK among the world’s top performing currencies.
Speaking of the top performers, I was updating the return charts for the currencies yesterday and was amazed at the returns on the Brazilian real (BRL) and Australian dollars (AUD), YTD. Brazil is up 31.42%, and the Australian dollar has increased 28.05% during 2009. The Australian dollar continued to strengthen yesterday as the central bank signaled it would continue to increase interest rates in the coming months. “A further gradual lessening of monetary stimulus is likely to be required over time,” the Reserve Bank said in Sydney today. A rally in commodity prices, along with increasing interest rates will push the Aussie dollar toward parity with the greenback.
To recap… Silver linings of the current economic storm cloud: increased worker productivity and decreased consumer credit. The ECB and BOE kept rates unchanged. And Aussie dollars continue to move closer to $1.
By Chris Gaffney