I can’t say that there has been much to write about from the past week’s events. Economic releases globally were more underwhelming than anything else, showing a certain degree of stabilization in industrial output.
I’m always amused at their erudite forecasting. Two years ago they were calling for a mild slowdown but then for GDP to increase again this year. With their poor forecasting results I’m really not sure why we should believe them!
However, G7 ministers all colluded to support a view suggesting the pace of contraction had eased but remained guarded with the financial sector still facing potential risks. Indeed, just looking at the general rising in the budget deficits of the industrialized nations the rising fear is going to be inflation.
The UK announced a budget this week that will generate record borrowing requirements provoked by the double whammy of significantly lower tax revenue and the massive fiscal stimulus.
The net impact of this significant rise in global government borrowing requirements and the relative dearth of investors in government bonds can only do one thing – cause interest rates to rise. It’s not imminent, but it will develop over the coming months.
If the IMF is right in its forecasts of a deeper recession then it is difficult to see from where demand is going to come, how asset prices can recover. I imagine it will come down to a balancing act between which arrives first - inflation or demand. If it’s the former then increased borrowing costs are going to hit the ability for leveraged buy out companies to finance their debt.
Well, that’s the long term. For the coming week we have the month-end rash of economic releases, in particular the US Q1 GDP which is forecast to have improved slightly from Q4. Japan sees industrial production numbers and unemployment data.
Much of this is towards the end of the week and it seems most likely that there will be a relatively quiet start to the week. The yen has strengthened over the past week in line with last week’s comments and there is a good chance of seeing a brief dip in the dollar’s value to below 96.00 but expect a recovery from there. However, I find it hard to expect any bounce above 98.00.
In my world of measuring the individual movements in currencies the move lower from 101.43 to 96.51 so far today has been pretty much in line with my expectations so I’m quietly confident that once we see the correction back close to 98.00 we should see the next larger leg lower that I feel will reach the 92.40 area perhaps by the end of next week or the following one.
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