Welcome to Kit Juckes's Market Commentary blog. This page is updated regularly to cover events impacting the global financial and currency markets.

The most recent post appears at the top – scroll down for older entries.

.

  Click here to return to the current month

I wrote yesterday morning that the US Q3 GDP data would be unlikely to advance my own thinking about the state of the global economic recovery. And so it proved, though they did provide a shot in the arm for asset markets giving the S&P its biggest daily gain since July. A preliminary assessment of the month of October shows that equity markets rallied modestly, gold, palladium and platinum prices all increased and market interest rates moved higher, notably in Australia. In currencies, that positive economic sentiment and rising (market) interest rate trend has resulted in the yen being the weakest of the major currencies, while sterling (recovering form its September battering) and the rate-sensitive Australian dollar battle it out for top spot.

The preliminary US GDP data should be treated with caution, albeit not to quite to the same degree as the UK data. The Goldman Sachs research which concluded that the UK flash GDP release is uncorrelated with the final outcome – and also tends to be revised higher – suggested the US release is more accurate, but tends to be revised slightly lower. So beware the revisions. That said, the good news in the GDP report was that the contribution from inventories was small. What matters for GDP is the change in inventory levels, so what matters to GDP growth is the change in the change in inventories (if that makes sense!). Put another way, a slower pace of de-stocking increases the growth rate of GDP and that is what happened in Q3. However, this only accounted for a quarter of the 3.5% overall growth rate, the biggest contributor being consumption which accounted for two-thirds of the increase in GDP. Inventory reduction caused a 5.6% decline in GDP in the previous six quarters, so a 0.9% positive contribution is small beer. As the pace of de-stocking slows further and then turns in renewed stock-building, I think there is scope for upside growth surprises in the next quarter or two.

The fact that the growth figures may be OK is not the same as saying I am totally confident about the growth outlook. As I said yesterday, I am sorely tempted to hide under the duvet for a few days and see whether the US economy maintained its positive momentum in October or succumbed to post-cash-for-clunkers weakness in manufacturing output and employment. I was heartened to see that the number of people claiming unemployment benefit in the US is still falling, and I would be encouraged if this afternoon’s Chicago Purchasing managers’ survey were upbeat (the consensus forecast is for a bounce from 46.1 to 49.0). We also get October consumer confidence from the University of Michigan. However, the big test comes next week, with the national ISM index and the monthly payroll report.

Yesterday was the first day I wrote this blog while travelling and I could not work out how to attach links to articles from a Blackberry! However, one story I have been following is the possible re-opening of the RMBS (residential mortgage backed security) market which is showing ever-so-tentative signs of recovering. The FT carries a story on this (click here). This is critical for the return to ‘normal banking’, particularly in the UK. The growth of the RMBS market (which grew from under £10bn in 1999 to around £170bn in 2006 fed the growth of lending because it allowed banks to package mortgages together and sell them on to investors, removing them from the banks’ balance sheets. In the last 18 months, this market has been effectively shut. For banks to lend more money, they need either to pass existing loans to someone else or to raise more money. Raising more money requires issuing capital, which the banks are keen to do (as we can see from Lloyds). But that takes time. They also want to attract more deposits, but attracting foreign depositors has become more difficult. Using the RMBS market to get more loans off their balance sheets will free them up to make new loans and that will be critical both to economic recovery and to the MPC considering winding down their asset purchase scheme, which is intended to offset the current weakness of bank lending. So far, the RMBS market is showing signs of life but nothing more. However, low interest rates, tight credit spreadsand a dearth of interesting investment opportunities will all help nurture RMBS back to health. It is worth keeping an eye on these developments. For a slightly gloomier assessment of the outlook for bank capital raising, this week’s Economist carries an excellent article (click here).

Finally, some assorted news stories on a Friday! The FT leads with rising house prices in the UK (click here) and John Lewis reports more sales growth (click here). The Times cites a survey of economists expecting the MPC to extend QE next week with which I agree (click here) and Market News reports that “European central bankers, worried that the soaring euro could squelch a nascent economic recovery, are increasingly pressuring US authorities to put some bite into their bark(ing) about a strong dollar, well-placed monetary sources told Market News International”, increasing speculation that the G20 Central Bankers’ and Finance Ministers’ meeting at St Andrews on 5-6 November will see increased opposition to dollar weakness.

.

The last few days of the month are exposing raw nerves amongst the investor community. But there is a difference between this equity sell-off (and dollar rally) and the one we saw in September. The September correction was initially triggered by talk of central bank 'exit strategies' from super-easy money. This one is being caused by growth fears after some soft economic data in the US (following on from poor UK data last week).

That's an important difference. I suspect the Fed in particular was happy to put a little doubt into the market's collective mind and slow the pace of asset gains (and the dollar's fall) a month ago. But the 'cure' to a sell-off caused by hawkish policy rhetoric was to shut up, so there were good reasons to buy the equity sell-off and sell the dollar rally.  

This time, the fear is that there is no 'plan B' if monetary reflation doesn't work. If unprecedented monetary accommodation fails, I don't think there is any rabbit that can be pulled out of the hat. Just more of the same policies.  

So the price action in equity markets is more frightening this time and the move equally sharp but the increase in volatility feels bigger and more 'real money' investors are selling. The approach of the end of the year probably plays a role – and that is something I will remember when the end of November rolls by.  

The test of course, comes from the data. Not today's US third quarter GDP but next week's figures – US business confidence and employment readings for October, UK September industrial production and October manufacturing PMI. Goldman Sachs revised their forecast for GDP down a bit to a 2.7% annual rate (that's a 0.7% quarterly increase in anyone else's language). But the catalyst was an even steeper pace of inventory reduction than others forecast and the flip-side of that ought to be more optimism about stock-building in future quarters.  

If growth slows, asset markets are likely to struggle. A bigger question long-term however is whether they would continue to correlate with a strengthening dollar. To date, weak asset markets have caused renewed fears of illiquidity and a rush to safe havens. But I'm not sure a more protracted period of weak growth would imply a return to the financial system stress which triggered the dollar's rally last year. Sooner rather than later, we will get back to a world where poor US economic data is bad for the dollar, not good for it.  

It's Halloween this weekend and markets are entering into the spirit of it. All sorts of scary things are likely to happen. I'm tempted to hide under the duvet and re-emerge when we get real economic data next week. On balance, I think these will show recovery remains on track on both sides of the Atlantic. We'll see.

Good morning. The debate about the dollar’s unending decline has been replaced in some quarters by talk of its revival this morning. Such is the fickle nature of the press. The catalyst for a slightly stronger dollar is a correction in equity markets which, in turn, stems from some rather soft US economic data. I’ll get back to the data in a moment but the idea that economic weakness could be a catalyst for a dollar revival (or for the revival of any currency) on anything more than a short-term basis is pretty hard to accept.

I think it’s worth putting this year’s dollar moves into some kind of context. In trade-weighted terms, the dollar fell by over 40% between mid-2001 and 2008, the period when ludicrously low US interest rates pumped up the US trade deficit, pumped up global currency reserves and pumped up the credit and housing bubbles. The bounce we saw last year, which was triggered by a search for a safe-haven and by a sudden shortage of dollar liquidity as the banking sector imploded, retraced 38% of that move to the great pleasure of fans of Fibonacci. The latest moves represent a 16% fall between early March and the low on October 21, followed by a 1.6% rebound thereby recouping one tenth of the fall. The dollar also bounced from a low point in late September as the equity market stalled (around 1080 on the S&P, falling to 1020). That correction saw the dollar index bounce by a little over 2% before the equity market stabilised and the currency downtrend resumed. There is no dollar ‘crisis’ in 2009 – what we have is either a correction from the dramatic dollar rally that accompanied the credit crunch, or a resumption of a long-term downtrend that was caused directly by Alan Greenspan’s monetary policies and is being continued by the policy choices of the Fed now – i.e., keep rates low to prevent too rapid a rise in the savings rate. As long as the US policy choice is to use low rates to boost spending, sure in the knowledge that doing so is not inflationary in the near-term because import prices don’t increase much, the dollar will remain in a downtrend and indeed there will be no interest to the US in seeing it recover. And of course, the reason the US can think like this is that – for all the dollar’s apparent weaknesswhen we look at individual exchange rates – there are still many economies which won’t let their currencies appreciate against the dollar, led by China.

Most of the papers in the UK carried the news yesterday that McDonald’s is closing its branches in Iceland, because they are not viable (click here). It’s easy to dismiss this as a sign of the woes of the Icelandic economy, but McDonald’s faces a problem in Iceland because it has to import the ingredients for a Big Mac. Maybe this is a good development and a local alternative will emerge (reindeer-burgers?), but the contrast with the US is clear. The dollar’s fall is not pushing up US import prices. These fell 12% in the last year.

If the dollar’s fall is not a source of concern, the same cannot be said of other currencies’ appreciation. Since the US dollar reached its peak in early March, the New Zealand dollar has appreciated by 50%, the Australian dollar by 43% and the South Africa rand by 40%. All three have sizeable current account deficits – South Africa and New Zealand’s exceeding 5% GDP. That means that if equities were to take a more meaningful tumble and the global growth recovery were to be de-railed, these currencies – and the NZ dollar and rand in particular – would be very vulnerable. It is no surprise then that with month-end approaching, and some market participants looking to reduce risk into the end of the year, markets are skittish this week. Whether it’s more than a one-week phenomenon will depend critically on how the US October data round (which kicks off in earnest with purchasing managers’ surveys and the employment report next week) plays out.

