European preliminary third quarter GDP readings this week indicated the continent is slowly moving out of recession, although commentary from many officials warned that any recovery will be subdued. On Friday, the ECB's Weber said Euro Zone growth would be more sluggish than before the crisis, and forecasted a "speed limit" of 1% or so on European growth. Germany is leading the way out of the crisis, with a second successive quarter of growth that was even stronger than in Q2. France also reported a second quarter of growth, but the somewhat disappointing +0.3% figure was in line with the prior quarter. Austria and the Netherlands both escaped recession with strong growth, while Spain and Greece remain mired in recession. Note that the advanced Euro Zone GDP reading was -4.1% y/y.
Fed speakers weighed in on various high profile debates, although no major shifts in thinking on monetary policy could ultimately be drawn from the comments. Tarullo and Yellen (both voters) acknowledged that the Fed needs to pay more attention to asset price bubbles - a topic which Chairman Bernanke has famously shied away from in the past. Dallas Fed Governor Fisher (currently a non voter) admitted the Fed is watching the dollar carry trade for disorderly influences. Finally, noted hawk Plosser (also a non voter) commented that while he sees no short-term inflation threat, excess reserves could have an inflationary effect if they flow into the economy too quickly. On Thursday evening, the Fed confirmed that while its balance sheet shrank modestly last week, excess reserves reached a new all-time high of $1.1T.
The ongoing reform of US financial regulations took another step forward as Senate Banking Committee Chairman Dodd outlined some of the moving parts of his financial regulatory reform bill. Dodd said the proposed consumer protection agency that would have the power to assess fees on banks with $10B or more in assets. The bill envisions limits on leverage and size of large financial firms and would give regulators the power to force firms to divest assets. There was a great deal of talk about a "Tobin Tax" on financial transactions during the G-20 and EuroFin conferences in Europe. IMF Chief Strauss-Kahn once again said proposed transaction taxes could be avoided and would only work if all nations instituted them at the same time (which is very far from likely). British PM Brown was said to be rallying support for a Tobin Tax in the UK.
In earnings, Wal-Mart offered mixed Q3 results, beating analysts' bottom-line projections but missing revenue targets by a hair. Department store name Kohl's came in slightly ahead of estimates for its Q3, although its Q4 guidance fell short of expectations. Struggling retailer Abercrombie & Fitch exceeded beaten-down expectations, while Nordstrom and JC Penny offered in-line results. Homebuilders Beazer Homes and Toll Brothers outperformed their peers this week after reporting very strong fourth quarter results. The CEO of Toll Brothers said data suggests the market for new homes is improving, although demand has been volatile since Labor Day.
In tech, Hewlett-Packard offered a preliminary view of its Q4 and announced it would acquire network hardware firm 3Com for $2.7B. Intel reached a deal to settle all outstanding antitrust and patent disputes with AMD, paying the latter $1.25B and entering a five-year cross license deal. Selected solar names have been strong this week on news out of Spain and solid earnings results from JA Solar and Yingli Green Energy. JA Solar crushed earnings and revenue estimates and called for robust results next quarter. Yingli Green Energy offered good quarterly results and moderately improved its 2009 shipments guidance. Spain approved new renewable energy goals for 2010-12, setting a goal of increasing the amount of power generated via wind, solar and geothermal by 37%.
The US Treasury completed an onerous $81B in quarterly refunding this week, wherein strong three- and ten-year auctions were followed by the now customary weaker sale of 30-year bonds. On the whole, the results were a timely success ahead of President Obama's visit to the nation's two largest creditors (China and Japan) which began today. Yields are rangebound as the week draws to a close, despite the October Budget Statement, which was worse than market expectations, confirming the worst deficit streak in history (13 months).
The greenback began the week on a soft note in the aftermath of Saturday's G20 conference, where attendees failed to express any concerns about dollar weakness. Perception that government officials have adopted a policy "benign neglect" toward the dollar aided global risk appetite, pushing spot gold out to fresh all-time highs above $1,115/oz. The IMF said pressure from carry trading had moved the dollar closer to "medium-run equilibrium," but added that the dollar was still on the strong side. Recent weeks have seen a consensus emerge that a sustainable global recovery would depend on rebalancing growth requiring that trade surplus nations need to focus on growth while trade deficit countries need to build savings. This talk has put consistent selling pressure on the dollar, based on speculation that any concerted effort to rebalance the global economy would "talk down" the greenback. Nevertheless, the dollar has consolidated its position throughout the week despite steady advances in gold and equities.
One factor benefitting the dollar was plenty of verbal intervention during the Asia-Pacific Economic Cooperation (APEC) summit in Singapore. Treasury Secretary Geithner reiterated several times during the week that a strong dollar was "very important" for the US. Other APEC finance ministers seemed to agree with the US point of view. As noted above, Fed Governor Fisher is watching the emerging dollar carry trade for bad influences, although he conceded that the depreciation of the dollar has been "rather orderly" so far.
The sovereign rating situation was also in headlines this week. Fitch commented that the UK was the advanced economy that is most at risk to lose its "AAA" sovereign status while Germany is the least likely to lose its "AAA" rating. For Japan, a material rise in JGB issuance above ¥44T would prompt review of its ratings. Fitch also warned that US ratings would be pressured if its fiscal position did not stabilize, but said that there were no near-term risks to US's sovereign rating at the moment.
In specific price action, despite spot gold's continued run at fresh all-time highs, EUR/USD has yet to take out its highs of 1.5069 from back on Oct 23rd, although the pair tested the 1.50 handle all week. Moreover, euro strength has so far failed to dent German exports. Sterling was aided by chatter that Kraft would proceed with a hostile bid for Cadbury; GBP/USD tested above 1.68 during the early part of the week. Fitch's sovereign rating contributed to pound weakness.
In Asia, President Obama's visit to the Far East prompted a slew of Chinese Yuan comments. The IMF said a revaluation of CNY should be not resisted, prompting persistent speculation that China could revalue its currency over the weekend. Earlier this month dealer desks saw good selling pressure in long-dated USD/CNY forwards ahead of President Obama's visit to China. There is speculation that these sorts of developments could prompt a weaker dollar again other Asian pairs in coming months. However, China's PBoC reportedly told APEC members at the recent summit that yuan flexibility would be very gradual.
Chinese data continued to surprise to the upside. China's October industrial production grew 16.1% y/y, beating expectations by six-tenths of a percent, while the Trade Balance came in just shy of $24B, above the $19B estimate. Note though that the components of the trade data showed declining levels of metal imports. Meanwhile in South Korea, the central bank held rates at 2.00%, and maintained a dovish stance. The Bank of Korea stated that inflation is being contained by the stronger Korean Won.
Trade The News Staff
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