October 13, 2005
AMAZED & ASTONISHED, BUT NEVER SURPRISED
This morning's Labor Department report on import and export prices is sure to re-energize the debate about whether rising energy prices are more than a short-term inflation threat. But while the dismal scientists will squabble about what awaits in the long run, the here and now offers clarity in abundance.
Consider that U.S. export prices rose 0.9% in September as import prices surged by 2.3%. The 2.3% spike is the highest monthly increase for import prices since October 1990, the Labor Department notes. The ignominious point alone makes it hard to dismiss the inflationary pressures suggest by the numbers.
Reviewing the import/export details doesn't help. Indeed, energy prices last month were the primary culprit driving import prices higher. And since America relies increasingly on foreign oil to feed its petroleum fix, energy and import prices are likely to be forever joined at the hip, for good or ill. For the moment, it's all for ill, with petroleum import prices generally soaring 7.3% last month vs. just 1.2% for non-petroleum items. In fact, energy's import price index has, for the fourth month running, set a new high since the data series was introduced in 1982.
"The spike in energy prices and the aftereffects of Hurricane Katrina filtered through to import prices very quickly," observes David Resler, chief economist at Nomura Securities in New York, in a research note sent to clients today. So, is it time to start worrying in earnest about inflation? That depends, Resler advises, on where energy prices are headed. No one really knows, so the answer necessarily remains elusive.
Nonetheless, it's a sign of the times perhaps that the bond market is no longer waiting for definitive proof, or so suggests the rise today in the 10-year Treasury yield at one point to 4.5%, the highest since this year's first quarter. Was this just a passing anxiety attack that, like so many in the past, will quickly fade? Or, has the fixed-income set finally decided to get off the bench and make a decision about the morrow?
Regardless, the threat of higher interest rates is now compelling enough to neutralize other news. Case in point: forex traders were buying dollars today, effectively ignoring the Commerce Department's report that America's red ink in trade continues to mount. The U.S. traded deficit deepened to a negative $59.0 billion in August, $1 billion more than in July. Jay Bryson, global economist at Wachovia Securities, writes today that "the increase in the deficit was not nearly as large as most market participants had expected, leading the dollar to strengthen in the immediate aftermath of the data release."
In early Thursday trading, the greenback reached a two-year high against the yen, for example, compelling one currency manager to proclaim that America's paper money was second to none (again) in the world financial system. Alas, the reason for the bullishness on the buck is something less than encouraging outside the forex world, namely, the rising price of money. Nonetheless, Paresh Upadhyaya, a currency manager at Putnam Investments, told Bloomberg News today that "the dollar is king," explaining: "The market is focused on cyclical themes, meaning higher interest rates in the U.S." Meanwhile, Masanobu Ishikawa, general manager at forex broker Tokyo Forex & Ueda Harlow, tells AP via SanDiego.com that "the Federal Reserve has made it very clear that interest rates will continue to rise this year, which makes it easy to buy the dollar."
The dollar also managed to get another leg up on the euro today, in part thanks to fresh news of Europe's challenges in the realm of economic growth. The euro-zone economy grew at just 0.3% in the second quarter, down from 0.4% in the previous quarter, the Eurostat statistics agency said today in a press release. That compares with 0.8% for the U.S. in the second quarter.
Expectations of higher U.S. interest rates seem firmly grounded, and increasingly potent. For some speculators, there is no other news. But the tunnel vision won't last forever. Trade deficits and other challenges shall be heard, later than sooner, perhaps. But heard, nonetheless. Just one glimpse of what may lie ahead comes from none other than a currency strategist who, of course, pored over today's trade report for August. Yes, the deficit was less than expected, to judge by the consensus prediction, even though it was bigger than July's. "But what's more interesting is the U.S.-China deficit, especially with what's going on in Beijing just now," Rebecca Patterson, currency strategist with JP Morgan in New York, tells Reuters. "It's going to put a lot of pressure on the U.S. to get China to move [further on yuan flexibility], and to the extent that they don't, that's going to raise protectionist rhetoric in Congress, which I think is ultimately dollar-negative."
As it happens, Treasury Secretary John Snow is in China at the moment, and his agenda goes well beyond sightseeing. A chat with China's president Hu Jintao is on the docket, and the subject of yuan flexibility is sure to get another airing between the two. So far, the Treasury Secretary has been quite the diplomat, dispensing such observations of the Middle Kingdom as: ''I'm astonished every time I come to see how much has happened since the last time I came,'' Snow said, as per AP via McCall.com. Compared with a visit a decade ago, ''the changes are nothing short of breathtaking," Snow exclaimed.
If Snow's observations were meant to compel the Chinese to introduce more yuan flexibility, the gambit isn't paying off. As Reuters reports today, "Chinese Finance Minister Jin Renqing on Thursday snubbed U.S. demands for faster currency reform, saying the country will liberalise the exchange rate in its own time and in line with its own interests." No word yet on whether Snow was "astonished" by China's snub. And just for good measure Jin told reporters: "Using revaluation of the renminbi to resolve global imbalances, particularly the imbalances of certain countries, is impossible and also unnecessary."
No matter, as the dollar's still generally up against most major currencies as we write this afternoon. Now isn't that astonishing?
Posted by jp at October 13, 2005 2:09 PM
Yes, Dollar's rally is making things more worse.
This economy has become like a hurricane... no one knows where it will land and what destruction it will cause ;-)
Wanted to appreciate you on a wonderful write up. Extermely good insight.
Posted by: NAvin at October 20, 2005 3:05 PM