Daily Breakfast Spread, 6 June 2011
consumers and more likely, given what we think is a precarious fiscal position,regular upward adjustments to retail fuel prices are in order (probably over thenext several years) to trim the fiscal deficit. Thus, even after this upward revision toinflation, we still judge inflation risks to lie to the upside. This means inflation andinterest rates are likely to be well supported in 2011 and 2012, dragging growthwell below recent trend rate of 8%. While the investment climate can be improvedwith a more pro-business stance by the government, it always takes much morethan a few quarters or a year to see the effect on actual supply. Thus, it is difficultto envisage the economy escaping some ‘pain’ in the short-run.
: Job growth has slumped back to January levels; a bit lower in fact. Worse,investors may recall that January was an awful month weather wise, so even thatcomparison is kind to the May outcome reported Friday: payrolls expanded by 54k,the least since Sep10 (when they fell by 29k).Markets would have reacted more dramatically had it not been for the servicesector ISM, which rose by more than 2 points. Thank heaven for small favors. Infact, it’s a bigger favor than it seems: not only did the ISM go up, but the servicesector is sort of the supply-side equivalent of consumption: it’s big and slow-moving and carries a lot of weight and momentum. So a two point rise in such alarge mass is good news indeed – especially when it was driven by an orderscomponent which rose by 4 points (to 56.8) and an employment component whichrose by 2 points (to 54).There’s absolutely nothing on the data calendar this week, save for the joblessclaims that appear every week. They’ll be interesting but not that interesting. Theyhave started returning to the good side of things, after having taken a 6-weekdetour in the wrong direction. Last week they fell to 422k (sa), some 50k betterthan one month ago but remain a far cry from the 375k-390k reading thatprevailed in February and March. Only a decisive move below 410k this weekwould raise any favorable eyebrows. The thing is, even a small improvement won’tcome easy what with labor markets so prone to sentiment and the latter moving inthe wrong direction right now.There’s a load of Fed speeches on tap, though, and they will be interesting indeed.Plosser, Fisher, Hoenig, Lockart, Dudley and (chairman) Bernanke himself are allscheduled to opine on matters that will pale in comparison to the Q&A sessionsthat will follow their speeches where reporters will, to a woman, all zero in onwhether the Fed still intends to put QE2 to bed or whether it might be putting QE3into the oven instead. Officials so far have been stunningly silent about the slide inthe data over the past 6-8 weeks. No doubt they’re in an awkward situation: nosooner had they intimated (at the last FOMC meeting on 27Apr) that QE2 would bethe end of QE period when things started to go downhill. The poor data reached acrescendo last week and the Fed now has no choice but to speak or let everyoneand their sister do their speaking for them.The interesting question, or one of them anyway, will be whether the Fed speaks asone or as many. Two months ago, there was a lot of democratic disagreement overwhether the Fed was being too slow in ending QE2. Bernanke prevailed (inextending it to its natural end) and he sure looks good now. The question remainsas to what “the Fed” now thinks about the drop in the data since the last FOMCand what it means for policy. A lot of democratic discourse might not be good formarkets just now, given that 10Y Treasury yields are down by 60bps since April (to2.99%) and the SPX has fallen for five straight weeks. But a United Front, whateverthat might mean in terms of content and policy projection, seems impossible at this juncture. All we know for sure is that officials will repeat what they have alwaysrepeated since the start of the crisis back in August 2007: the Fed will do whateveris necessary to support the recovery. Good to hear. For the 25
We no longer expect the Vietnamese dong to devalue this year, and see USD/ VND stable at 20500 in the medium-term. The market is telling us two things aboutthe dong. First, the unofficial exchange rate, which has led past devaluations, isencouraged that the dong is stabilizing from the government’s efforts to improve