FYI | Jun 29 2008
By Greg Peel
This week brings a wealth of economic data from across the globe, but there is really only one thing that matters. Will European Central Bank president Jean-Claude Trichet raise the EU cash rate on Thursday? This is what Trichet has threatened, and what the markets have been pricing in. But if the ECB does raise then, well, may we say God save the Fed, for nothing will save the US dollar.
US Treasury secretary Hank Paulson is off to visit Mr Trichet, and one doesn’t need to be a fly on the wall to guess what topic of conversation might follow the pleasantries. The Treasury is playing down the visit, noting that Paulson will visit all of Frankfurt, Berlin, London and Moscow. He will meet with Trichet on Tuesday – two days before the ECB rate decision. Discussions are intended to focus on the health of the global economy, “among other issues”. “Currency issues may also come up,” the Treasury has offered.
Yeah pull the other one – it plays Yankee Doodle Dandy.
There is growing incredulity and anger across the globe in regards to the Fed’s failure to raise the cash rate last week. While it is not supposed to be in the Fed’s brief to protect the US dollar – it is the Treasury which owns the printing press – Bernanke has already compromised that notion by speaking strongly against US dollar speculation earlier in the month. Barclays Capital – for one – claimed on Friday that the Fed has now “let the inflation genie out of the bottle” and that its credibility has fallen “below zero”.
Trichet, on the other hand, has been a hawkish vigilante from Day One of the global credit crisis. While the Fed has slashed and slashed to save the banking system and the US economy, the ECB has left its cash rate fixed on 4% for the duration, constantly citing inflation as the danger. While some might argue that such a stance has proven laudable, and that raising the cash rate would be showing the Fed how a real central bank adheres to its brief, the problem is global inflation is measured as the inverse of the reserve currency. That’s the US dollar, not the euro. There are 45 countries across the globe with their currencies pegged to the US dollar. Had the Fed raised its cash rate last week the ECB would have been free to do as it desires. But given that did not happen, Trichet finds himself flipping off a hatch and staring at a big red button.
Currency issues “may come up”, indeed. More likely Paulson will be entreating Trichet to remember the US tanks rolling through the streets of Paris. While French president Sarkozy has become quite chummy with a lame duck George Bush of late, Trichet appears to be more of proponent of the famous Gallic disdain for all things American. However, on Paulson’s side are the mighty manufacturing exporters of Europe. The strong euro is already killing the European economy.
We can only now wait. The ECB makes its decision on Thursday, but prior to that there are some data which will provide food for thought. Most importantly, an estimate of the EU June CPI is released on Monday, and the result of the EU June PPI is released on Wednesday. The EU June manufacturing index is disclosed on Tuesday, and the services index on Thursday.
It’s another fun week in the US – one in which the Fed’s decision not to raise will be either supported by, or denounced by, various data.
Monday kicks off with the Chicago purchasing managers’ index for June, and May net consumer credit. Tuesday sees the June ISM manufacturing index, and May construction spending. Wednesday is May factory orders, and the first hint of the pending employment numbers. The private ADP calculation for June is released on Wednesday, although this figure rarely correlates at all with the official number. The official figures come out Thursday, along with the ISM services index for June.
If the June employment numbers are again weak, as they were in May, then the Fed could claim justification. However, failing to fight inflation can mean a coming wage-price spiral that would see many more out of work in the end.
On Friday, Americans really will be singing Yankee Doodle Dandy – it’s the Fourth of July holiday (but one suspects all the fireworks may go off the day before).
Australia also has a busy economic schedule this week, commencing with May new homes sales and private sector credit on Monday, along with the TD Securities-Melbourne Institute monthly inflation gauge for June. While this is a private gauge and not an official RBA data-point, there is little doubt the RBA will pay attention – it makes its monthly rate decision on Tuesday. However, at this stage no one is expecting a change.
Tuesday also brings the June AiG performance of manufacturing index, while Wednesday brings May retail sales and building approvals, and June skilled vacancies. Thursday it’s the AiG performance of services index for June, and the May trade data. The RBA will be closely monitoring the trade data, as a blow-out in the terms of trade sparked by soaring commodity prices is likely to bring about a rate hike.
Japan releases its second quarter Tankan survey on Tuesday, which is a comprehensive wrap of the state of the Japanese economy – still the second largest in the world by a good margin.
It is a week that will draw focus to the fate of the US dollar, for the dollar will determine the fate of oil and food prices. However, it must be noted that the US dollar actually hit its previous low of US$1.60 to the euro in April. At that point – and it now seems like an eternity ago – oil hit US$110/bbl. Since then the euro has been down to US$1.54, and has only last week started pushing back meaningfully (dollar falling) to reach near US$1.58. This means that US$30 of the oil price has nothing at all to do with a weak US dollar.
Given OPEC can opens its books and show the world that there is no additional demand for its oil at present – hence no production increases are required – that extra US$30 in the oil price is all “fluff”. It is media beat-up, investor fear, and constant talk of “150 oil” or even “200 oil”. If the ECB raises on Thursday, and the dollar hits US$1.60 once more, oil could well reach US$150/bbl. But it would have no reason to be there.
