Lasting Damage from the U.S. Debt Debacle

August 2, 2011

The U.S. House of Representatives approved the deficit ceiling increase Monday.  The Senate is expected to do so this afternoon in time for President Obama to sign the bill before today’s deadline.  But all is not clearly well.  Risk aversion is manifest in the marketplace today.

  • Many consider the compromise a poor bill, and the process taken to this point has scared investors.  Lasting damage has occurred to U.S. credibility.
  • A downgrade of U.S. debt remains probable by at least one rating agency.
  • The state of U.S. democracy is very troubled.  Voters do not trust the political institutions.  Foreigners see America in a wholly different light.
  • Strains have also return to European markets.  The Italian-German 10-year bond spread has widened to 374 basis points following a press report that Italian cash flow will run very low by September.  The French-German spread is 75 bps.  Spain’s 10-year yield of 6.45% is at a 14-year high.  The euro fell below $1.4200 and for the first time below 1.10 Swiss francs.

The dollar has weakened 0.8% against the Aussie dollar, 0.6% versus the Swiss franc and 0.1% against the Canadian dollar while strengthening 0.4% relative to the euro, 0.2% against the kiwi and 0.1% versus the yen, yuan, and sterling.

Stocks got slammed in Pacific Basin markets.  Share prices fell 2.4% in South Korea, 1.4% in Australia, 1.2% in Japan and Singapore, 1.1% in Hong Kong and India, 1.3% in Taiwan, and 0.7% in China.  In Europe, the British Ftse, German Dax and Paris Cac have weakened by 0.6%, 0.5%, and 0.4%.

The ten-year German bund and Japanese JGB yields fell by three basis points to 2.42% and 1.05%.  The British gilt is off one basis point at 2.79%, and the 10-year Treasury is indicated four basis points at 2.71%.

Gold climbed 0.6% to $1630.80 per ounce, while oil prices relapsed 0.5% to $94.38 per barrel.

The Reserve Bank of Australia’s Official Cash Rate was left at 4.75% as expected.  A statement expressed greater concern about medium-term inflation but also observed greater downside global growth risks and called the decision not to tighten “prudent” in light of heightened uncertainty in world financial markets.

Vietnam’s central bank left its repo rate unchanged at 14.0%, also as had been predicted.

Japanese verbal intervention escalated in the press and in remarks from Finance Minister Noda.  The yen touched its record low of 76.25 per dollar yesterday but has a 77 handle this morning.

Australian building permits recorded a third straight monthly decline, dropping 3.5% in June to 15.5% below the level a year earlier.  Analysts were looking for a rise of about 3%.  Aussie home prices dipped 0.1% last quarter and fell 1.9% on year.  Australian commodity prices in SDR terms rose 0.9% on month and 27.6% on year in July.

The on-year rate of increase in New Zealand labor costs of 1.9% in 2Q was the same as in 1Q but surpassed expectations. 

Japan’s monetary base registered a 15.0% on-year advance in July, lowest in five months.  Japanese labor cash earnings flipped to a 0.8% on-year drop in June from a 1.0% rise in May.  The negative result had not been predicted.

Britain’s construction purchasing managers index had a higher-than-expected reading of 53.5 in July, similar to June’s 53.6 score, but suffered a drop in jobs.  The British Barclay’s Bank announced significant staffing cuts.

The Swiss manufacturing purchasing managers index in July printed at 53.5, a point better than forecast, but down from 59.2 as recently as May and scores above 60 during the three months to February.  The volume of Swiss retail sales jumped by 7.1% on month and 7.4% on year in June.

Norway’s factory PMI improved fractionally to 56.5.  A score of 58.6 in February had been the best since October 2007.

Producer prices in the euro area were unchanged in June after dipping 0.2% in May.  The PPI was 5.9% higher than in June 2010.  The annualized quarter-over-quarter rate of PPI inflation had spiked to 11.8% in the first quarter from 4.5% in 4Q10 but slowed to 6.3% in 2Q11.  Producer prices in June were actually 0.1% below the average 2Q level.  Along with slowing growth, price pressures are subsiding.

Consumer prices in Thailand firmed 0.2% in July and maintained a 4.1% on-year rate of rise.  Thailand’s PPI fell 1.2% last month but accelerated to 5.2% on year from 4.5% in June.

Romanian producer price inflation advanced to 8.4% in June from 8.0% in May. 

South African motor vehicle sales were 10.5% greater than a year earlier in July.

Scheduled U.S. data releases today include personal income and spending, motor vehicle sale, and weekly chain store sales.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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