Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Big moves in thin holiday trade…
Last night Mario Draghi moved to protect the EU economies from the sharp rise in US interest rates by reaffirming the ECB’s dovish stance, stating that its benchmark interest rate will remain low for an “extended period.” China’s cash crunch abated to some degree following supportive remarks made by the PBoC while the Fed (Bernanke) approved stricter rules for eight of the largest US banks, in particular, a leverage-to-capital ratio that exceeds the 3% currently required of European banks under Basel III. Brazil’s central bank signaled a move to increase borrowing costs to strengthen the real despite its own government statistics (CPI data) that suggest inflation is receding. And the US jobs report fell just shy of perfection Friday, with 195K non-farm jobs created and zero change in the unemployment rate of 7.6%. Gains were seen only in professional- and service-related jobs, which includes temporary positions (+10K), while manufacturing jobs were lost (-6K). Of the 195K jobs created, 132K were derived from the Birth/Death Model.
That stream of news, combined with the twice-baked notion that the Fed is ready to “taper” in coming months, pushed the US dollar index to its best level in months while stocks staged an indecisive rally. Treasuries were clubbed, sending rates to new interim highs while the PMs lost some ground but held steady above previous lows. Away from the US, Asian stock markets managed a slight bounce off of recent bear market lows while European stocks sank (despite Draghi’s comments), reacting to a resurgent slide in the PIIGS sovereign debt. Leading the charge downhill was Portugal, whose rates on its 10-year debt breached the pivotal 7.0% level once again (see the box scores).
With rates and oil prices having spiked here in the US, future economic data is likely to be strained. When that is recognized, pressure on the dollar should resume, providing the needed stability for the PMs. Signs this process has already begun have appeared, albeit from dimly lit corners. Serving as one example, the New York Purchasing Managers Index (Current Business Conditions) cratered to a recessionary level of 47.0.
That said, there seems to be a concerted effort to maintain the illusion of “organic” growth (i.e., 12 million people remain unemployed) for a bit longer. Appearances, however, will not hold indefinitely. In that, we would expect the Fed and US regulators to push the new aforementioned reserve standards into law before reinstating future commitments to QE – as controlling where these dollars are retained for investment (i.e., Treasuries) becomes an imperative amid the search for lower borrowing costs.
Have a great weekend.
VP Investment Management