This week will be a big week for the markets. In addition to the ongoing Euro debt crisis there will be a plethora of economic reports including six PMI reports that will tell us a lot about future economic growth. Of the 13 monthly PMI reports five have reported so far with two positive (Empire & Kansas City) and three negative (Philly Fed, Richmond Fed, and the Texas Manufacturing Survey).
All the LEI’s we follow have turned south recently and I believe there is a reason why. What we’re seeing now is the aftershocks of higher oil prices from the beginning of February to their peak on March 1st. WTI rose from a low of $97 to a peak of $109.93 on March 1st. They remained elevated until the end of April.
Source: Bloomberg
Higher oil prices caused gasoline prices to approach the critical level pulling additional money out of consumer pocketbooks. This elevated food prices and other essentials taking more of the average workers income. The result was weaker economic growth which is now being reflected in the economic data reported each week. Want to know where the economy is headed, watch oil prices. Currently they have fallen by a barrel since their March 1st peak. If this trend continues look for economic activity to pick up again over the next quarter. Also helping on the inflation front is the rise in the dollar. Since it’s trough last year the trade weighted dollar has appreciated 10%, this has helped to bring down import prices. The combination of falling gasoline prices and a stronger dollar should act as a stimulus going forward.
Source: Bloomberg
Speaking of dollars there is a shortage of them despite the Fed creating an extra .3 trillion. International investors and financial institutions that are required to own only the highest quality assets to meet investment guidelines or new regulations are finding fewer options beyond dollar denominated assets. The U.S. is one of only five major economies with credit default swaps on their debt trading at less than 100 basis points, meaning they are viewed as almost risk free.
The dollar is riding high but there could be problems in its future. It will have competition with the Chinese yuan. The People’s Bank of China just authorized direct trading between the yuan and the Japanese yen. The agreement will go into effect on June 1st. This is yet another step by China towards the globalization of its currency.
Everyone is watching the daily events in Greece. However, the folks at GaveKal think what happens this Thursday in Ireland is more important.
This Thursday Irish voters will decide whether to accept the EU’s new “fiscal compact.” Recent polling data indicate it is expected to pass. According to GK if the Irish say “yes”, it could influence the vote in Greece. A Irish “yes” vote weakens Greece’s bargaining position. The majority of Greeks want the Euro. They know that the Drachma means devaluation. Stay tuned. What happens this Thursday in Ireland may ultimately determine what happens in Greece on June 17th.
As I wrote recently in “Will There Be Stimulus,” the President has every reason to change his tune the closer we get to elections. A rising stock market, an expanding economy, and a lower unemployment report bode well for any president wanting to keep his job. President Obama’s chances of retaining his job follow the fortune of the stock market. A falling stock market eroded John McCain’s bid for the presidency. Look for the President to become more market friendly the closer to get to the fall.