Today’s news highlights will be German inflation for October (expected to come in around -0.1% on an annual basis), US durable goods orders (expected around +1%), new home sales (a 440,000 annual rate) and the sale of $41bn in 5-year Treasuries. There is also a central bank policy meeting in Norway, where the Norges Bank is expected to raise rates from 1.25% to 1.5%, the first European central bank to do so. The Economist magazine’s Big Mac index makes Norway the most expensive in the world to eat a burger. Unlike some others, however, Norway has a huge current account surplus so its currency will probably remain expensive.

.

The ECB released money supply data this morning, which show private sector loans falling for the first time since records began. Annual M3 growth slowed to 1.8% from 2.6%, also a new low point. Loan weakness is driven by a 0.6% annual fall in lending for house purchases which may reflect the weakness in Ireland and Spain most of all, and may in due course increase talk about divergence between economies within the eurozone (click here for the ECB press release). What do we learn from this? Firstly, that for all the recent strength in business confidence (strong confidence data were released in France this morning, again), European banking certainly has not returned to normal. Secondly, that a central bank which takes monetary data seriously surely cannot be thinking about increasing rates for a very long time indeed. With M1 (notes and coins and short-term deposits) growing more quickly, it is clear that the banking system is not getting cheap liquidity through the economy. Thirdly, a reminder that the eurozone’s financial system has many of the same problems as the UK and US can help erode the positive sentiment surrounding the euro. Half term and month end are resulting in thin trading markets this week, and lazy ‘long’ positions in stocks – along with lazy dollar shorts – are getting squeezed out. I don’t think we are seeing anything more than natural corrections to trends. However, this is a reminder that the big currency adjustment is not within the G7 currencies, but between G7 ones and those of economies where the credit crunch didn’t strike. The Norwegian central bank will probably raise rates tomorrow, and this morning there is a lot of hawkish commentary coming from the Reserve Bank of India where 6% GDP growth and 4.75% rates sit uncomfortably together, particularly given rising inflation rates (now in double digits).

Another development that is likely to add to the hawkish attitude of non-G7 central bankers – and particularly non-Japan Asian central banks – is the prospect of rising food prices. I’ve attached an article from The Telegraph on this topic (click here). Growth, a weak dollar, rising oil prices, biofuel subsidies and the fact that food has lagged behind other commodities, all point to higher prices ahead. I don’t know if I am convinced this is a long-term trend as innovation in food supply seems to me to be happening faster than in energy production, but food prices are increasing. Food is a bigger part of CPI baskets in emerging economies and this is yet another reason for the bouyant economies in Asia to consider tightening monetary policy. More a case of ‘watch this space’ than a near-term issue, but it is perhaps a reason for those economies where growth is strong (and fighting inflation is a priority) to tolerate stronger currencies.

The main news items today will be the UK CBI distributive trades survey; will this be more robust than the official data released last week, sending sterling back up? Also, the first part of this week’s debt auctions in the US happens today – $44bn 2-year notes. Market interest will focus on whether US equities fall further as the correction continues. Results remain robust but a 1050 S&P is possible. And finally, The Times carries an interesting article about ‘Exit Strategies’, written by Deutsche Bank Chief Economist George Buckley (click here). No-one is exiting easy monetary policy for a long time in the G7, but everyone is talking about it.

.

A debate is now raging about just how dire a state the UK economy finds itself in. The fall in the preliminary third quarter GDP data, which I wrote about on Friday, has elicited differing responses both in the press and from economists. Here’s a sample from the FT (click here), the Sunday Times (MPC told: don’t panic over recession figures) (click here) and from the populist Sun newspaper (click here). Goldman Sachs, whose study of how inaccurate preliminary GDP estimates are in the UK, was quoted in the Sunday Times. Its analysis shows two main findings. Firstly, that the correlation between the UK preliminary GDP estimate and the final figure is a mere 28%, which is far lower than in other major economies. The UK is the first to release its GDP data and often revises it substantially. Goldman argues that business surveys are a more reliable indicator. These have been more optimistic. Secondly, Goldman shows that the average revision to GDP data is 0.6% upwards. In other words, the preliminary reading understates growth by 0.6%. Taking a completely different stance, maverick ex-MPC member Danny Blanchflower this morning was quoted on Bloomberg as saying that there’s every prospect of the third quarter GDP data being revised down.

The Times report on the latest John Lewis sales data is worth reading (click here). They continue to paint an upbeat picture of sales recovering from a low base but doing so steadily. I am more in the Goldman Sachs camp than the Danny Blanchflower camp on the UK economy. The GDP data are unreliable, and the business confidence indicators have proven more accurate. We’ll get the next set of those in a week’s time. Today we have seen the release of a little-watched business confidence survey from KPMG (click here). However, one thing that has happened as a result of the GDP data is that sentiment has swung back in favour the next MPC meting, on 5 November, voting to extend the Bank of England’s asset purchase scheme (QE). I have written before that I think this is likely to happen. The MPC views QE as a policy which makes up for the weakness of bank lending to the domestic economy. There is little evidence of bank lending recovering and while we can argue whether that is due to lack of demand or lack of supply, I expect the MPC to err on the side of caution. Indeed, in a sense the question about whether to extent QE is a very different one from the question about interest rates. If the UK does see a return to 0.5% GDP growth next year with inflation around similar levels, current interest rates will look far too low. But if bank lending remains sluggish, the appropriate policy would be to raise rates and leave QE in place. That won’t happen, but I highlight it because there is a risk that low rates continue to push asset prices up (including house prices) while the underlying economy lags somewhat. That will create problems further down the road.

There isn’t much in the way of headline-grabbing economic news this week. The US comes out with its first estimate of Q3 GDP on Thursday. The market expects 3.2%. The Goldman Sachs analysis on GDP data suggests – if I read it right – that the preliminary GDP data in the US is likely to be revised lower over time. So, a strong figure is not inconceivable. But with purchasing managers’ surveys and the monthly payroll report due next week, and with a focus in bond markets on another huge treasury auction schedule, this feels like an ‘in-between’ week when markets are skittish but not necessarily establishing any fresh direction. I would not be surprised to see the equity rally pause and major currency pairs trade in relatively tight ranges.

.

I’ll get to the UK in a moment. First of all, the early news this morning has all been positive for growth with business confidence surveys around Europe recovering. The highest-profile is the German Ifo survey which bounced further to a reading of 91.9. That’s the best in a year, though still not back to long-term averages (click here for the press release). The data followed the release from Markit of the European ‘flash’ purchasing managers surveys. The composite European one rose to 53.0 from 51.1, way ahead of expectations and back to levels last seen at the end of 2007. So far, the strength of the euro and the woes of Latvia are not having too much effect on business confidence offset by the revival in global trade. European bond yields are a little higher this morning and I am increasingly confident that euro-denominated swap rates and bond yields have now reached their lows.

So the UK stays in recession. Third quarter GDP fell by 0.4% after a 0.6% decline the previous quarter to mark its sixth consecutive quarterly decline. That’s the longest losing stretch since 1955, when records began. The report doesn’t make attractive reading (click here). This series is a ‘flash’ estimate, subject to considerable revision and personally I don’t place too much importance on it. However, after soft retail sales and the softness of August industrial production data at the start of the month, it cannot be ignored. There are plenty of people who believe the UK economy is still deeply mired in recession and they will tend to point to a growing split between those parts of the economy which benefit from reflationary policies (Bond Street stores, owners of houses in Mayfair, investment bankers), and the vast body of the economy where debts, limited access to credit, unemployment and taxation are all hampering recovery. These people have the upper hand today. For myself, I still see an economy where the data is exceptionally mixed and the more forward-looking indicators are in better shape than the backward-looking ones. The other news today was a further increase in mortgage approvals – to 42,088. Still low, but still rising.

In the US, yesterday’s news continued to be positive. The positive earnings trends remain positive and 80% of S&P companies are still beating earnings expectations. The weekly unemployment claims data showed a slight rise to 531,000, up on the week but still trending lower. This week was the one used for the monthly payroll survey and, with the level of unemployment claims down on a month ago, this suggests we may see a monthly payroll fall below 200,000 in two weeks’ time. We also saw the leading indictors release for September which rose 1%. The 6-month average increase in this series is now 0.9%, higher than I have ever seen. It’s not a high-profile indicator, but one interesting article was published in the FT, written by the newspaper’s well-connected Fed-watcher, Krishna Guha. He is floating the idea that the Fed may start to change its language on policy at upcoming meetings, edging closer to removing some of the stimulus (click here). Nobody I have spoken to this morning gives this notion much credence, but as the dollar weakens and stocks rally, perhaps the Fed will once again try to temper expectations that they will keep rates at zero ‘forever’. If US interest rate markets react, it will make people question the dollar’s status as a ‘funding currency’ and allow the yen to resume its place as the weakest major currency. As for today, we only get existing home sales data and more focus on equities – which look very well supported.

.

A 7% rally in the S&P index since the start of October has run out of steam and those cheery souls who analyse markets with the help of technical analysis will point to yesterday’s patter of a higher high, lower low and lower close as a sign that the move has run out of steam – for now at any rate.

Reasons to be optimistic about the S&P really boil down to three factors. Firstly – and by far the most important – is that interest rates remains extremely low. It is possible to be concerned that the sharp rise in UK market rates in recent days is a harbinger of what will happen in the US (the two economies do, after all, have a lot in common). But in the 7 1/2 weeks since I joined ECU, 2-yr US swap rates have traded between 1.16% and 1.43%. The current level of 1.33% is barely above the average for the period. By contrast, UK and European 2-year rates are back at the highest levels seen since mid-August. Secondly, the US economy is recovering and we are still more likely to see upside than downside surprises to economic data. Much was made this week of slightly softer than expected housing data, but this is small beer at this point. We are already in waiting mode ahead of the key October business surveys and employment report. Thirdly, earnings are still robust. Counting through the third quarter results that have been released for the S&P so far, I reckon some 80% are ahead of expectations.

