Is the US spending juggernaut slowing?
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Is the US spending juggernaut slowing?

  • Safe haven currencies gain on growth concerns
  • How sustainable is the euro at these lofty levels?
  • Europe discusses a Greek debt restructuring
  • The incredible squeeze on UK household disposable income


A US government shutdown was averted last Friday after an eleventh hour budget compromise between the Democrats and the Republicans, but looming even larger is the question of raising the $4.13trln government debt limit, which is expected to be reached in the next few weeks. Congressional Republicans are apparently demanding much larger cuts to government spending in order to secure their vote for raising the debt ceiling. For their part, the White House is reversing fiscal course quickly, with the President due to address the nation on Wednesday. In this address he is likely to outline a plan which will include reducing the cost of both Medicaid and Medicare, increasing taxes and lowering defence costs. Thus far, the treasury market has not really reacted to this issue, believing that although the brinkmanship may continue for a while longer, ultimately a deal will be done.

Guest post by FXPro



Safe haven currencies gain on growth concerns.
Both the Japanese yen and the Swiss franc have benefitted overnight from safe haven flows amidst increased concerns about the growth outlook. Yesterday, the IMF lowered their growth forecasts for both the US and Japan; this was followed by an admission from Japan’s Economic and Fiscal Policy Minister that the economy would suffer more than initially thought from last month’s shocking earthquake. Also unsettling was the news that the severity rating for the nuclear accident at the Fukushima Dai-Ichi station had been raised to 7, the highest level, making it at least as serious as the Chernobyl accident of 1986. USD/JPY is back under 84 this morning, while the Swissie fell to 0.9020 at one stage. Asian equities have fallen by 1-2% overnight.

How sustainable is the euro at these lofty levels? If we reflect back three months ago when the euro fell below 1.30 against the dollar and was looking like a sick invalid, very few would have believed that it could recover to 1.44 just three months later. And yet, here we are. Indeed, alongside the Scandi bloc, the euro is amongst the top-performing major currencies for the year-to-date, with a gain of 8% against the dollar and more than 11% vis-a-vis the Japanese yen. In very simple terms, it is those currencies where the respective central banks have been raising rates that have performed the best, whereas those that are the furthest from hiking (Japan, the US, etc) are being punished. Interestingly, the issue that the vast majority of commentators felt would hobble the single currency in 2011, namely the debt crisis, has barely registered. That said, the euro is looking rather overbought from a technical perspective, and traders are very long. Another interesting observation in terms of fx performance this year is that the much-maligned British pound has actually out-performed other darlings of the currency market such as the Swiss franc and the Aussie dollar. Indeed, against the dollar, the pound has managed a 4.6% increase this year.

Europe discussing a Greek debt restructuring.
According to Der Spiegel, some of Europe’s finance ministers raised the prospect of a Greek-debt restructuring in a conference call last week. Apparently, ECB President Trichet was strongly opposed to such a proposal, claiming that it could trigger another confidence crisis in the eurozone, and threaten the viability of those banks that hold significant exposure to Greek bonds. Trichet’s stubbornness is said to be concerning other European finance ministers, especially German FinMin Schaeuble. Germany is not inclined to raise the financial assistance it has already provided to Greece. It will be interesting to observe how Trichet’s position on this issue holds over coming months as we approach the end of his presidency. It is not as though a restructuring would be a surprise to anyone – indeed, its’ inevitability is such that the only real question is the extent of the haircut that would be imposed on debt-holders.


The incredible squeeze on UK household disposable income. If you thought last year was bad in the UK, think again. The Centre for Economics and Business Research claims that household disposable income will fall another 2% in real terms this calendar year, after a decline of 0.8% last year. If this forecast proves accurate, then it would represent the worst two-year period since 1919-1921. Later today, a number of major retailers will produce trading results that will confirm that retail sales last month were truly dreadful. Footfall figures fell 7% YoY in March.

Looking Ahead

Tuesday: UK: Total Trade balance Feb (expected – £4.0bln, previous – £3.0bln), CPI March (expected 4.4%, previous 4.4%); GE: ZEW survey sentiment March (expected 12.0, previous 14.1); US: Trade Balance Feb (expected -$44.3bln, previous -$46.3bln); CA: Bank of Canada rate decision (expected steady at 1.0%).
Wednesday: FR: CPI MoM Mar (expected steady at 1.8%); UK: Unemployment change (expected -3k, previous -10.2k), Unemployment rate Feb (expected steady at 8.0%), Avg. weekly earnings Feb (expected 2.6%, previous 2.3%); US: Retail Sales Mar (expected 0.5%, previous 1.0%), Retail Sales less Autos (expected 0.7%, previous 0.7%), Business Inventories Feb (expected 0.8%, previous 0.9%).
Thursday: EZ: ECB Monthly Report; US: Initial Claims (previous 382k), PPI Mar (expected 1.1%, previous 1.6%), PPI core (expected 0.2%, previous 0.2%).
Friday: CH: GDP Q1, CPI Mar YoY (expected 5.2%, previous 4.9%), Industrial Production Mar (expected 14.0%, previous14.9%), Retail Sales YoY Mar (expected 16.5%, previous 11.6%); JP: Industrial Production Feb MoM (previous 0.4%); EZ: CPI Mar YoY   (expected steady at 2.6%), Trade Balance Feb (expected EUR -3.6bln, previous EUR -3.3bln); US: CPI YoY (expected 2.6%, previous 2.1%), CPI Core YoY (expected 1.2%, previous 1.1%), Industrial Production Mar (expected 0.5%, previous -0.1%).

Source: Bloomberg

Simon Smith, Chief Economist


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