Archive - Feb 8, 2011 - Story

In a world in which every central bank is laser-focused on destroying its currency, interventions that serve to stabilize currencies are a fond memory. Yet that is precisely what the Egyptian Central Bank did earlier after it intervened directly in the FX market to support the EGPUSD after it plunged to lows of 0.168. Subsequent to the intervention the pound jumped modestly to 0.1701, which only means that the intervention support level will be promptly taken out in the next four days if not hours. The inverse spot rate is 5.8789, which as we predicted a few days ago is about to surge far higher, even when taking Ben Bernanke's admonitions that the ECB has no choice but to keep its currency weak. Of course, a plunge in the EGP simply means that food will get all that much more expense, and let's remember for a second just what was the reason for the revolution in Egypt to being with...

A key European economic indicator printed earlier today, with Industrial Production coming in at -1.5% on expectations of 0.2%, and a second consecutive negative print, after the former number was revised to -0.6%. This is a confirmation of ongoing European weakness following recent deteriorating data from the export-complex which after all are to be expected considering the EURUSD is held up artificially high courtesy of hopes that various can kicking contraptions by the ECB will buy Europe a few more months of pretend stability. Thus, the trade off is simple: a decline in export activity in exchange for a strong euro giving the impression that things are ok (note the second consecutive week of no sovereign bond monetizations in Europe), and a rising market driven higher in sympathy with what US stocks are doing (even as the US is now supposed to be the growth dynamo of the entire world, which is odd considering that the benefits from the payroll tax cut will start expiring in Q2). And if none of the above makes sense, you always have Goldman, which just blamed it all on, you guessed it, snow.

Markets slightly positive this AM after data showed that consumer credit expanded by over $6.1B in December (v $2.4BE) and consumer credit balances expanded for the first time since August 2008. Revolving credit rose $2.3B in December. The question remains one of jobs. Consumer electing to spend on holiday purchases for the first time since the crisis is a good sign, as is the makeup of the GDP gains we have seen which reflect an increasingly less timid consumer. Without jobs growth, however, we are merely getting a more levered consumer after some debt retrenchment. In the aftermath of a credit crisis – and possibly on the verge of a new one at the sovereign level – is that really such a good thing? China hiked rates 25bp for both of its benchmark rates.

A few second- and third-tier indicators, on small business sentiment, job vacancies and turnover, and consumer confidence. There is a small $1.5-$2.5 billion 17-30 year POMO closing at 11am Eastern, which should be sufficient to continue the relentless stock ramp, and push the Price Oscillator for the S&P beyond 73%, one of the highest levels on record.

Goldman's Francesco Garzarelli throws some numbers at its Bond Sudoku model, spins around its Wavefront Growth equity basket, and the magic firm's 8-ball spits out the following: "we presently show a 3.25% level in US 10-yr rates at the end of Q1:11. In light of the strength of the data, this now looks too low, and we would now lift the forecast to 3.5%. Our end-2011 and end-2012 projections are 3.8% and 4.3%, respectively, and we stick to these." In other words, if the market moves, we will adjust our "forecasts" accordingly. If China hike 3 more times as is expected and the 10 Year falls off a cliff, well then, we will no longer "stick to those."

The attempts to fight Bernanke's inflation resume in Asia, where not even fully recovered from recent New Year celebration partying, the PBoC decided to hike rates for the second time in over a month. The reason: January inflation could be as high as 6% which means trouble for the various members of politburo. Benchmark one-year deposit rates will be lifted by 25 basis points to 3 percent, while one-year lending rates will also be raised by 25 basis points to 6.06 percent, the People's Bank of China said. The rises take effect from February 9. For the time being markets are orderly, even though the announcement did send the EURUSD to the highs of the day.

RANsquawk European Morning Briefing - 08/02/11