Monday, October 06, 2008

It's the Economy, Stupid !

With all the talk about the $700 Billion Dollar Bailout by the Senate and the House, I think the market is missing a very important issue, THE ECONOMY IS SLOWING! Not just a little but in rapid fashion, so much so that it would not surprise me to see a 50bp inter meeting cut in the near future. The September ISM Manufacturing number published on Oct 1 showed a contraction from 49.8% in August to 43.5% in September. This number was much weaker then expected. The employment component declined to 41.8% from 49.7%. This should result in further declines in the overall employment rate and that of the manufacturing sector in coming months. The price paid index slowed significantly from 53.5% from 77.0%. This on the back of much lower oil prices. The Employment numbers released Friday were also pretty bad. Non Farm payrolls fell 159k in September against an expected fall of 105k. This included Good producing jobs which fell 77k and a decline in service producing jobs of 82k. Strength from export demand is fading and manufacturing growth will probably continue to slow. The reason for all these statistics is to point out the the economy is slowing broadly. I haven't mentioned Construction employment (down 607,000 since its peak 2 years ago) as everyone expects that to be lower.

The Fed has been saying that they are trying to fight a battle on two front, Inflation and a slowing economy. It seems now that the inflation battle is being won. Remember the prices paid index is down big and with employment falling sharply who has any money to spend. I walk from Grand Central Station everyday to my office. More and more store fronts are empty (forget my local downtown). With the news talking about failing banks, takeovers and the tremendous volatility in stocks, who feels confident enough to spend extra money these days?

This is the reason I think the Fed will begin to cut rates very soon. The cut will not be to stem the panic from the Credit Crisis. Nor will it be intended to help the Credit Crunch. It is simply to help get the economy moving again. The Fed has already been holding the Fed Funds rate below the 2.00% target for a week or so, so why not cut it and give a boost to the market.


So if I am correct what will happen to the market?

The "Big Dollar". This is an interesting one. Lowering rates and the huge Bailout should put pressure back on the dollar BUT Europe is clearly having its own problems and is not moving as quickly or decisively to deal with them. As such I think this is a tossup and I prefer to be slightly short dollars but I say this with little conviction.

Latam/Asia. One of my rules of trading is "The Trend is your Friend". As such I feel no reason to be short dollars against any Latam currency. All closed very weak on Friday and I expect when I arrive at my desk they will be weaker.

I think it is going to be a very long week !

Good Luck and Good Currency Trading.

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Anonymous Anonymous said...

Here in Italy there's an old saying (not properly politically correct, I know...): "in a world full of blinds even a single-eyed person is a lucky person". US economy might be awful, but EU economy isn't certainly any better and EU Commission and EU Parliament simply don't have any real political power, unlike US Congress. Each country will do what is thought to be the best for itself and who minds the rest?

Let's say that EUR (and possibly GBP) are now in a worse shape than USD, which in turn is in a worse shape than JPY. Indeed, Japanese banking system seem to have been relatively safe from the subprime contagion.

As far as Latam currencies, well I'm reading your blog to have a clue...

Have a nice day, AT

7:54 AM  
Blogger Banker said...


Latam is in full blown meltdown. As I write this the BMF future is limit up ! Usd/Mxn closed friday at 11.33 right now it is 11.8400.
These markets are nervous.

A friend just brought up a good question.....Does the Euro survive this ??


1:50 PM  

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