Personal income and spending rose again in January, the U.S. Bureau of Economic Analysis reports. The news offers fresh ammunition for arguing that the trend remains encouraging for two key pillars of the economy. But there’s some fine print to consider. It remains to be seen how (or if?) the Middle East turmoil, and the associated rise in energy prices, will alter consumer behavior. As such, the February numbers may already be dated. Meanwhile, the jump in income last month was primarily due to a new cut in payroll taxes that began last month. Nothing wrong with that, of course, but it’s not the same thing as saying that companies were handing out big raises last month.
Last week I highlighted the energy price concern. This week I try to look at each of the major market worries in an objective fashion. As usual, I will review the data and also look ahead. I try to take both a trading and an investment perspective.
Background on “Weighing the Week Ahead”
Colombia’s central bank (Banrep) increased the benchmark rate by 25 basis points to 3.25% at its February 25 meeting, the first hike after maintaining the rate at 3% for nine consecutive months. The decision surprised the markets and RGE as expectations were tilted toward an unaltered monetary policy rate. In its communiqué, Banrep said that the conditions keeping the rate at a low level had changed as domestic demand and credit dynamics had improved, economic growth is approaching its long-term trend, inflation projections are close to the middle of the target range and inflation expectations have deteriorated. Still, Banrep maintains that the new rate level is supportive of economic and employment growth and helps to keep inflation within the target range.
In Washington, before lobbyists try hard to destroy something, they first spread a great deal of disinformation about it. Thus the “End Users’ Coalition” (a front for the derivatives dealers) promotes its lobbying points as fake research. And “fiscal conservatives” attempt to distract from the fact that our largest banks brought us to the brink of budget disaster – this is their preparation for demolishing all vestiges of financial reform.
Summary: Americans today are easily led by fear, as our leaders well know. Commies and Islamo-whatevers under the bed. Global warming. Alar on apples (see Wikipedia). Repetition makes it so, the secret to successful propaganda. Today we look at at a favorite of conservatives seeking political advantage: inflation (scary even if imaginary). See the links at the end for more information.
Overall, the economic and political outlook has become more clouded for the MENA region, even for the oil exporting nations that should stand to benefit from higher fuel prices, at least until demand destruction kicks in. As the chart below shows, demographic traits and unemployment levels contribute to this uncertainty to different degrees, depending on the country. Across the region, governments have responded with a mixture of reinforcing food subsidies, transfers to the population and, increasingly, more extensive use of force.
Economic projections unanimously show that the Greek debt-to-GDP ratio is on an unsustainable path. Still, European politicians hesitate to bite the bullet of debt restructuring. Their hesitation is understandable. Apart from the – probably manageable – losses which would be inflicted upon European banks, debt restructuring puts the Greek financial system at risk, is hard to sell to the German public and is in the context of EMU an untried and risky step into the unknown. Above all, it sends the wrong political signal to Greece, which is that economic salvation may come from debt forgiveness, instead of from economic reforms. Debt forgiveness reduces the momentum for reform. Yet without tackling its bloated public sector, the many privileges and entitlements, the rigidities in goods and labor markets and its lax tax morale, Greece will never be able to compete in the euro area. Its economic problems would continue to burden the public finances, making it hard to regain the confidence of financial markets. Taxpayers and bank customers in northern Europe are not keen on paying the bill for a country whose predicaments are of their own making and which has been fudging the financial numbers for years. So, while the case for reform is clear, the case for debt restructuring is less so.
Will monetary policy, once again, be unable to count on fiscal policy’s support to combat inflation? Two weeks ago, the government trumpeted a R$ 50 billion “cut” in the 2011 budget, which the Minister of Finance called “fiscal consolidation”. We are still awaiting details. Since the announcement of this positive – albeit undefined – initiative […]