This morning retail sales figures came in much better than expected, posting the largest increase in nearly 6 months. This bodes well for the US economy, however it must be noted that the threat of potential inflation could be the driving force behind the advance as purchases out of fear could be short-lived.
Meanwhile, where there is smoke there is fire and it looks like Ireland may need to access the emergency facility, whether they want to or not. With the market pushing yields higher and the tremendous doubt surrounding their budget plans in question, perhaps it would be better for them to just get it over with already and remove the speculation from the marketplace.
Overnight, Japan posted better than expected GDP figures as the effects of their easing program may be working better than expected. As a result, there is Yen weakness across the board despite the risk from the Euro zone.
The minutes from the BOE rate policy meeting are due out on Wednesday, which could foretell whether the Pound will remain a “safe haven” currency for money flows should the Euro continue to falter.
There are various inflation figures due out from different regions this week so we will see if the data matches up with the perception of inflation because of QE2 here in the US. While the program of bond buying has officially started, the expectation of the program may have already driven prices higher before the official announcement.
So this week it’s most likely going to be about inflation data and the Irish debt crisis, with the market trading on risk themes and price fundamentals.
In the forex market:
Aussie (AUD): The Aussie is mixed this morning as Japanese Yen and Euro weakness have pushed it higher, though Dollar strength from the safe haven bid have pushed AUD/USD below .99. The minutes from the RBA rate policy meeting are due out on Tuesday, and they are likely to show a commitment to keeping inflation in check through higher rates.
Kiwi (NZD): The Kiwi is mixed as well as retail sales figures came in better than expected, balancing out risk themes in the market. Retail sales figures came in at 1.6% vs. an expectation of 1.1%, which could put inflationary pressure on the RBNZ to move on rates.
Loonie (CAD): The Loonie is higher this morning across the board as oil prices are rebounding from Friday’s sell off. In addition, this week is a light week for new out of Canada so today’s move could be a bit of money flow moving from Euro, as the uncertainty surrounding the Irish debt crisis has investors on edge.
Euro (EUR): The Euro is lower across the board on speculation that Ireland may access the emergency fund as Germany pushes them toward rescue. While no official application has been made, Ireland may indeed become the Euro zone sacrificial lamb. Trade balance figures for the EU came in better than expected.
Pound (GBP): The Pounds is mostly lower as monthly home price figures were cut by the most in nearly 2 years. CPI figures are due out on Tuesday, followed by the BOE minutes on Wednesday. If it appears likely that the BOE is taking a more hawkish stance, then the Pound could be on the receiving end of hot money flows despite the UK’s close ties to the Irish economy. (Click chart to enlarge)
Dollar (USD): The Dollar was stronger to start the morning but has given back some gains as US retail sales figures came in much better than expected. Sales increased 1.2% vs. an expectation of a .7% increase. However, Empire manufacturing numbers came in way worse than expected, posting a loss vs. an expected gain. US CPI data is due out on Wednesday so we’ll get an idea of where prices are and will likely hear that inflation is tame as everything that matters is stripped out of the figure. This will confirm the need for QE2 and we’ll see how markets respond.
Yen (JPY): The yen is weaker across the board as Japanese GDP figures came in better than expected, posting a 3rd quarter gain of .9% vs. an expectation of .6%. This pushed the annualized GDP figure to 3.9%, much better than the expectation of 2.5%. Bond yield differentials have pushed USD/JPY to above 83 for the first time in nearly 6 weeks. (Click chart to enlarge)
Today was a positive day for economic data around the globe as nearly every figure bested expectations. This bodes well for the global economy, but the risk of the Euro debt crisis resurfacing and spreading has left the market cautiously optimistic.
It is this cautious optimism that is counter-balancing the effects of QE2 and keeping the markets tame. However, we are not out of the woods yet. Here in the US we basically have a tale of two economies; those with jobs and those without. The housing market here in the US still is the elephant in the room and home buyers may continue to be cautious despite cheap money.
If the further monetary stimulus does not make its way to the housing market specifically, then we could see biflation, a condition where asset prices continue to decline putting pressure on banks, and prices for necessities (food and energy) continue to rise.
The Fed is basically trying to fool consumers into creating demand for houses by trying to encourage inflation to get people buying today. This will hopefully allow the banks to clear their inventory and reduce their balance sheet risks and can begin to start lending again.
However, without help on the fiscal side, this could be all for naught. And with a lame duck session of Congress just beginning, I doubt there’s going to be cooperation on much.
So keep an out for inflation yourself, and don’t rely on the government figures. As we enter the winter season, fuel to heat homes, gasoline to drive around, and food to feed your family could all be going up despite what the figures tell us. You just may want to save up for that possibility, rather than spend away on useless stuff. So buyers beware!
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