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US economics, finance and companies review and analysis

Contributed by Daniel Stewart & Company

By Daniel Stewart & Co

Following the previous week’s encouraging NFP figures, Retail Sales carried the torch last week, defying not just the weather but also most economists. They were even better (+0.8%) if autos are excluded. It is more significant that Consumers keep their jobs and keep opening their wallets than if they are cautious in outlook (as  expressed by the Reuters/University of Michigan Survey). This is especially true if the business elements of GDP, exports and investment, are picking up. The Trade Balance in January, however, was negative as usual: exports were pulled down by lower airplane sales (which are typically lumpy) and imports of crude oil and Japanese (Toyota?) cars were sharply down.

Meanwhile, in China both exports and imports are growing strongly, seemingly too strongly for a Government trying to meet a 3% inflation target and contain a ‘westernstyle’ asset price bubble. China has certainly been doing its bit to keep the global economy moving and the relationship with the US is becoming increasingly symbiotic, as well as fractious. The row about the value of the renminbi rumbles on but sooner or later some sort of upwards move is likely: either as a one off or gradually. The one way the currency market can express its opinion is in the value of Non Deliverable Forwards, which unlike freely tradable forwards such as GBP/USD, do reflect expectations of future rates and these currently point to a 3% revaluation within the next 12 months.

The price of Gold took a knock during the week and there were reports of at least one sovereign seller. Could this be Greece or one of the other so-called PIGS? Trading volumes in the currency market is reported, after a period of circumspection, to have at last risen above pre-Summer 2008 levels: an extraordinary $2.7trn every day. It is thought that over 95% of this is speculative trading. Is it really so safe to come out again?

It has been Industry’s turn to chip in to the recovery. To some extent this requires a ‘half full glass’ approach as some of the headline figures were, in fact, down on the previous month. However, the weather in February was severely disruptive and worse numbers had been expected. For those who recognise the resilience and inherent strength of US industry the steady upwards creep of capacity utilisation is very encouraging. Even the still declining housing data offers positive aspects: in absolute numbers there are still a lot of houses being built or about to be built.

The FOMC at its latest meeting has taken account of both the continuing recovery and its precariousness. The key phrase ‘for an extended period’ has been retained in respect of the main Fed Funds rate and this probably means until the end of 2010 at the earliest. This should also encourage the Bank of England the ECB to hold back. Unlike the MPC, however, the FOMC feels able to withdraw other ‘emergency measures’ and the last one (accepting commercial mortgage-backed securities as collateral) will end on June 30th.

The January Long Term TIC figures were sharply down on December and it appears that the Chinese authorities are still net sellers. If others (e.g. the Japanese, Russians) join them there might be implications for funding the record US Government deficits. However, it is not clear where else the funds are going: the Treasury auctions are well subscribed and the dollar has been quite firm in recent weeks. It has to be said that there is a considerable time lag in publishing the TIC numbers and they can vary hugely from month to month (last November was $123bn whereas October was about the same as this January’s $19bn)

Chinese leaders and officials continue to protest at the pressure from the US (and elsewhere) to revalue. It is said that the memories of the (rather disgraceful) Opium Wars in the nineteenth century still rankle the mandarins. More likely is that they have studied in detail what happened to Japan after it agreed to strengthen its currency in the 1980 s and 1990’s resulting in the ‘lost decade’. They will still have to revalue but they will choose their moment as a matter of principle. Meanwhile, Messrs Obama and Geithner are determined ‘to keep their heads whilst others are losing theirs’.

Meanwhile, the Bank of Japan in its increasingly desperate attempts to arrest deflation has doubled to 20trn yen its lending programme to banks. It is, therefore, adding liquidity when many other central banks are scaling back. It believes the economy is ‘picking up’ and boosting credit may accelerate the process. It has not really helped the yen to weaken very much or at least not yet and more drastic action is looking more plausible.