I expect to see the euro head toward parity against the dollar by the end of the year, if not before, as investors give up on the idea of a stronger global recovery and become more risk averse.
Ironically, Asia may be leading the way as China, the world’s fastest growing economy, looks set to slow. The U.S. Conference Board revised its measure of China’s Leading Economic Indicator from 1.7% to 0.3%, the smallest gain this year. The data from Japan has been even worse- First, May’s unemployment rate unexpectedly rose to 5.2% from 5.1% in April vs. the consensus expectation of a decline to 5.0%. May’s industrial output had been expected to be flat after the 1.3% gain in April, but instead declined by 0.1%. The most disappointing report, however, was overall household spending which fell 0.7% on a year-over-year basis in May as opposed to an expected 0.3%-0.5% increase. Recent reports have showed retail sales plunged 2%, their biggest drop since early 2005. Deflation is hitting Japanese wages, which are off 2.4% year-over-year. The implications for consumption going forward are obvious.
Global equity markets experienced steep declines during Tuesday’s trade. The MSCI Asia-Pacific Index fell 1.6% with Chinese shares seeing the largest sell-off, sending the Shanghai Composite to its lowest level in 14 months off the revised Leading Economic Indicator report. In addition the recent decline in Chinese equities made for a difficult environment to launch the last IPO of a major Chinese bank and reports suggest that the Agriculture Bank has had to cut its price. European markets were off 2%-3%. The global slowdown story is taking a toll on basic materials, industrials, oil and gas. Financials outpaced the overall market to the downside.
In the US, the S&P 500 slipped by 3.1% after the Conference Board’s confidence index slumped to 52.9 this month from a revised 62.7 in May. The index averaged 97 during the expansion that ended in December 2007. Significantly, the gauge of expectations for the next six months dropped to 71.2 from 84.6.
Safe haven demand pushed the US 2-year note to a new record low yield while driving the 10-year yield below 3% and the 30-year bond yield below 4%. In Europe, core bonds markets, like Germany, France, and the Netherlands and UK gilts are also seeing strong safe haven demand, however, peripheral bond markets fell as spreads widened out. Credit default swaps appear to be leading the bond market itself, with five year Spanish CDS is posting a new record high, but all the peripheral countries, including Ireland, saw pressure on credit-default swaps.
I wrote back in February that the Fed was withdrawing policy, by ending Quantitative Easing, too soon. The Central Bank, which ceased Quantitative Easing in March, will likely consider resuming the program should Friday’s NFP report shows a lose in private sector jobs.
Jobs are a by-product of 2 phenomena; new innovation, and credit bubbles. Neither one is likely to happen in the near future, which means that the 8 million jobs lost since the start of the recession in December 2007 will not be coming back any time soon. And while it is always possible to see the NFP surprise to the upside on Friday, the bottom line is that there will be no significant, sustained job creation in the months to come.
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