Overall, as long as economic recovery continues and interest rates stay low, the fuel for the equity market revival remains in place. I remain bullish but corrections are necessary. What will be interesting to observe is how the equity market reacts to more mixed trends in currency markets. With policy-makers the world over expressing their displeasure at the dollar’s weakness (or their own currencies’ strength) we are now seeing a range of currencies drift lower. The South Korean won, the South African rand, the Brazilian real and the Canadian dollar have all fallen by over a percent against the US dollar in the last week, even as sterling and the euro have made further gains. There is a risk that we see more volatility for a while in the second-tier currencies which have benefited from greater investment flows this year. The rand is up 27% against the dollar in 2009, the real up 33%, and with policy-makers increasingly vocal there will be a conflict between very positive underlying fundamentals and the urge to take profits ahead of year’s end. But beyond the choppiness, the dollar remains in a downtrend.

The main even in the UK today was the release of September retail sales data. These were disappointing and at odds with what we have heard from surveys (CBI, BRC) or from the John Lewis weekly data. Sales were unchanged in volume terms on the month, up 2.4% year over year (still trending better, but not as good as expected). The most notable softness was in clothing and it could be argued that this is due to unusually warm weather distorting seasonal clothing sales. However, the press headlines will cite unemployment and household debt reduction. The report, for those who are interested, is available (click here). The Bank of England also released its latest Trends in Lending report (click here) referring to August trends which remained downbeat. If I draw one conclusion, it is that the expectations that the MPC will decide to suspend asset purchases at the next meeting (i.e., stop QE) seem optimistic. If I were on the MPC (unlikely), I would propose extending the mandate but would shift to a significantly slower pace of buying, tapering purchases off.

Press attention this morning was led by the strength of Chinese GDPO data overnight which is up 8.9% (click here). The Chinese economy is growing far too fast for comfort on the back of inappropriate monetary policies. The debate about renminbi revaluation can only become more intense from here.

.

I wrote yesterday that if Mervyn King, Bank of England (BoE) Governor, were a supporter of a ‘top 4’ UK football team, he would have been reluctant to start his speech in Edinburgh during the Champions League games. In the event, his speech was mostly about bank regulation rather than the economy (click here). He did refer to football (“By international standards UK banking is highly concentrated. There are four large UK banking groups. Of these four, two are largely in state ownership and their assets are a multiple of the assets of the next largest bank. As in the English Premier League, getting into the top four will not be easy for those outside it. But in both cases I hope greater competition will produce less rigidity in the composition of the top four.”), showing his Aston Villa colours. Clearly, policy-makers are concerned about the size of the big four UK banks, relative to the size of the UK economy and the Government’s ability to support them in crisis. Mr King is also very concerned about retail and commercial banks having large investment banking and trading businesses. I think that’s a theme which will return time and time again. Using the capital of a large retail bank to underpin trading activities is very different from the world that existed 30 years ago when investment banks (even Goldman Sachs) were mostly partnerships with limited capital. Their risk discipline was born of the fact they invested their own money and their size meant that they were not systemically important. All that changed after the Big Bang in the UK and changed even more when the growth of the derivatives market forced investment banks to increase their capital.

Yesterday’s markets were messy. The Brazilian move to impose a tax on investment inflows caused little reaction initially. However, some softer data on US housing starts (which increased by a little less than was generally expected) and the Bank of Canada’s policy statement – which left rates on hold and indicated concern about the dollar’s strength (click here) – triggered a burst of dollar buying and some weakness in equity markets. It is clear that the ‘risk’ trade has gone a long way and corrections will be regular and occasionally significant. That doesn’t mean the core themes have changed, however. The Fed is on hold and largely indifferent to dollar weakness, while welcoming asset price inflation. Fear of asset bubbles emerging in Asia is a worry for some Asian central bankers, but the solution is to allow greater currency appreciation. That means that while some central banks may resist raising rates (Canada), others may try alternative methods of stemming inflows (Brazil) and a third group might tackle domestic priorities and let their currencies rise (New Zealand, Australia, Norway). China is the odd one out, but will eventually need to make a choice about how to tackle the strength of its economy and size of capital inflows.

Today’s calendar includes BoE Minutes, the UK CBI industrial trends survey and the US Fed Beige Book this evening. I don’t expect fireworks from the news flow and I will be watching to see if equity markets start to rise again after their correction and ‘risk’ currencies appreciate.

.

It has been a quiet start to the week, punctuated by two notable events so far. The first is that the S&P index made new highs for the current cycle yesterday evening. The second was the announcement from Brazil that they plan to impose a 2% tax on foreign investment in Brazilian equities and bonds. Asset reflation continues to play a critical role in creating a sustainable economic recovery, but resistance to the dollar’s weakness is growing.

A strong equity market yesterday correlated with a weak dollar, as has been the case for some time. Low US rates and quantitative easing drive both private sector domestic money and foreign investment out of US deposits and government bonds, helping riskier assets and undermining the dollar. A strong equity market doesn’t cause a weak currency. It’s the policy stance which drives both equities and currency trends. The US equity market wasn’t really being driven much by rates yesterday and certainly after the close, the driver was the strength of results with Apple coming out well ahead of expectations. I’m not sure that Apple is a bellwether of the wider equity market – it’s an awesome design company which has captured a bigger share of consumers’ wallets than analysts seem able to understand. My wife (a journalist) uses a beautiful, fast and to my mind frustrating Mac at home. My children are armed with iPods and I’m sure iPhones will be on the Christmas wish-list. So whether last night’s results tell us much about the wider earnings season I’m not sure. However, they look likely to propel the S&P through 1,100, leaving a few more sceptics languishing behind. All the way up in this equity rally, we have been assured that it is temporary, that a major correction is due and that it is more due to liquidity than earnings. Now we are being told these are the wrong kind of earnings – more cost cutting than increased sales. I still suspect that tells me more about how many investors have missed the rally (and the point) than anything else. The next chart level everyone is looking at, apparently, is 1,120. I expect it will break.

The Brazilian Finance Minister reminds me a little of King Canute, trying to hold back the tide. A 2% tax on investment in Brazilian asset markets is fighting against a year-to-date return of some 140% for Japanese investors in Brazilian equities. However, whether it works or not, it is a signal of frustration at the real’s strength and possible intent to take further measures if it continues to appreciate. The path of least resistance in currency markets is to buy the currencies of countries whose central banks are not inclined to fight appreciation. Norway and Australia stand out in this regard. This afternoon, when the Bank of Canada makes its latest policy statement, we will see whether they say anything about the Canadian dollar, and as the Swiss franc moves closer to parity with the dollar, I am watching to see what they say or do.

European Finance Ministers met yesterday and a series of quotes are being released this morning showing their unhappiness at the euro’s strength (dollar’s weakness). Henri Guaino, President Sarkozy’s Special Advisor, is quoted saying that the dollar drop may force a move to weaken the euro and the Finnish Finance Minister, Jyrki Katainen, is quoted as saying that a strong euro is a worry for the eurozone. With German producer price data this morning posting a 7.6% annual fall, it’s easy to see why inflation is not a worry. The latest Bundesbank monthly is worth reading (click here) if you want to understand the challenge for the European economy. There is a chart on page 16 (ignore the rest!) showing the collapse in lending to domestic enterprises and households. European corporate bond issuance is rising sharply but with bank lending making up 80% of overall funding (the ratio of bank lending to capital market funding is much higher in Europe than in the US), this is a major barrier to sustainable recovery. So far, the talk about a weaker euro is all coming from politicians however, and the ECB holds all the relevant policy tools, so markets are inclined to pay no more than lip-service.

Fed Chairman Ben Bernanke also gave a speech yesterday evening (click here) about Asia and the Global Financial Crisis. He is joining the chorus calling for a shift away from export-led growth in Asia by boosting domestic demand. Asian economies need to boost demand but the US, too, needs to address its long-term over-consumption. Not now, when consumption is weak, but structurally. Bernanke says, “Admittedly, just as increasing private saving in the US is challenging, promoting consumption in a high-saving economy is not necessarily straight-forward”. Maybe increasing US private saving really is difficult, but the fact that the Greenspan- and the Bernanke-led Federal Reserve has spent two decades running a policy of (by historical and international standards) exceptionally low real interest rates, suggest that the Fed has not tried very hard. Ever since the collapse of LTCM (Long Term Capital Management – click here) in 1998, the Fed has adopted a ludicrously accommodative monetary policy which was directly responsible for the US housing boom, bubble and crash. Reading this speech, I do not get the impression Mr Bernanke has learnt all the key lessons of the last decade – and I am all the more convinced we are set for further monetary accommodation which will drive the dollar down, equity, gold and commodity prices up, and credit spreads even tighter.

Enough of a rant. In the UK, September saw the biggest budget deficit for that month on record, (£14.89bn) but the outcome was actually not quite as bad as expected. Mervyn King is speaking in Edinburgh this evening (at 20:15 BST) and given that his comments in September in Newcastle and to the Civil Service Select Committee drove sterling sharply lower, all will be watching to see if his tone is more upbeat. I suspect it will be. Mr King is a keen Aston Villa supporter, which is perhaps why he is happy to make speeches that could move markets in the middle of Champions League matches.  

