The US Dollar remains the preferred currency
The US Dollar and US Treasuries have benefited from the Euro debt crisis as Spain’s recession seems to worsen! Moody has downgraded five regions including Andalusia and Catalonia to junk status and lower respectively.
The Bank of Spain commented that the annual contraction rate of 1.7 % was perhaps heightened by the austerity program in the recession. The deficit is thought to be 7.4 % of the Spanish GDP. European Central Bank President (ECB) Mario Draghi said a couple of months ago that he will do what is necessary to support the Euro FX. He came up with a bond-buying program to rescue ailing nations with the help of the International Monetary Fund (IMF) in administration of the reforms that must accompany the program. Now, the exuberance in the market for his support becomes null and void as he must have a country that will request the rescue. Furthermore, ECB President Draghi must convince the German Parliament that the program is sustainable with the help of the IMF! The European Union (EU), European Central Bank (ECB) and the International Monetary Fund (IMF) denied Greece the ability to tap into a rescue account. It looks as though Greece should be getting the next tranche of funds, but the terms are still in play.
The Federal Open Market Committee simply confirmed their $40 billion purchases of mortgage-backed securities and Operation Twist is in effect until years end. They want to keep interest rates low possibly through 2015 and noted any increase in inflation may be minimal. Congress is working on some interim solutions for the fiscal cliff for January 2nd of 2013! They are tinkering with the idea of replacing the $109 billion in spending cuts with more targeted savings of $55 billion. The tax breaks that also come due would total about $400 billion, with the $600 billion in automatic spending cuts the results could lead to a recession if not dealt with properly. The last US Unemployment report had the unemployment rate at 7.8 % which is pointing toward recovery. The US budget deficit for 2012 (October through September) came to about $1.089 trillion!
In 2012, the US government spent $3,538 trillion between mostly Medicare, Medicaid and Social Security. At its current pace, the US government is on target to perhaps hit $16.39 trillion in borrowing limits by the end of the year. This is the fourth year that the budget deficit has exceeded $1 trillion. Thoughts are that if not dealt with, the US could spiral into a recession with potentially 2 million jobs at risk! The White House is to work on about $1.2 trillion of the automatic cuts unpleasant as it will be for both Democrats and Republicans. The spending reductions could potential cut about $55 billion from defense and another equal amount from other domestic programs in 2013. Tax increases for the top income consumers may also be discussed. The cuts are expected to reach $109 billion in 2013 in both defense and non-defense programs. The US leaders could not agree on a sustainable solution for this problem last year, so whether they increase the debt ceiling or somehow work on long-term deficit reduction the problem can only snowball as time approaches the year end!
This market will be about the US recovery, containment in the Euro Zone and inflation. This is really viewed as more of a short-term phenomenon as a bit more of inflation is regarded healthy as long as employment is rising. Should the economy experience both high inflation and high unemployment, then stagflation would take over as we had experienced in the 70’s. Hyperinflation is inflation springing out of control, from the excessive printing of money that can devalue the currency and make it ineffective in purchasing goods and services. Fed members are even questioning the possibility of deflation. The National Inflation Association (NIA) has concerns that the US economy may enter a state of hyperinflation 2013 – 2015! The $2.3 trillion in US government and housing debt through QE1 and QE2 and the buy program of mortgage debt worth about $40 billion per month with QE3 including an open ended condition may stimulate growth and employment, but at the risk of the US Dollar devaluation!
US New Home Sales increased 5.7% in September to a seasonally adjusted 389,000. New homes listed for sale seasonally adjusted was at 145,000. It would take about four and a half months to go through the inventory.
The Markit US Flash PMI for September was at 51.3 while the previous reading was at 51.1. Any number over 50 points to expansion. The new orders portion was at 51.6 while the previous reading was at 52.3. The output portion of the index increased 51.5 while the previous reading was at 50.6. The employment portion of the index was at 52.1 while the previous month was at 51.9. The US Initial Jobless Claims is forecast at 372,000 while the previous reading was at 388,000.
The US Advanced Durable Goods is forecast at 7.0 % while the previous reading was at -13.2 %. The durable goods excluding transportation is forecast at 1.0 % while the previous reading was at -1.6 %. The US Pending Home Sales is forecast at 2.5 % while the previous reading was -2.6 %.
The US Kansas City Fed Manufacturing Index is forecast at 4 while the previous reading was at 2.
The Chicago Fed National Activity Index will be out tomorrow to weigh economic activity and inflation.
The US Bloomberg Consumer Comfort Index will also be out to measure the current consumer attitudes.
Friday, we look forward to US GDP which is forecast at 1.9 % while the previous reading was at 1.3 %.
Friday also will report the US Consumer Sentiment which is forecast at 83.1 unchanged from the previous reading.