Forex Market Outlook 10/18/11
With the overhang of the realization that indeed Euro zone leaders will not have a resolution in place by next week like the G-20 leaders asked for, it is now questionable what exactly Merkozy were referring to when they claimed to be able to have something ready by early November. Is their timetable still in play? From where I sit, it doesn't seem likely.
So the markets have turned their attention to global economic data and at this point it isn't pretty. Overnight, China reported GDP figures that came in less than expected but nevertheless were impressive, showing growth of 9.1% vs. an expected 9.3%. This was worrisome for the markets as this was the slowest pace China has grown in nearly two years, but some encouraging signs are that domestic demand is picking up as retail sales figures were higher than expected, as were industrial production figures.
This put pressure on both the Aussie and Kiwi as the RBA also said that they could envision a rate reduction as inflation there is "less concerning". However, the RBNZ governor said that rates may need to move higher in New Zealand as the economic activity generated from the rebuilding from the earthquakes may no longer require stimulus.
This sent markets into risk aversion mode right away and that sentiment was carried into the European session as German economic confidence figures came in at 3 year lows. In addition, France's credit rating is in jeopardy if the Euro debt resolution puts too much strain on the French economy though the pace that these negotiations are taking place may not make this a worry any time soon.
What we are seeing though is the signs of inflation creeping up around the globe, most visibly in the UK who reported CPI of 5.2% inflation vs. the expectation of 4.9%. I thought that expectation figure yesterday had to be wrong, but boy was I mistaken. To be clear, the BOE has an inflation target of 2%, which means it is running more than twice their mandate. I'm sure the UK citizens love this as the economy slows down. Stagflation anyone?
As bad as the UK seems, there may be a bigger stagflationary problem and that is occurring right here in the US. This morning PPI data came in hotter than expected, posting a headline figure of 6.9% vs. the expected 6.5%, with the core figure showing 2.5% vs. an expected 2.4%. This may mean that tomorrow's CPI data could be hotter than expected and that we are experiencing inflation, despite declines in housing prices. Were it not for the drag of the housing market, inflation might be much, much higher.
Yet the markets know that Bernanke is going to do nothing about higher costs because that is EXACTLY what he is hoping will occur. Meanwhile, misguided protesters will continue to direct their anger toward Wall St. and not Washington DC even though US bank earnings are coming in way lower than expected.
But I suppose it is easier to point the finger at those who actually show up for work, as Washington DC is in full-on election mode right now which means that virtually nothing will get accomplished which at this stage of the game may be a blessing in disguise. The debt "super-committee" will likely do the bare minimum and kick the can further down the road and the blame-game politics we've come to endure will only grow as more and more people donate to the campaigns of these fools who have caused the economic malaise we are experiencing.
Maybe the Occupy Wall St. movement will help reduce the unemployment rate as fewer people show up to pick up their checks, though the auto-apply feature comes in pretty handy especially when you are not looking for work as you are supposed to be.
Bernanke will be speaking later today and will likely shift the focus back on the Euro zone, which is an entirely different mode of blame politics. We'll be told that if the Europe can just get their act together then things will be alright.
Do you believe this? Me neither.
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