.

Good morning. There was lots to digest over the weekend and there is a lot going on this week. However, I’d start with a few observations on bubbles and inflation. I bought a book last week (This Time is Different: Eight Centuries of Financial Folly, by Carmen Reinhart and Kenneth Rogoff). If you are fascinated by financial bubbles this is a wonderful empirical guide. My own take on bubbles is that the essential ingredient to them is for credit to be freely available and too cheap – but not for everyone. The Dutch tulip bubble was caused by credit growth to a group of wealthy merchants who drove bulb prices up but didn’t change the price of beer, coffee or tobacco in Amsterdam. And so on. I only bring this up because the current situation has all the hallmarks of a bubble. Credit is ludicrously cheap, if you are lucky enough to be able to get any. Investment banks, investment-grade companies and whole economies where the credit crunch never hit are having a ball. G7 small and medium-sized businesses – and households – are finding life much tougher.

The bubble will continue to drive G7 currencies down relative to alternatives to the chagrin of central banks from Israel to Brazil. It will drive equity and commodity prices further and credit spreads tighter. Understanding that we are trying to escape the wreckage of a colossal burst bubble by creating another is scary but critical to understanding where markets and economies are going. And because I am of an optimistic nature (on Monday mornings, anyway) I should point out that if we do a better job of managing deflating this one, the policy could work. Homeopaths believe that a little of what caused an illness can make you better.  

Anyway, buying a book on Amazon is a reminder of how much the retail industry has changed. But we cannot expect things to stay as they are. Wal-Mart is taking Amazon on in the on-line sales game. Last week, Wal-Mart started selling popular books on-line for $10. Amazon reciprocated. Wal-Mart went lower. So did Amazon. Then Wal-Mart announced it would sell merchandise from other retailers on its site, in exchange for a share of the revenue. The Wall Street Journal presents an interesting article on the subject (click here). If Wal-Mart came into any industry in which I was a market leader, I would be very worried. But as a consumer, a further outbreak of price-driven competition is good news. Core inflation appears to be reaching a base in most economies and in the UK, at least, base effects are unfriendly for the next few months. However, massive excess global capacityis a constant which will prevent inflation from being a problem for a long time.

Enough of these long-term concerns. The weekend news was mostly encouraging in the UK. Rightmove announced a jump in house prices (click here) courtesy of a dearth of properties for sale. The British Retail Consortium reported that sales in London are booming courtesy of the weak pound and an influx of tourists (click here). And the ITEM Club, while remaining gloomy, is apparently raising its UK growth forecast significantly (click here). The UK has a busy week of economic events, including a speech in Edinburgh tomorrow by Mervyn King, the publication of the Minutes to the last MPC meeting on Wednesday, and the latest Bank of England ‘Trends in Lending’ report on Thursday. Public finance data and money supply are released tomorrow, while Thursday sees retails sales for September (where I hope for a solid 0.5% bounce) and Friday sees the release of Q3 GDP. Whether the outcome is positive or negative (it’s a close call) will decide the timing of the end of the recession. All of this is overshadowed this morning however by an interview in the Sunday Times yesterday (click here) by David Smith of MPC member Adam Posen. Mr Posen appears to favour further expanding the Bank of England’s bond purchases and this has rattled markets this morning. The current quantitative easing (QE) mandate will run out in early November on current trends. Everything we learnt from Charlie Bean and Paul Fisher last week would suggest to me that an extension of QE is almost certain. Increasing the size of the mandate – but warning that it might not all be used and that the pace of purchases may slow – would give the MPC flexibility. And until bank lending picks up (not just to the biggest companies, but to the wider economy), why would the MPC want to stop QE? The pound has slipped this morning, but I would pay more attention to the mounting evidence of economic recovery than to the prospect of QE continuing.

In the US, a lot of second-division economic data is due for release but the Fed’s beige Book, analysing regional economic trends, is due out on Wednesday evening. In Europe, Finance Ministers meet today and there is a strong chance of rhetoric arguing against dollar weakness (click here). Talk is cheap and I doubt the dollar is about to stage a significant recovery, but major currencies are currently mostly in ranges. I am watching interest rate markets more closely, and they continue to suggest the generally better economic data is causing some hedging of term interest rate exposures. If that continues, we could see further yen weakness. We will also watch to see what, if anything, the Bank of Canada does with interest rate policy this week (Bloomberg surveyed 14 banks, and none expect a hike this year).

.

The US bank earnings season got underway yesterday and the Financial Times (click here) highlights the difference between the performance of Goldman Sachs (excellent) and Citigroup (less sparkling). It is a bit of an over-simplification to use this as an example of how Wall Street is booming while Main Street languishes, but there is a grain of truth there. Cheap funding from the Federal Reserve is providing the fuel for investment banks. Equity markets are higher and M&A is picking up. Bond issuance is up, although bank lending is weak. Small and medium-sized companies are struggling to get access to credit and many loans remain impaired but capital markets are in far better shape than they were.

What is important about this is to understand how policy-makers resolve the dilemma. And here there is no real choice to make. Policy is set for Main Street, not Wall Street. If the consequence of policies that are necessary for Main Street is that the investment banks make a lot of money, then so be it. I’m sure there will be debate about bonus restraint and what can be done to prevent a return to the behaviour the politicians disliked before. But that will be tackled (to the extent it really is), through regulation. The FOMC remains dovish on interest rates, irrespective of what is happening to asset markets and will do so until the domestic banks are in good shape and the underlying real economy is back on a sustainable path.

Right now, that contrasts with the subtle shift we are seeing in interest rate policy elsewhere. At one extreme the Reserve Bank of Australia may raise rates by 50bp in November rather than a further 25bp. In Europe, the driver of policy will be inflation as much as growth and ECB rhetoric is clearly shifting on rates even though politicians (notably Christine Lagarde, the French Finance Minister) are very vocal in trying to thwart the euro’s strength. In the UK, where rates are on hold for a long time, the upshot of the Bean speech and the Fisher interview this week has been to cause the short end of the gilts market to sell off. A slower pace of quantitative easing is likely, the remuneration rate for bank reserves with the Bank of England may not be cut, and benign neglect of sterling by policy-makers seems to have come to an end. If these are backed up by signs of strength in retail sales data next week, we will see a further, albeit subtle, shift in rate expectations – with positive implications for sterling.

What themes does all this imply for markets? Firstly, if the US is running policy to revive domestic lending and sustain the domestic economy, that is still very positive for asset markets and still on balance negative for the dollar. US interest rates set the global cost of money and in many other economies (Brazil, China and India to name three big ones) monetary policy is just too accommodative. Asset prices and economic growth in those economies will remain supported and where the currency is not allowed to appreciate, the US is likely to be critical (click here for the latest report to Congress on in International Economic and Exchange Rate Policies). This report doesn’t go so far as to provoke a major row, but criticises China for not allowing the renminbi to appreciate.

The second conclusion is that market interest rates are turning higher, albeit very slowly, even in the G7 economies. The UK and Europe are leading, the US is lagging slightly and of course Japan is a long way behind. This pattern means that whereas the yen was joined by sterling and the dollar as ‘funding currency of choice’ for those wanting to own higher-yielding currencies, the yen may not regain that mantle on its own. That may mark a medium-term turn in the yen’s value across the board. It is early days for this trend, as it is early days for looking for market rates to make any meaningful move higher, but if economic data in the US, the UK and the eurozone is positive in the weeks ahead, that would provide a catalyst for a meaningful re-think about currency and interest rates trends.

Key US event this afternoon are the release of September industrial production data and the latest consumer confidence numbers from the University of Michigan. US output jumped in August helped by strong auto production. A slowdown is likely and economists expect a 0.2% increase. There is considerable uncertainty around this release. As for consumer confidence, this indicator jumped very sharply in September relative to August, as equities moved higher – a correction is possible. Bank of America also announces results and in the comparison I made at the start, Bank of America is firmly in the Main Street category of bank.

.

The Dow Jones index made it through 10,000 last night for the first time since early October 2008, after JP Morgan came out with strong third quarter results. Goldman Sachs and Citigroup – as well as Google, IBM and Harley-Davidson – are releasing earnings today so the equity market has plenty to focus on. So far, while analysts are still forecasting falling earnings, results show a double-digit gain. I continue to believe that a combination of savage cost cuts (employment reduction), falling interest costs for large corporates and a sharp reduction in capital spending are enough to boost earnings even without any pick-up in underlying economic activity. It is also important to note that while the US economy has struggled, multi-national companies have been able to enjoy the resilience of the non-G7 economies and many have benefited from the dollar’s weakness as well.

The equity rally is mature, but I still doubt people are fully invested. I don’t often attach links to cartoons, but Monday’s ‘Alex’ in the Telegraph is worth a moment’s deliberation (click here). The script is that the equity bears will all know when to sell when Clive finally gets sucked in to the rally. And that’s the point – there are still a host of people looking for this rally as a chance to sell. The same is true of the corporate bond market, where institutional investors have made the most of their money this year from falling yields and tightening credit spreads. The trading community has simply not been able to embrace the rally in the market and I receive messages daily from contacts who believe it is only a matter of time before the market melts down again.

The second significant event yesterday in this regard was the release of the latest US FOMC minutes (click here) and they are significant because the meeting they refer to was on September 22-23rd. The day after the meeting, the Wall Street Journal published an article by Kevin Warsh (click here) arguing that when the fed does raise rates, they will have to do so relatively aggressively. I interpreted the Warsh article as a sign that there was something of a split within the FOMC with some members keen to send slightly less dovish signals and hopefully temper the rally in asset markets. US equities stalled and the dollar ceased to fall for a while after the Warsh article was published. The FOMC minutes do show a bit of a split but with an overwhelmingly dovish undertone. The most eye-catching observation was that some members favoured further increasing purchases of mortgage-backed securities.

