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US President Obama presented a package of measures last night that was larger than expected and aimed at restoring some confidence in the flagging US economy. The USD 450bln plan emphasised tax cuts, as well as an infrastructure spending bank with USD 80bln of firepower.  

This was more a fiscal stimulus plan, rather than a few measure to support the jobs market that was anticipated ahead of the event. It’s a measure of the shift that is occurring right now, away from monetary policy and back onto governments as the central bank toolbox looks somewhat bare.

Guest post by FxPro

Still, as the recent debt ceiling negotiations showed, the desire for cross-party unity on budgetary issues is thin to say the least, despite Obama’s many pleas for such last night.   Republicans have said there are some bits they like, other they don’t, so battles are likely to be more prominent than bear-hugs over the coming weeks on Capitol Hill.

Commentary

Welcome slowdown in Chinese inflation.   The latest CPI data in China showed the headline rate moderating from 6.5% to 6.2%, an expected but also welcome development given the recent increases.   Producer prices for August were also softer, down from 7.5% to 7.3%.   The picture was also one of moderation in the latest activity data, with industrial production growth for August seen at 13.5% from 14.0%, with retail sales a touch softer at 17.0% (from 17.2%). It’s early days, but today’s data do show that the Chinese economy is moving in the right direction, in other words seeing both activity softer (the government lowered its growth target earlier this year from 7.5% to 7.0%) and also prices.

 

ECB slowly waking up to the new reality.   Yesterday’s move to seeing downside growth risks in the eurozone was quite a notable shift for the ECB, which has, up to now, been dead-set on embarking on a tightening cycle and signalling as such.   This has been ill-conceived from the outset and the July tightening was even more at odds with the prevailing economic and financial winds. Trichet strongly defended the ECB’s record of delivering price stability, as he has done before.   But in doing so he’s fallen into the trap of defending the average. It’s like saying that, on average, people survived a coach crash in which 49% perished.   It’s of no consolation to the unfortunate. Now, the ECB may have been unable to do much about the divergences in the eurozone and the consequences thereof. But inflation targeting has been seriously tarnished by the financial crisis, something which other central banks appear to have realised, but the ECB has not. Unless there is a strong feeling of common purpose at this weekend’s gathering of G7 finance ministers and central bankers, it seems that Trichet is not for turning on rates.   But when his successor arrives in November, it’s far more of an open question.   We still believe the next move in rates should be down, largely based on the economic risks, but also simply because the previous tightenings were not warranted at the time.

 

Can gold be the safe haven of choice?   There was a fear that gold would become the safe haven of choice in the wake of Tuesday’s events in Switzerland, but so far this has not been borne out. One reason for this is no doubt the fact that Tuesday caused a lot of pain for investors. Our calculations (based on Q2 reserves composition) suggest that the SNB made CHF 17.5bln on Tuesday on the back of the gain in their FX holdings. This means there was a lot of pain elsewhere, not all of which would have been hedged. On top of this, gold was already trading at record highs on Tuesday, just ahead of the SNB announcement. This did not make for a strong inducement as an alternative to the Swiss. So far, data on ETF holdings of gold are also not suggesting a strong move into the precious metal on the part of investors.   Some are suggesting that the prospect of further QE from the US and possibly elsewhere could propel gold to new highs. But the caveat here is that when QE first started with a vengeance in 2009, there were a lot of under-valued and distressed assets around. Most investors believe that this is not the case this time around. For gold to move to being the safe haven of choice would require concerted efforts from several central banks to effectively turn on the printing presses and go for currency debasement. We’re not at that stage yet, but today’s G7 meeting (central bankers and finance ministers) will be closely watched for signs that leaders are seeing more in common than that which divides them.

 

Germany’s loss of momentum.   The body of evidence supporting the view that there has been a significant loss of momentum in Europe’s largest economy is growing rapidly. Exports in July were much weaker than expected, down 1.8% in the month, after a 1.2% fall in June. Over the past six months, German exports have stalled, not surprising given the slowdown in many of their major trading partners. Recent survey data suggest that the once-buoyant manufacturing sector is being heavily impacted by this weakening of foreign demand, especially out of Europe. In recent months, inventories have started to build and domestic demand has slowed as consumers have (like elsewhere) become more cautious. Germany relies on foreign demand to prosper, so with the rest of Europe and the United States hunkering down, the former will suffer. A weakened Germany cannot be good for the euro at such an incredibly uncertain time.