Overnight, news out of China that CPI figures came in as expected was a welcome relief to the markets. Inflation in China rose 5.5%, and in industrial production figures came in as expected, posting a gain of 14%. Retail sales figures were slightly lower than expected, coming in at a gain 16.9%.
The fear was that if inflation came in higher than expected in China, the Central bank would raise interest rates to try to slow growth. If Chinese growth slows, then the global economy is in BIG trouble. Think about these figures for a moment. Everything is showing double-digit gains, with retail sales figures growing close to 17% YoY. Contrast that with the US advanced retail sales figures due out later this morning which are expected to decline by .5%.
You tell me which economy is more important to the world right now?
Another piece of news that had the potential to move markets was the release of the UK CPI data, which also came in as expected showing headline inflation of 4.5%, with core inflation coming in better than expected at 3.3% vs. an expectation of 3.5%. At this point it is apparent that the BOE is content to allow this extraordinary inflation (by UK standards) to persist with the hope that government austerity will reduce demand and cause prices to fall naturally. Sounds like they are heading more toward stagflation to me.
In Japan, the BOJ rate policy decision left policy unchanged, and there was a minor hope that the BOJ would move to be more accommodative to try to help the recovery.
This all adds up to risk-taking in the markets, with stocks trading higher, though commodities are lower.
In the forex market:
Aussie (AUD): The Aussie is higher as steady Chinese growth means it is unlikely that the government will enact slowdown measures which is good for Australian exports. Business confidence figures were slightly lower than last month, but risk appetite is strong to start the morning.
Kiwi (NZD): The Kiwi is higher on risk appetite, shaking off yesterday’s decline after the earthquakes that just occurred. While expectations for the next rate hike have shifted dramatically, as long as China keeps growing the New Zealand economy should recover.
Loonie (CAD): The Loonie is mostly higher despite lower oil prices which are trading at 96 and change. While there is no major news out this week for Canada, expect the Loonie to trade with US economic data, especially if it is weak.
Euro (EUR): The Euro is trading mostly higher despite yesterday’s S&P downgrade of Greece’s credit rating to CCC from B. To be honest, I didn’t even know that that rating exists! This makes Greece the second lowest-rated country of those with ratings. Nevertheless, the market believes that a resolution is forthcoming by the end of the month.
Pound (GBP): CPI data in the UK came in as expected at 4.5%, as did retail prices though home prices fell slightly. The UK still has a persistent inflation problem and the BOE has chosen to allow it to continue in the face of declining economic data. This sounds like stagflation to me. (Click chart to enlarge)
Swissie (CHF): The franc is weaker across the board after the SECO report lower economic expectations for 2012, citing recent currency strength as an impediment to its exports. While growth has been steady for 2011, don’t look for the SNB to raise interest rates on Thursday as they don’t want to contribute to further strength.
Dollar (USD): The Dollar is weaker on risk appetite as we await the release of the US advance retail sales figures and PPI data later this morning. The expectation for a decline in the retail sales of .5% is alarming and indicative of a lack of confidence in the current direction of the US economy.
Yen (JPY): The Yen is mostly weaker on risk appetite and the BOJ left monetary policy unchanged last night. There was a slight expectation that they would ease policy to help with economic recovery, but it may be too soon for that. My guess is that they would wait until supply chains are repaired and factories are back to full capacity before enacting such measures. It doesn’t make sense to weaken now to encourage exports if companies aren’t ready for it. (Click chart to enlarge)
It’s their time now. China and other emerging markets are playing catch-up with the US and Europe and continue to grow at a rampant pace. The US is becoming less important on the global stage as China continues to grow. It won’t be long before the Chinese are able to exert their influence which may or may not be in-line with US interests.
In a nutshell, China has given us the rope to hang ourselves and we’re just about dead. But as long as China keeps growing, the global economy may not care. Politics in Washington are starting to heat up and it is patently obvious that our current path is wrong and unsustainable.
Whether or not we have the will to succeed in the face of adversity used to be undebatable, but now the question must be asked. Are politicians willing to share in the same sacrifice that they are asking of the general public? My heart tells me yes but my head tells me no, which means unfortunately that the US economy will continue to decline.
So invest in areas that seem to be on the rise, and there is no better way to do this than through the forex market!
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