This makes the Warsh article look even more like a minor speed-bump for asset reflation. The Fed is still concerned about the sustainability of the recovery and is still opting for extremely reflationary policies. I remain bullish of US (and global) equity markets and of higher-yielding and commodity-related currencies in this environment. The policy stance is also bearish for the US dollar and currency forecasters are once again revising dollar forecasts lower this morning. One caveat is needed here, in that I am not sure how the dollar would react to strong US economic data. There wasn’t much of a reaction to better than expected retail sales data yesterday, but this afternoon’s weekly unemployment claims figures could do more to shift psychology regarding the outlook for employment.

In Europe, there is little news. The ECB Monthly Report was published (click here). There is no indication of any policy change from the ECB any time soon, and with year-over-year inflation running at -0.3% in the Eurozone, no real reason to look for change. At the same time, the Reuters Tankan was released for Japan overnight and this shows a worsening manufacturing outlook for the first time since March (click here for more information). These two factors make me wary of getting too excited about a big move weaker for the dollar relative to the euro and yen. I think the risk is that all three weaken relative to non-G7 currencies.  

In the UK, yesterday’s unemployment data have triggered a significant change in mood about the economy. Employment is a notoriously lagging indicator so I was not expecting good news form this quarter, but it is heartening, at least, to see the labour market improve. Less exciting perhaps, but more significant is the shift we are seeing in commentary from the Bank of England (BoE). Paul Fisher, the BoE’s head of markets, is interviewed in the FT today (click here). The title of the article (‘Mr QE finds cause for confidence’) pretty much says it all. Fisher backs up the comments of Mr Bean yesterday. Quantitative easing appears to be working. He is also keen to stress that the comments on sterling that we have heard from Mervyn King referred to falls by the currency in the past. I don’t really buy into the view because Mr King is surely aware of the reaction that will be made to his comments. However, with inflation now having reached its trough, I doubt we will get any more negative commentary from the BoE.

.

Yesterday saw the US dollar’s trade weighted index fall to its lowest level since August 2008. That the dollar needs to fall further as a key part of global economic rebalancing is almost universally accepted. Indeed, I thought that there was opposition to the idea from the FT’s Martin Wolf when I saw the headline ‘The rumours of the dollar’s death are much exaggerated’ (click here) but as I read the piece I realised that Mr Wolf is talking about global currency architecture and he pretty much takes further dollar weakness for granted unless or until the architecture is changed. The recipe yesterday for the dollar’s decline was pretty much the same as has been in place for most of the recent past: falling shorter-term money market rates; rising equity prices; and a dovish speech by a Fed Governor – this time Donald Kohn, Vice Chairman of the Fed (click here). Kohn’s speech basically says inflation and growth will probably stay below target for some time, warranting very low rates for an extended period. No real news, but just what the vast majority of bearish dollar market participants want to hear.

The dollar is in a downtrend. The US has no interest in a strong dollar while inflation is low and trade data do show that a falling dollar helps reduce the deficit. Furthermore, a falling dollar is a symptom of low interest rates, which are boosting asset values and supporting US households’ wealth. As I’ve argued before, boosting wealth is a key part of helping generate economic recovery. So too is getting corporate bond yields down so that corporate America can find an alternative to bank lending as a source of finance. However, US indifference to a weaker dollar doesn’t mean that this is the cure for global imbalances or any way of avoiding future crisis. One of the main reasons that asset prices do well when the dollar falls is that those economies whose currencies are linked to it are forced to intervene to buy their currencies to prevent them appreciating against the dollar. The reserves they accumulate are re-cycled back into asset markets, driving down yields on bonds. China is, of course, at the top of this group and has maintained a stable exchange rate against the dollar since the middle of 2008. Domestic rates are too low and the currency is plainly undervalued. This morning’s Chinese news tells us that their currency reserves have now reached a staggering $2.773trillion, that their M2 money supply measure has risen 29.3% in the last year, and that the trade surplus totalled $12.93bn in September – considerably better than expected as exports recover from the global recession. At the moment, nobody is talking about renewed revaluation of the renminbi, but any plan to sustainably reduce global imbalances will require a revaluation of the renminbi, as well as changes in global financial architecture (as argued by Mr Wolf) and a weaker dollar.

The Deputy Governor of the Bank of England (BoE), Charles Bean, gave an illuminating speech to the London Society of Chartered Accountants last night (click here). To say it is dry is an under-statement but there are two observations of note. Firstly, he argues persuasively that the increase in the size of commercial banks’ reserves with the BoE is not a sign that they are failing to use the cash. I cannot really understand how Mr Bean could argue for any cut in the rate the BoE pays for these reserves, given this argument. Secondly, he observes that in due course the MPC will have to reverse some of its bond purchases in order to avoid over-shooting its inflation target, and that this will drive gilt yields higher. I pointed out yesterday that we are now past the trough in UK inflation. The key for the MPC will of course be when they see signs of bank lending recovering but as inflation rises they will feel some urgency to mop up the money they have pushed into the system. Nothing would make me want to invest in UK gilts at this point in time.

UK labour market data have just been released. The brief summary is that unemployment is going up but more slowly than City economist expected. The unemployment rate is 7.9%, unchanged from August. 20,800 more people filed for unemployment benefit, and average earnings – including bonuses – rose 1.6% year-over-year. Adjusting that for retail price inflation, that’s still a 3% increase in real incomes which is enough to underpin consumer spending. Further rises in unemployment are inevitable but the trend in job losses is slowing.

.

The following headline grabbed my attention this morning: ‘China’s car sales rise 83.62% in September’. That is, by any measure, an extraordinary rate of growth and continues to act as a reminder not only that China has escaped recession and is seeing strong growth, but also that domestic demand is proving stronger than expected. China’s car sales totalled just over a million units in September and indeed in the last six months they have averaged 1.1m per month, up from a rate of 700,000 in the second half of 2008. Contrast that with the US where September’s ‘post-clunkers’ sales are down to 400,000 and sales for the year as a whole will be under 6m. There has been a host of research done over the years on car sales (and on TV and mobile phone sales) which concludes that sales take off as soon as a threshold level has been breached for per capita income. That seems reasonable: when a threshold of wealth is reached, a car ceases to be a luxury and becomes a near-necessity. From my own experience, I have been struck over the years by three features of Beijing, a city I have visited at least once a year since the early 1990s. Firstly, the city is getting bigger, sprawling ever closer to the airport and is now vast. Secondly, the pollution has become steadily worse. I used to fight jet-lag by running through the streets but I wouldn’t do that now. Finally, the number of people on bicycles is going down and cycling looks ever more dangerous. China has crossed the threshold where car ownership increases dramatically and with a population 4.5 times as big as the US, the potential for car sales to go on growing is clear. It is taken for granted that Asia simply doesn’t consume enough and is too dependent on exports to drive the global economy. That may be true, but only up to a point. Consumption in China is growing and will continue to do so. Indeed, it might do so even faster if the renminbi were allowed to appreciate. The renminbi appreciated by 13% against the US dollar between the start of 2007 and the middle of 2008 but has been kept in a tight range since then, falling against the euro and yen as a result and even more dramatically against the strongest Asian currencies. An undervalued renminbi is allowing China to dominate world trade which is reviving sharply. That makes sure that the flow of cheap imports into our shops continues. In the long run, in the interests of avoiding asset bubbles in China and elsewhere in Asia, renewed renminbi appreciation is necessary. For now, China’s economic strength will continue to support economic recovery.

Away from China, this morning’s news is mostly positive. In the UK the RICS survey showed a further improvement (click here) with the net balance of surveyors reporting an increase in prices rising to 22%. The British Retail Consortium reported a 2.8% year-over-year increase in like-for-like retail sales as consumer confidence recovers (click here). Official retail sales data for September are due next week and indications are positive so far. Not that either of these reports is having an impact on currency markets, where the gloom surrounding sterling remains exceptionally high. This morning’s Wall Street Journal carries an article entitled ‘Sterling Takes a Beating’ (click here). It captures the gloomy mood and also shows the net short sterling position in the US futures market, which has reached extraordinary levels. When the pound bounces, it is going to do so fiercely but it needs a catalyst and better-then-expected high-frequency data are not sufficient.

The key to rehabilitation – for both sterling and the dollar – lies in the level of market interest rates. Indebted countries need attractive interest rates to draw in foreign capital and neither the UK nor the US has those at the moment. I think this will change in the final quarter of this year as economic data improve and crucially as bank lending starts very slowly to revive. Policy rates aren’t going up any time soon, but market rates can move earlier. As that happens, the yen will take over the mantle of weakest of the major currencies.

Finally, the UK has seen the release of September inflation data. The ‘official’ CPI inflation rate fell to 1.1% from 1.6%, and the retail price index fell to -1.4% from -1.3%. Given that base effects are less helpful from now on, I suspect this is the trough for the current cycle in both CPI and RPI. European markets focus on the monthly ZEW (Centre for European Economic Research) survey, due later, and expected to show investor confidence improving. The US will focus on third quarter corporate earnings with Intel the highest-profile release. The US equity market needs stronger earnings to justify recent out-performance relative to the corporate bond market, but may well get it and push indices higher still.

.

