It’s a central bank world–we just live (and invest) in it

Friday’s market action on the very weak U.S. jobs number—just 88,000 jobs created in March—put worries about U.S. economic growth on center stage.

At least in the short term.

What with earnings season highlighting companies’ growth for the first quarter and projected growth for the second quarter, and what with the Commerce Department set to release retail sales figures for March on April 12, I think it will be easy for the market to get caught up in growth worries and for the bulk of investors to start behaving as if growth were the most important issue facing the market.

Don’t go with the crowd. Recent numbers casting doubt on U.S. growth rates shouldn’t be ignored, but they haven’t changed the basic forces driving global financial markets.

This is still the central banks’ game. And currencies—the relative price of the dollar, the euro, and the yen—are still the most important mechanism for transmitting messages from the central bank to the markets.

If I’m right and this remains the central banks’ game, I’m looking for a strengthening dollar (and a weakening yen and euro) to continue to put downward pressure on the price of oil, copper and other commodities—and to continue the rout in gold.

U.S. economic growth does figure into this equation since weaker than expected U.S. growth will temper the boost that the dollar might otherwise deliver to Japanese and U.S. equities. Decent growth in the U.S. economy is likely to give the current rally more room to run.

But growth is really a sidebar to the main story.

Which isn’t to say that the story hasn’t changed at all. Read more

Did Germany kill the euro yesterday?

Yesterday,, March 14, Germany left the EuroZone.

Oh, nothing official. And I’m not holding my breath waiting for any objective confirmation such as the re-introduction of the Deutschmark. But the new German budget marks the beginning of the eventual effective end of the EuroZone and the euro.

What exactly happened that’s so momentous? How can a single national budget make such a difference?

The German budget for 2014, announced by German Finance Minister Wolfgang Schauble Wednesday, March 13, on the eve of the March 14-15 European summit, includes another 5 billion euros in spending cuts. Total net new borrowing for 2014 will drop to 6.4 billion euro, a 40-year low. And it puts the German budget on a path to balance in 2015. That’s a year earlier than required by the German constitution.

If fiscal prudence is your goal, then this budget deserves the praise heaped upon it by Philipp Rosler, Germany’s Economy Minister, who said: “With all modesty, this is a result of historic proportions. The lesson from the sovereign debt crisis is that solid finances are essential. Thanks to this approach Germany is in the vanguard in Europe. Our success with a policy of growth-oriented consolidation is the envy of the world.”

The problem—aside from the smugness of those comments–is that fiscal prudence isn’t the most pressing goal in the biggest economies—next to Germany—in Europe. Read more

What will Mario and the ECB do about Italy now?

What will Mario Draghi do? The head of the European Central Bank has been notably silent in the aftermath of the Italian election debacle even as other EuroZone financial figures have threatened that Italy must keep its austerity bargain or else. (It’s not quite clear what “or else” might be in the this case. It’s one thing to threaten to kick Greece out of the euro and quite another to threaten a key EuroZone economy and the world’s third largest government bond market.)

Fortunately, Draghi does have some important ammunition left to him for this crisis—if he needs it and if he can get the Germans to agree (before their own key election in the fall.) At its last meeting on February 7, the European Central Bank decided not to cut its benchmark short-term interest rate below the current 0.75% rate.

That gives Draghi and the ECB the option of cutting interest rates by 25 basis points to 0.5%–if the bank wants to send a message of hope and reassurance to all those voters in Italy—and in Spain, Portugal, and France—that are clamoring for some efforts at economic growth instead of nothing but budget cuts, higher taxes, and increased unemployment.

The central bank doesn’t meet again until March 7, which gives Draghi plenty of time to assess exactly how bad things will get in Italy and in the financial markets. Read more

U.S. stocks sell off as Italian results point to a hung election

The more you know, the worse the results of Italy’s election are.

The U.S. stock market gets it. The U.S. market, the only developed market open when Italy started to deliver meaningful election results, sold off significantly today with much of the damage coming after 1 p.m. New York time. The Dow Jones Industrial Average finished down 216 points or 1.6%. The Standard & Poor’s 500 closed down 1.8%

If the results hold up—right now they show a hung parliament n Rome—I’d expect Japan and then Europe to sell off as they open tomorrow. That would leave the New York markets confronting a wave of selling as they opened. That could well be enough to overwhelm any hesitancy New York traders feel about going short before Federal Reserve chairman Ben Bernanke’s testimony to Congress on Tuesday and Wednesday. Especially since many traders will be willing to bet that the fear of the coming sequester—due to start on March 1—would bias U.S. stocks to the downside anyway.

What do the Italian election results show now? Read more

Yen and pound fall in currency wars; Tokyo stocks roar ahead

And in the two major fronts in the world’s currency wars: The Japanese yen resumes its decline as Prime Minister Shinzo Abe looks close to making a choice for the new head of the Bank of Japan, and the British pound picks up speed in its drop as the government indicates that it’s not backing off from its program of economic austerity even after Moody’s Investors Service downgraded the country’s credit rating to AA from AAA last week.

Japanese stocks staged a monster rally overnight with the Nikkei 225 index climbing 2.43% as news reports pointed to Haruhiko Kuroda as Prime Minister Abe’s choice to run Japan’s central bank. Kuroda is known as a staunch opponent of deflation so he’s likely to be a pedal to the metal proponent of weakening the yen in order to push domestic inflation toward the top of the Bank of Japan’s new inflation target band of 1% to 2%. Kuroda was in charge of the foreign exchange portfolio at the Ministry of Finance from 1999 to 2003 before leaving to head the Asian Development Bank. He’s known as a very able international financial diplomat and the thinking on Tokyo markets is that he will be able to sell Japan’s program to weaken the yen to the country’s international trading partners with relatively less push back. The Nikkei index rose pretty much across the board with 209 of 225 stocks up and only 10 down. The yen fell another 0.14% against the U.S. dollar to 93.29.

Damage to London stocks has been relatively minor this morning in reaction to Moody’s downgrade of the United Kingdom to AA and continued bad news on economic growth. The FTSE 100 Index is actually up slightly with a 0.45% advance. With so many companies listed in London actually focused on the global economy that relatively strong performance for London equities isn’t too surprising. For real damage you have to look to the pound, which is down 0.26% today against the dollar and looks likely to hit a two-and-a-half year low against the U.S. dollar.

That has produced talk that the pound could fall to parity with the euro. (The pound is now at 1.14 euros.) The pound traded at 1.02 euros at the end of 2008. Ladbrokes, the big betting house, is giving 6/4 odds that the pound will fall to parity with the euro in 2013. Ladbrokes is also giving 4/1 odds that the pound will reach parity with the U.S. dollar in 2013. That would require a huge drop since the pound now trades at $1.51. But you know what they say…Where there’s odds, there’s fire.