In arguably his strongest endorsement yet of the crying need to address America’s fiscal obesity, President Obama last night outlined his plan to reduce the cumulative fiscal deficit by $4trln over the next 12 years. In order to achieve this deficit reduction, the President envisages spending cuts outweighing tax increases by a ratio of 3:1. Also of note was the aggressive timetable Obama set out to negotiate an agreement: talks will begin in early May with the aim of completing a deal by late June. This dovetails with the increasingly heated congressional debate concerning the $14.29trln debt limit, which is expected to be reached by mid May (according to the Treasury Department).
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On the positive side, at least the White House and the Republicans are now agreed on the need for radical fiscal surgery. However, there are huge differences between both sides in terms of how the deficit is to be lowered. Obama wants to end the Bush-era tax cuts on the wealthy, and to prevent the elderly from paying too much extra for Medicare by building-in cost-containment measures into any health-care overhaul law. For its part, the GOP has been scathing of Obama’s proposals, with House Budget Committee Chairman Paul Ryan describing it as ‘hopelessly inadequate to address our country’s pressing fiscal’ problems. Should the two sides come up with a proper medium-term fiscal consolidation plan by mid-year, then the dollar stands to benefit over the long term. Before that however, the intransigence of both parties over coming weeks could be very unsettling for investors in dollar assets.
Commentary
Rising inflation may trigger another PBOC rate hike soon. Tonight’s raft of economic releases out of China includes the latest inflation estimates, which is expected to show that consumer prices climbed above 5% last month. As a result, there is a very real prospect that the PBOC will be tempted to raise rates again soon – the last move was just four weeks ago. The government’s inflation target for this year is 4%. Also being mooted is that China may be tempted to lift reserve requirements for the banks again – the current level for the larger banks is 20%. Should the PBOC announce another tightening of monetary policy in the near term, then high-beta currencies like the Aussie may react negatively.
More signs that the US expansion is gaining momentum. One of the more reliable indicators of the pace of expansion in the US is railroad shipping volumes and, right now, the news is very encouraging. In the first quarter of this year, railroad shipping volumes jumped 7.9%, according to the Association of American Railroads (AAAR). Moreover, the AAAR expect that volumes will continue to grow strongly in the current quarter. Separately, there were some interesting figures from the US Labor Department – apparently there were an extra 352K positions waiting to be filled in February, the total number of vacancies rising to 3.09m. This is the highest level since late 2004. A majority of the new posts were in professional and business services (accountants, computer technicians, lawyers).
UK labour market remains weak. After Tuesday’s news of a surprise decline in inflation last month, the labour market numbers were a far less dramatic affair, but nevertheless still offer some interesting insights into the state of the UK labour market. Firstly, the decline in those claiming unemployment benefits has been modest. Over the past six months, this measure has fallen 16k in total. Contrast this with the first six months of last year, when it was falling by more than this every month. The picture from the wider labour force survey measure of unemployment was perhaps a little more encouraging. The unemployment rate during the Dec-Feb period dropped down to 7.8%, from 8.0% previously. The rate for the 16-24 age bracket nudged higher, to 20.4%; rising youth unemployment is an issue not just for the UK, but for many developed and emerging markets also.
The labour market we are seeing right now should not be that much of a surprise, given the pattern of behaviour we saw during the downturn. Employment fell only 2% during the 2008-09 recession compared to around 7% declines in the recessions of the early ’90s and early ’80s. This is despite the fact that the peak-to-trough decline in output in 2008-09 was more than double that seen in the early ’90s. In other words, there is still a fair amount of slack within the current labour market, which can be seen in the still subdued level of earnings and declining productivity (output per hour falling 0.7% QoQ in the services sector). Combine this with the fact that output in Q1 is going to struggle to do much more than unwind the Q4 decline, then there is little basis for expecting the UK labour market to pick up much steam in the coming months.
High oil prices now hurting demand. Not surprisingly, unambiguous evidence is now emerging that the high oil prices are weighing on demand. On Tuesday, OPEC lowered its global oil consumption forecast for 2011, with Saudi Arabia in particular announcing that it was cutting back on production due to lower demand. The fact that high oil prices are hurting should really be no surprise to anyone, especially for those who pay the exorbitant price of petrol and diesel that we do here in the UK. In advanced economies where wages growth is minimal these days, the significant loss of purchasing power due to higher oil prices is acting like a tax on consumers. Since the end of last week, WTI has fallen by $4 a barrel to $123 – it would not be surprising if we saw more declines in coming weeks as further proof emerges of demand waning. In terms of ramifications for fx markets, this may temper demand for high-beta currencies like the Aussie and the currencies of major oil-exporters like the NOK.
Looking Ahead
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
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