The UK political party conference season is over and the focus, inevitably, has been on the Conservative Party’s proposals. In a nutshell, David Cameron is betting that voters want to see the Government take some leadership and tackle the tough questions on fiscal policy, tightening sooner than Labour would. He also proposed that the Bank of England (BoE) end its asset purchases soon. David Blanchflower, the outspoken economist who left the MPC this summer, described Mr Cameron’s speech as bizarre and warned these policies could tip the UK into depression. The Centre for Economic and Business Research will publish a report this week apparently, saying that a Conservative government would cut £100bn from the budget deficit and that as a result, the BoE could keep rates unchanged at 0.5% until 2011 and below 2% for a further three years. David Smith mentioned the research in his column in the Sunday Times (click here) and it is having a fair amount of coverage this morning.

The core argument is that keeping rates really low will help the corporate and banking sectors and avoid a relapse in the housing market. Rising asset prices will help consumer and business confidence. Those who forecast a double-dip return to recession or simply that the growth would peter out, argue that rebuilding balance sheets requires household debt ratios to fall and that will hamper spending. The driver of rising household debt was rising household wealth and the catalyst for debt reduction was wealth destruction. The need for debt levels to fall is clear, but the higher asset prices rise, the better the net wealth position of people will be and that will allow debt reduction to happen more slowly. The only two major economies where debt levels have fallen in the last decade are Japan and Germany. So the notion of really accommodative monetary policy being kept in place for a really, really long time is appealing. However, I think it is a policy mix that works better in the US, say, than in the UK. Tomorrow sees the release of UK inflation data for September and the annual ‘official’ inflation rate will fall to -1.5% (according to consensus forecasts) from -1.3%. On that basis, the paltry 1.4% annual wage growth which will be announced the day after, is still a solid 2.9% ‘real’ increase. But September is almost certain to represent the trough for UK inflation. As the economy spiralled down and as interest rates were slashed, the CPI index fell 3.8% in just four months from October 2008 to January 2009. Now, mortgage rates are no longer falling and, while discounting is still a feature of the High Street, a falling pound is pushing up import prices. And one thing the UK can be certain of is that the cost of any services provided by the public sector will increase as the government – both central and local – tries to get to grips with its finances. So the risk is that from a trough of -1.5% in September, CPI inflation will be back above 2% in a year’s time. Given the part sterling plays in inflation in a relatively small, open economy, adopting a policy mix which is designed to be so negative for the currency could easily backfire.

For now, while the economy continues to be perceived to be so fragile, and while the MPC and Mervyn King in particular are perceived to welcome a weaker pound, the markets are going to extend the current trend. But if the economy does continue to emerge from recession, the policy focus could shift pretty quickly. We aren’t going to learn much on that score this week but next week sees September retail sales data released and early indications are positive. I will be watching for signs of any recovery in bank lending and in early November for a reversal of the shockingly weak August industrial production data. If all that falls into place, sterling could enjoy a significant rebound in November/December. Market data continue to point to a very large number of bearish sterling positions (in favour of both the dollar and the euro) in financial markets. One further positive ‘straw in the wind’ for the UK economy, meanwhile, was the release of the OECD’s leading indicators at the end of last week (click here). This report was heartening globally (particularly in France and Italy) but also does nothing to suggest the UK is going to fare worse than other major economies.

The US is having today off celebrating Columbus Day. I think a bank holiday in October – before winter descends on us and the clocks fall back – is an excellent idea. However, for financial markets it means the week will start slowly. There has been a huge focus over the weekend on the dollar’s weakness. Wolfgang Munchau at the FT wrote about this over the weekend (click here). I believe the US dollar is in a long-term downtrend as a necessary part of re-balancing the global economy. However, I would throw in two caveats. Firstly, a disorderly fall would be counter-productive and too many people are embracing this theme now. Secondly, I don’t think the dollar needs to fall significantly against G7 currencies. What needs to happen is a real appreciation of the currencies outside the G7. This is happening. But a much weaker dollar against other G7 economies which have many of the same economic problems as the US is not desirable.  

Finally, a really good article to point out from the Economist on the nature of wealth; it’s both short and a good read (click here).

.

There were three pieces of economic data in the US yesterday that support a more upbeat view of the economic outlook. They are not high-profile data points like the employment report but they are at the very least, straws in the wind. The first was the release of the US Federal Reserve’s weekly data on commercial paper (click here for the table). Outstanding commercial paper increased by $67.6bn last week. The commercial paper market is used by many companies to finance themselves, but it was also how the ‘shadow banking’ industry was financed, with SIVs and others issuing asset-backed commercial paper to buy structured assets in the credit boom. When the structured credit bubble burst, the commercial paper market collapsed. The fact that it is now operating more normally will help widen access to credit – something that is necessary for economic recovery to continue. The second ‘straw in the wind’ was a 33,000 fall in the US weekly unemployment claims data. This is a volatile series, but is at its lowest level since the first week in January. My suspicion that the September payroll data were distorted by the timing of Labor Day is increasing. Thirdly, when weekly chain store sales for the whole of September are compiled, they show like-for-like sales up 1.1%, and 70% of stores reporting sales above expectations. This, again, supports a view that back-to-school sales were pushed into September rather than August as a result of the timing of Labor Day and there is a clear pattern towards discounting and away from luxury. My teenage daughter’s favourite – Abercrombie and Fitch – is still showing sales down 18%.  

These are merely straws in the wind. Enough, on a quiet Friday ahead of a US bank holiday weekend, to bring about a bit of a correction to the stellar performance of the US bond market, and perhaps even to trigger some position-squaring in currency markets with dollar short positions being bought back. I’m not going to read too much into it from a markets perspective but I continue to side with the optimists on the near-term US growth outlook. Meanwhile, the Federal Reserve still wants to have its cake and eat it. By sounding cautious on growth and reassuring that rates will go up when (but only when) the recovery happens, they aim to keep inflation expectations anchored, bond yields down and persuade the US’s creditors that the dollar is not actually going to be allowed to collapse. That’s a fine juggling act. However, for now, they are succeeding. Today sees the release of August trade data. A huge $33bn deficit is likely, but that is under half the size of the monthly deficits we were seeing in 2006.

The UK MPC left monetary policy on hold at its meeting yesterday. As with the US, I remain cautiously optimistic about the outlook for the economy. I have written about this a fair amount. This morning, I would refer you to the John Lewis weekly sales report (click here). John Lewis sales overall have been pretty good for a while but mostly on the back of Waitrose, the upmarket food store which has taken over a number of sites vacated by the demise of Woolworths (as an aside, the replacement of a toy shop by a food shop has left my 10-year old son questioning why we need M&S, Tesco express, Budgens and Waitrose – all within 50 yards of each other). But to the main point, which is that the September trend in John Lewis’ department store sales is very encouraging across the board. The only weakness is in cold weather clothing. As they put it ‘we are definitely seeing a start of seasonal ramp-up in sales and stocks’. I am however, still struck by how much pessimism there still is out there. I had dinner with Danny Blanchflower in September and was struck by how bearish the general mood of those present was. Mr Blanchflower is quoted in the Times today (click here) along with others and still sounds distinctly bearish about the economy, urging caution on the MPC. As long as this mood prevails and until the evidence of recovery is far more persuasive, Mervyn King’s dovish stance will remain intact and it will be too soon to be bullish of the (very oversold) pound. Finally, the fiscal debate is re-opened by David Cameron and the Conservative Party conference. The Financial Times’ take is interesting (click here). The more hawkish Mr Cameron sounds, the longer rates will stay low. Particularly if post-conference opinion polls suggest that the electorate like what they hear (or at any rate, prefer it to what they heard from the Government).

Overall, today has the potential to see risk come off the table causing corrections in equities, in gold and in the dollar. I won’t read much into any of it. I am focused on a gradual improvement in economic conditions in the US and the UK and trying to work out when that starts to impact interest rate (and therefore currency) expectations. Central bankers understandably want to give growth as much of a chance as possible, as long as inflation remains a non-issue and it is this which provides the fuel for asset markets to move higher. For now, I am bullish of stocks, precious metals and non-Japan Asian currencies. When growth is sufficiently entrenched for inflation to become the main concern of policy-makers, I expect the currency which will benefit the most, will be sterling.  

Have an enjoyable weekend!

.

The US third quarter earnings season kicked off after the close of the equity markets last night with Alcoa announcing a $77m profit in the quarter (click here). Analysts had expected a loss. The ’cash for clunkers’ programme helped, boosting demand, but overall the story is of cost cutting and growth in demand globally. It is not a US story. American companies’ earnings are based on Asian demand and domestic cost-cutting from lower labour costs and lower interest rates. The earnings season continues with Pepsi before the US market opens today. I mention earnings because tightening credit spreads and reduced risk have taken stocks a reasonable distance. Now, the move needs to be backed up by earnings for equities to out-perform corporate bonds and for asset allocation to shift away from bonds and back into equities. Corporate bonds perform on the back of low interest rates and reduced fear of default but they don’t gain from improving earnings and so may struggle to really perform from here. If the US earnings season is positive (and at the moment, that is what I would be betting), the S&P index is going to resume its uptrend and make fresh highs.

The relevance of this for currency markets is that it is going to further reinforce the fact that the global economy is doing better than the US (or UK) economy, and US (and UK) companies are benefiting from that trend. Overnight, we saw a fall in the Australian unemployment rate (for September) to 5.7% from 5.8%. The market had expected a rise to 6%. Employment increased by 40,000 instead of falling as expected. The fact that the Reserve Bank of Australia surprised with a rate rise earlier in the week should have sent the market a clue that the data would be good but the impact of the data was to act as another reminder of the shift in economic power away from the US/UK – indeed away from the G7 – to Asia in particular. We are seeing major currency appreciation around the Asian currencies (Korean won, Thai baht, etc). Tomorrow, the Bank of Korea has a policy meeting and will feel very squeezed between a desire to start pushing interest rates higher and a reluctance to see excessive currency appreciation. Any signs of tighter policy, now or soon, will increase the appeal of the non-G7 currencies and maintain the US dollar’s downtrend.

