High Dollar Plunges Risky Asset Prices

* The dollar traded mixed on Thursday, lower versus the yen and higher against the commodity currencies as investors scrambled to increase liquidity. Commodities, stocks, gold and interest rates all plunged as deflation pressures increased. US initial jobless claims unexpectedly increased and the Conference Board US LEI unexpectedly declined. Uncertainty about the European bond crisis, German referendum on the Greek bailout and US financial regulation also worried traders, but that is not the major problem. The appreciating dollar is. The S&P 500 plunged 43.46 to 1,071.59. The yen surged on carry-trade unwinding. Sterling fell. The Australian and Canadian dollars plummeted over 2%.

* Rumors of a possible ECB intervention to support the euro boosted the EUR/USD today. From the December high to this week low, the pair fell nearly 20%. From mid-July 2008, before the Lehman Brothers and stockmarket crash, the EUR/USD dropped 22%. The appreciating dollar then caused the collapse in asset prices as the Fed failed to meet the increased dollar liquidity. What we experience now is an encore of what happened in fall 2008 when the rising dollar led to the collapse in equity and commodity prices as the sharply appreciating dollar overvalued asset prices. To ease debt deflation, the right approach would be for the Fed to sell the dollar and not sterilize the sales. The Fed is unlikely to intervene and devalue the dollar and the central bank’s failure to meet rising liquidity demand will further increase the risk to the economy and stocks.

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Financial and Economic News and Comments

US & Canada

* The Conference Board US leading economic indicators index, a measure of future economic activity, unexpectedly slipped 0.1% m/m to 109.3 in April, the first decline in 13 months, after a downwardly revised 1.3% m/m increase in March, LEI data from the Conference Board showed, suggesting US economic growth will continue but may cool somewhat in H2 2010. The coincident index, measuring current economic activity, advanced 0.3% m/m to 100.6 in April after a 0.1% m/m increase the prior month, continuing its improvement since mid 2009.

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* US initial jobless claims in the week ending May 15 unexpectedly rose 25,000, the first rise in five weeks, to 471,000, the highest level in a month, from the previous week’s upwardly revised 446,000, according to figures from the Labor Department. The 4-week moving average increased 3,000 to 453,500. Continuing claims in the week ending May 8 dropped 40,000 to 4,625,000 from the preceding week’s upwardly revised 4,665,000. The 4-week moving average of those continuing claims fell 9,500 to 4,642,500. The insured unemployment rate for the week ending May 8 was unchanged at 3.6%.

* The Philadelphia Fed manufacturing index increased to 21.4 in May from 20.2 in April, indicating Philadelphiaarea manufacturing expanded above the zero level for a ninth straight month and at a faster pace for four successive months, according to the Federal Reserve Bank of Philadelphia’s May 2010 business outlook survey. The shipments index climbed to 15.8 in May from 5.6 the prior month, indicating shipments grew the most in three months. New orders expanded at a slower rate in May, with the new orders index declining to 6.1 from April’s 13.9. Employment grew at a slower pace this month, with the employment index sliding to 3.2 from 7.3. The prices paid index decreased to 35.5 in May from 42.7 in April, but prices received increased to 3.5 from 1.0.

* The Canadian leading economic indicators index, a measure of future economic activity, increased a marginally more-than-expected 0.9% m/m to 237.2 in April, a 11th straight monthly rise, after an upwardly revised 1.2% m/m advance in March, led by gains in housing and stock markets, LEI data from Statistics Canada showed, pointing to sustainable Canadian economic growth.

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Europe

* The eurozone consumer sentiment index declined to a lower-than-expected -17.5 in May from -15.0 in April, indicating euro-area consumer confidence fell the most since December 2008, according to the flash estimate released by the European Commission.

* Germany’s producer prices grew a more-than-expected 0.8% m/m in April, the third advance in four months, after a 0.7% m/m increase in March, according to PPI data from the Federal Statistical Office. April producer prices rose 0.6% y/y, the first year-on-year rise since February 2009, following a 1.5% y/y March decline.

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* The seasonally adjusted volume of UK retail sales grew for a third consecutive month in April, increasing a marginally more-than-expected 0.3% m/m, after an upwardly revised 0.5% m/m March gain, according to data from the Office for National Statistics. The retail-sale volume rose as forecast 1.8% y/y, following March’s downwardly revised 1.8% y/y rise. Excluding automotive fuel, the seasonally adjusted retail-sale volume was up 0.1% m/m and 3.0% y/y in April.

Asia-Pacific

* Australia’s median expected inflation rate decelerated to 3.6% in May from 4.1% in April, reflecting “concerns that the unfolding of events in Europe might affect the domestic economy,” according to the latest Melbourne Institute survey of consumer inflationary expectations.

* Japan’s GDP expanded at a 4.9% q/q annualized rate in Q1 2010, less than anticipated, after rising at a 4.2% q/q annualized pace in Q4 2009, preliminary Q1 GDP data from the Cabinet Office showed. The Q1 GDP rose 1.2% q/q, a fourth consecutive quarterly expansion, after a 1.0% q/q Q4 increase. The Q1 GDP grew 4.6% y/y, following a 1.1% y/y Q4 contraction.

Source: Hans Nilsson

20.05.2010