Is the US economy improving enough to offset the global negativity emanating from the Euro debt crisis? Apparently the markets think so as risk assets traded higher yesterday and that follow-through has carried over to this morning. Yesterday’s better than expected data here in the US showed that things may be improving despite the global economic malaise that has heightened risk in the marketplace. Also, there is some decent news out of the EU as well that is contributing to the sense of relief we are seeing this morning.
The big news here in the US yesterday came from the initial jobless claims report that came in at 366K, which is the lowest we have seen in some time. In addition, there was also some positive news on the manufacturing front, as the Empire manufacturing index and the Philly Fed came in much better than expected, with the former posting a reading of 9.53 vs. an expected 3, and the latter posting a reading of 10.3 vs. an expected 5. This is a step in the right direction but could also be an indication of activity taking place to stock up inventories for next year.
While these are both positive developments, we need to see that this is the start of a new trend and not a one-time phenomenon. Yet as problems in the EU persist and the possibility of a slowdown in China is looming, the global economy needs the US to recover quickly.
This sentiment was not lost overnight, as Asian equities and the commodity currencies traded higher with the Japanese yen and US dollar trading lower. The idea is that if the US recovers, it will be god for demand for Asian exports. The Aussie, for example, is trading back over parity vs. USD.
Even though there was little economic data in the overnight session, there are some positive developments coming from the EU. In Germany, a motion to get rid of the ESM was defeated in Parliament paving the way for the use of that fund as per the agreements that have been made so far. In Italy, new PM Monti has passed a confidence vote over the austerity measures and budget cuts Italy is making in order to reduce deficits and comply with EU mandates.
Yields in the EU are falling as bonds are rallying ahead of the implementation of the ECB 3-year loan proviso, which is to begin next week. This will help provide European banks with added liquidity to prevent shortages, and has increased the demand for short-term sovereign debt to use as collateral.
There is also some Fed speak today with various Fed officials set to make comments about the various situations. One take away comes from Fed governor Dudley, who said that the Fed would not be using monetary to combat the potential fall out from further problems in the EU, but they would stand by at the ready to increase liquidity if need be. One example of this was the move to reduce swap lines recently.
The only real news of the morning here in the US is the release of CPI data. The headline figure came in unchanged vs. an expectation of a gain of .1%, leaving the YoY number at 3.5% as expected. The core number, ex food and energy, increased .2% vs. an expected .1%, pushing the YoY number to a slightly higher 2.2% vs. the expected 2.1%.
While these numbers are largely in line with expectations, the slight tick up in core CPI is consistent with my discussion yesterday about biflation. Higher costs for items that are necessities strain the average consumer, vs. the more discretionary items. So the government can say whatever they want about inflation, but it is easy to see through the smoke and mirrors as you leave the grocery store or pull out of the gas station.
Regardless, the markets appear to be in risk-taking mode with global stocks and commodities holding on to gains this morning. Whether or not this will continue ahead of the weekend remains to be seen but my guess is that we may be able to coast into the end of the year without incident.
If there is going to be any hope of a Santa Claus rally, it needs to start now!