The MPC meets this morning and announces its decision at noon. The odds strongly favour them leaving rates on hold and making no change to the quantitative easing (QE) programme. The Times gives some interesting insight on the debate (click here). The £175bn QE programme will run out in early November, but that means a decision about whether to extend it can be left until the next meeting in a months’ time. Likewise, any decision about a cut in the rate the Bank of England pays for reserves can be left for the meeting that precedes the November Inflation Report. I have learnt to my cost that Mervyn King is possibly the most dovish central bank governor in the G7, but the improved tone of economic data in the last month is something I have referred to frequently. If the better demand data continues and if we see some easing in credit conditions to the wider economy (i.e., if the banks get the message and start lending again), we may not see further QE. When that happens (it will not be this month; it could be in November and is highly likely on a six-month horizon), market interest rates will start to move slightly higher and sterling’s decline will come to an end.

The ECB also make an interest rate announcement today but, like the MPC, will surely do nothing. At some point, the ECB will want to start reversing its own exceptional policy moves and drain excess money out of the system. However, to do so would infuriate European politicians by sending the euro sharply higher against the US dollar. I think it is too soon for this to happen, but we will be watching for it – it is inevitable in due course.

.

Yesterday was a good day for bonds, equities, gold and higher-yielding currencies. Liquidity-driven asset reflation is back in vogue. The US equity market peaked on 23rd September; the day before Fed Governor Kevin Warsh penned an op-ed for the Wall Street Journal entitled ‘The Fed’s Job Is Only Half Over’ (click here). The prospect of a really long period of really low interest rates had provided the jet-fuel for asset reflation and the warning that rates might have to start going up before the all-clear was sounded on the economy was enough to trigger a correction. The release of disappointing employment data for September, providing encouragement to those who fear a double-dip recession, added to concerns but paradoxically made a mockery of Mr Warsh’s comments on interest rates. How on earth can you start a hawkish interest rate commentary when the unemployment rate is rising vertiginously? So this week, with interest rates still low, equity markets are moving higher. At the same time, the Reserve Bank of Australia’s decision to increase the cash rate (by 25bp to 3.25%), is a powerful reminder of the fact that while rates are glued to the floor in the G7 economies, the same is not true elsewhere. Australia escaped the global economic crisis largely unscathed and is benefiting from Asian growth and rising commodity prices. It’s not alone in that regard and money is consequently rushing to investment opportunities outside the G7 economies.

So does this mean that the all-clear can be sounded once again for global equity markets? And does it also mean that we will continue to see non-G7 higher-yielding currencies continue to power ahead of the over-indebted and policy-constrained pound and dollar? The Economist magazine debated the subject in this week’s edition (click here), quoting ECU Investment Committee member George Magnus, among others. I think the key issues are laid out here. The economic bears’ principal fear is that a balance-sheet adjustment is now needed on the part of both households and governments which will hold back demand. The front page of today's Financial Times rams home the message about public sector spending and taxation (click here). It is impossible to argue against this conclusion but the policy imperative is that we need asset reflation. Albert Edwards fears a reverse of the 1990s boom, when rising asset prices boosted consumer confidence and spending. Now, with asset prices down, the fear is that savings will go up and spending down. The cure, surely, is to help equity and house prices rise and indeed this morning’s news that UK consumer confidence has risen to a one and a half year high (according to the Nationwide Building Society) suggests the policy is working. I agree with George Magnus that for Anglo-Saxon economies in particular, the next few years will see slower growth than the last cycle. But I do think that it is possible to kick-start growth by slowing the upward adjustment in savings. And I agree wholeheartedly with Crispin Odey’s observation that “If they print enough money, stocks can go anywhere they want to”. The key is to keep interest rates low. Using credit derivatives as a guide, the cost for an investment-grade company to borrow money is now 1% over swap rates. That spread was 2.5% a year ago. More significantly that means that 5-year money for large companies costs under 3.75% in the US, compared to 6.5% a year ago. This rate is important because the relationship between earnings and the cost of money is a major driver of ‘fair value’ in equity markets. Lower corporate bond yields make money cheaper and make equities look – to my mind – cheap, relative to corporate bonds now. A lot of money has shifted out of equities into corporate bonds this year and equity markets may now have to catch up against a backdrop of more range-bound bond yields.

In the long run, the worry with this is that interest rates cannot be divorced from the underlying economy. If the UK economy can grow at 1.5% and if inflation averages 2% over the next ten years, Bank of England rates will have to return to 4% in due course, and corporate bond yields will get back to 6%. Keeping rates artificially low for too long will cause distortions and asset bubbles because they will drive equity price/earnings ratios too high, and send house prices too high. But that is the long run. As The Economist article points out, Albert Edwards first published bearish views on equities in late 1996. Ultimately, he was right to be worried, but the S&P index doubled in value between then and its 2000 peak. I am worried about long-term growth prospects, but reflation can do more than delay the adjustment; it can also lessen its impact. The key is that inflation remains low enough to allow interest rates to stay at these levels. And the implications for markets are still rising equity prices, rising gold prices and appreciation by currencies where interest rates can go up.

I have focused on the reflation issue today because it is a remarkably news-free environment in markets. Overnight, Japanese Finance Minister Fujii is quoted in the Wall Street Journal (click here) saying he sees limits to yen appreciation but suggesting current strength is acceptable. The yen has benefitted. The talk of UK fiscal tightening is not helping sterling. The US Treasury is selling 10-year notes. But the key for the day will be whether equity indices can press on – as the third quarter earnings season gets underway – and break recent highs.

.

The Australians won cricket’s ICC Champions Trophy and raised rates. I love Australia and perhaps Sydney most of all. But I’m not going to be able to afford to go there for a long time. The Reserve Bank of Australia (RBA) has only hiked the cash rate to 3.25% from 3% but has indicated there are more hikes to come (click here for the RBA statement). The forward market is priced for rates to rise a further 2% by the end of next year. I think that although this morning’s news was partly priced in (as I discussed yesterday), it is significant. It highlights that in some parts of the world, asset price inflation is a bigger worry than a second down leg to the recession. It amplifies the sense that the major economies are lagging, particularly those in the East. I will be watching the Australian dollar closely in the next day or two to see if this move unleashes a new uptrend. I suspect it might and would not be surprised to see the Australian dollar and the US dollar trade at parity (today’s rate is 0.8875) by the end of 2010.

The US dollar, meanwhile, is being hurt by the continued talk of a shift away from a dollar-centric world. This morning’s Independent newspaper runs a story entitled ‘The demise of the dollar’ (click here). It talks of secret meetings to agree a change in the way in which oil is priced, away from the dollar to a basket of currencies. The inference is that global currency reserves will continue to be switched out of the dollar which will suffer as a result. I’m wary of some of these conclusions – at least as far as G7 currency relationships are concerned – because the huge quantity of global currency reserves re-cycled into US asset markets has held down real yields on US debt and effectively crowded other investors out – leading to the dollar becoming weaker against the yen and the euro. However, three conclusions stand out very clearly. Firstly, the shift in economic power away from the G7 economies is continuing. Secondly, there is a growing acceptance amongst those winners that one consequence of this power shift will be to strengthen their currencies. And finally, as long as the US economy is not strong enough for any rise in interest rates to be conceivable for a long time, the dollar’s underlying downtrend will remain in place – to the increasing annoyance, no doubt, of the European and Japanese authorities who can be expected to be pretty vocal in the days ahead.

In the UK, September economic data continues to surprise on the upside. Yesterday saw the release of the September PMI Services index, a survey of activity among 700 service companies surveyed by the Chartered Institute of Purchasing and Supply. The index reached its best level in two years. This morning, the Halifax house price index was published for September, showing a hefty 1.6% increase on the month (click here for more details). Prices are now 1.7% higher than they were at the end of last year. A shortage of properties for sale is a major factor driving the price recovery and there is an inevitable note of caution about the outlook, but as I have stressed recently, UK real disposable incomes are now growing. As long as mortgage rates stay low, the demand recovery will continue.

It was a completely different story for August output data however. UK industrial production fell in August by 2.5%, with manufacturing output falling by 1.9% to the lowest level since 1992. These figures reflect widespread temporary factory closures in August. There will be a rebound next month but the data has come as a considerable surprise to financial markets. If there is not a big bounce in September, Q3 GDP forecasts will be revised lower, providing yet another reason for the MPC to keep interest rates low for a very, very long time. The UK is a domestic demand-driven economy. Consequently, softness in the industrial production data matters less than the signs of life on the demand side. However, from a monetary policy and currency perspective, it is easy to see the link from weak output to lack of credit to the producers. And the manufacturing sector would like all the help it can get in the form of a weak currency.

.

The G7 meeting released a bland communiqué that fell short of undermining the dollar with excessive talk of global re-balancing, but also did not make mention of the need for a strong dollar – something that the Europeans (French Finance Minister Christine Lagarde has been notably vocal) have been calling for (click here for the text of the communiqué). That growth remains fragile is a constant refrain. The need for re-balancing is mentioned of course, but the focus is still being placed on China and the renminbi. It simply is not in the interest of the major developed economies for currencies to move too dramatically right now.

