G3 Recap 2-22-11

Main Items:

  • US Consumer Confidence improved to 70.4 in Feb vs 65.5 expected and 64.8 previously. This is the highest reading since Dec 2006.
  • Richmond Fed improved to 25 in Feb vs 18 expected and previously.
  • S&P/Cash-Shiller 20 city composite index dropped 40bps in Dec, the 6th consecutive decline.
  • Risk of a 2trn solar ‘Katrina’ – FT

Overseas Data:

  • EU PMI Composite improved to 58.4 vs 56.9 expected and 57 previously.
  • German IFO Business Climate Index improved to 111.2 in Feb vs 110.3 expected and previously.
  • Moody’s downgraded Japan’s debt outlook from stable to negative, citing the ongoing political gridlock that is reducing the chances for a near-term deal to tackle the deficit.
  • A 6.3 magnitude earthquake hits New Zealand leaving 65 people dead.
  • Australian NAB Business Confidence declined to 5 in 4Q vs 9 previously

Commentary:

  • The interesting moves today were in the commodity currencies – despite the move in oil and fiscal issues in the US, the commodity currencies weakened vs the USD today. JPM noted that historically, commodity currencies have actually been poor hedges for oil spikes.

    As Gavekal originally noted, the rapid rise in oil prices over the past couple of years is now consistent with a recession on the horizon. Below is a chart of the log 2yr change in WTI vs the ISM manufacturing index. It is similar to Gavekal’s chart, except I used the 2yr log change in oil prices and the PMI data, which leads IP. This chart, in contrast to Gavekal’s, suggests that this rally in oil prices will have a bigger impact on US growth in the coming months.

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