The big theme that is emerging for currency markets is the need/desire for re-balancing to happen through real effective currency appreciation by the big exporters. With deflation currently a greater fear among the G7 than inflation, no-one wants a strong currency (witness Japanese and European resistance). As a result, there is less concern than usual about rising import prices and the long-standing grievance that China, India, Brazil etc., are taking advantage of undervalued currency levels is being heard more and more. I remain optimistic about the near-term prospects for global growth, partly because monetary policy is so accommodative and partly because global trade is recovering. That means that economic out-performance by the ‘developing’ economies will continue. That’s going to increase political pressure within the G7 for developing currencies to appreciate. What may be changing, meanwhile, is the concern within many of those countries about rising asset prices. This is particularly true in Asia, where memories of the Asian bubble and the Asia crisis are still fresh enough. Currency links to the US mean that interest rates are too low and asset values are rising again. The chance of broad-based non-Japan Asian currency appreciation relative to G7 currencies (including the yen) seems very high to me.

Australia is not an emerging economy, but is part of the Asian currency complex and tonight could conceivably become the first major central bank to raise rates. The current cash target is 3%, and a rise to 3.5% by the end of the year seems likely. Bloomberg surveyed 20 institutions last week and only one (JP Morgan) is looking for a hike this week, but 15 of 20 expect rates to rise in the fourth quarter. The argument against acting now is that Q3 inflation figures are due on October 27th. Personally, I would get on with it and hike rates now rather than wait for information which will not tell me anything I don’t already know. Australian rates are too low for an economy that came through the recession very strongly. If the RBA does hike overnight, the Australian dollar will rally. But so might other Asian currencies as the economic power-shift from west to east becomes even clearer.

The US payroll report was released on Friday and was somewhat disappointing. 263,000 jobs were lost – more than in the previous month. Backward-looking revisions also increased the total number of jobs lost in the recession and the unemployment rate is up to 9.8%. Stone MccCarthy, a respected independent US consultancy, argued that the data is biased by the lateness of the Labor Day vacation, which caused teachers to be re-employed later than usual and explains softness in public sector employment. If they are right, the data are likely to be revised higher and next month’s report will be stronger. However, the sense that the recovery is losing momentum is inescapable. I do not like reading too much into one month’s data, and point to the weakness in European Purchasing Managers Surveys which were released last week, and have already been revised higher. However, the softer data do make a mockery of the talk about exit strategies from easy monetary policy. Rates are not going up any time soon. The softness of US data may also increase the sense in the market that Europe, contrary to expectations, is doing better economically than the US.

The UK’s only data release this morning was the Services PMI index. This release has only been published for four years, so it’s important to treat it with a grain of salt. However, it came out at a stronger than expected 55.3, up from 54.1. UK data has been pretty robust in recent days and weeks, giving the impression that September saw the economy turn a corner. The currency has yet to follow suit and my inbox remains full of bearish commentary from the banks. Halifax house price data, industrial production and the MPC meeting on Thursday are the highlights this week.

.

The US employment report for September is due for release this afternoon and could have a significant impact on sentiment in financial markets which remain very unsure of where trends are heading. The Institute of Supply Management (ISM) manufacturing index for September was released yesterday and disappointed expectations, adding to the sense that the global economic recovery ran out of steam last month. The S&P index is now 5% off its recent highs, and 10-year US and UK government bond yields are at their lowest levels since May.

Consensus forecasts for the US employment report look for a fall of some 180,000. Goldman Sachs announced that they were revising their forecast to a 250,000 fall and that has increased the nervousness in the market. There is no doubt that recent data has been somewhat soft, but I still expect the pace of job losses to slow, on average, in the months ahead. Over the last 30 years, the US ISM index has averaged 50.9, so this latest reading – while lower than expected at 52.9 – indicates an economy doing ‘better than average’. Some loss of momentum is inevitable. The average monthly payroll figure over those thirty years, by contrast, has seen an increase of 114,000. On that basis, employment data have a fair amount of catching up to do. This economic cycle in the US and elsewhere is notable for the speed and size of job reductions across the corporate sector since autumn 2008. As things stabilise, I expect employment to lag but ultimately to catch up with other economic indicators.

Away from the short-term indicators and the concern that the global recovery is losing momentum, the focus switches to the IMF jamboree in Istanbul this weekend and the G7 meeting that accompanies it. The fall in equity markets is helping the call from European officials for a stronger dollar, as money flows back towards safe havens. The G7 is rapidly losing its historical significance and is being supplanted by the G20 as the driver of co-ordinated global economic policy. However, it is hard to see how – except in times of great crisis – a group as large as G20 can expect to reach agreement on subjects like currency instability. Personally, I would like to see the G7 meetings continue. And if this weekend’s meetings produce any agreement, I suspect that it will be that an overly weak dollar is not in anyone’s interest right now. Longer term, global economic re-balancing, financing the US, a shift away from the dollar’s dominance of the global monetary system, and the shift in the world’s economic centre of gravity eastwards, all argue for dollar weakness to continue. But in the short term, just as equity markets are hitting a speedbump, so the dollar’s downtrend is pausing.   

Today’s economic data and market reaction will play a significant role in driving sentiment through October. I will update over the weekend with more detailed conclusions. My position going into the data is that the slight loss of momentum in purchasing management indices, for example, is natural and does not signal a ‘double-dip’ in the cycle. Furthermore, the reaction of bond markets is very significant since a return to the lows in yields will provide natural support for asset markets in due course and ensures that monetary stimulus stays in place. Finally, the economic data has not been softer everywhere. In the UK, with another rise in house prices announced overnight (Nationwide Building Society reports a 0.9% increase, with prices now flat year over year), the data continues to surprise on the upside relative to depressed expectations. This is not doing anything for sterling which is falling as the dollar bounces.

.

The IMF published its world economic outlook this morning, after drip-feeding some of the chapters to the world in recent weeks – it is doing so ahead of its annual IMF meeting, to be held this year in Istanbul (click here for the summary). The document itself is 226 pages long, but the one line summary is in the headline “Global recovery under way but likely to be slow, says IMF”. The IMF has increased its world output forecast from -1.4% to -1.1% for the year and from 2.5% to 3.1% in 2010. To put this in context, the most optimistic global growth forecast I have seen is 4.1%, courtesy of Goldman Sachs. The IMF forecast is a little more cautious than a City consensus. The overall theme is basically that things are better but we are not out of the woods and long-term growth will be held back by structural concerns. None of this is new. I would draw four points. Firstly, the single biggest revision in the forecast is not to economic growth but to trade and in particular, to imports by what we condescendingly call emerging economies. Six months ago the IMF thought these would increase by 0.8% in 2010 – now, they expect 4.6%. I would not be surprised if the recovery is stronger still. The second point is that the upward revision to growth was big, but the upward revision to inflation very small. Advanced economies’ CPI is expected to average 1.1% next year. The next few months are going to see some pretty benign inflation data in the major economies and that is going to allow monetary policy to remain accommodative and at the same I think it will prevent bond yields from rising significantly as central bank purchases of bonds (quantitative easing) taper off. Thirdly, the only major economy where growth forecasts are not revised up for 2010 is Japan. Structural economic weakness in Japan is very worrisome and the Bank of Japan will be the last major central bank to raise rates. I think the yen can weaken going forwards.

The final theme which I picked up from the IMF is what is happening in Europe. I was struck that the biggest upward growth forecast revision was to Germany, a natural consequence of the recovery in trade. However, looking at the make-up of eurozone GDP growth in 2010, I see that the overall 0.3% increase covers a range of 3.7% growth in Slovakia, to a 2.5% real GDP decline in Ireland. Spain too sees GDP fall in 2010. A single monetary policy for an economic area covering such a wide disparity of growth rates is a tough challenge. In the past, the ECB has simply focused on euro-wide money supply and growth data and erred on the side of its inflation-fighting mandate. However, with inflation not a threat the ECB is effectively going to be inactive for a fair amount of time. This morning, the euro slipped back as Joaquin Almunia, the EC Commissioner for Economic and Monetary Affairs (not the Arsenal goalkeeper!) announced that the eurogroup will discuss the euro’s strength ahead of the next G7 meeting this weekend in Istanbul. As I mentioned yesterday, there is clear resistance building in both Japan and Europe to further dollar weakness. In Europe, this growth disparity is much more of a concern to the politicians in Brussels than it is to the ECB. With some of the most recent economic data (in particular the business confidence indicators which come out at the start of the month) indicating a slower pace of recovery in September, I wonder whether this change of tone from policy-makers could trigger a recovery by the US dollar, given the scale of speculative positions in the market.

As for today, the UK came out with softer business confidence: the Chartered Institute of Purchasing and Supply index slipping to 49.5 from 49.7. It is above its average level for the last few years, and having bounced from a low of 34.5 last November a little pullback is inevitable. The Bank of England published its third quarter Credit Conditions Survey (click here). Banks report that mortgage defaults have fallen – a positive development – and also report that credit demand is picking up. Credit supply is expected to increase slightly. I view this as positive, but we need to see more solid evidence of credit growth recovering before the MPC backs off from further monetary accommodation. Later today we get the first of the major US indicators for September in the form of the ISM index of manufacturing activity. The Chicago regional index surprised everyone by slipping back yesterday. But it is highly volatile and much less reliable. At this point, the consensus looks for a rise in the index from 52.9 to 54.0. Along with tomorrow’s employment report, this indicator will help establish the mood for the month ahead. If the data comes in as expected, the chance that market interest rates have troughed in the US (and hence, globally) will have increased.

.