So Many Debates

Futures are pushing higher this morning on what is expected to be a slow news day. The focus will be on Bernanke’s 11:00 AM speech in Berlin. This is a prepared speech on global issues but traders will be ‘interpreting’ his every word to try to assess his immediate intentions on monetary policy.

EU Cuts Growth Outlook, Says Turmoil Has Raised Risks (Update2): “The European Commission cut its growth estimate for the euro-area economy after the collapse of the U.S. subprime market raised borrowing costs worldwide.

The economy of the 13 nations that use the euro will probably expand 2.5 percent this year, down from a May forecast of 2.6 percent, the commission, the European Union's executive agency in Brussels, said in a report today.”

While the reduction in growth isn’t large, the European Commission isn’t the first to cut its estimates. Last week the European Central bank cut its forecast for euro-area growth.

“The overnight money-market deposit rate rose to a six-year high of 4.65 percent last week as the crisis in the U.S. mortgage market made banks reluctant to lend, leading to cash shortages.”

The U.S. subprime induced credit contraction is starting to bite into the ‘real’ economy. The IMF has also jumped onto the estimate reduction bandwagon:

“IMF European Director Michael Deppler said yesterday that the turbulence in financial markets will slow European economic growth more than previously expected. The Washington-based fund, which had predicted growth of 2.6 percent this year and 2.5 percent for 2008, is “in the process of revising the numbers down,” he said.”

I mentioned yesterday in The Final Blow that stubbornly high commodity prices might be the catalyst to tip a wounded global economy into the red. Factor in the possibility of serious U.S. dollar weakness and the Euro area could rapidly experience some serious problems.

“The credit-market issues may compound pressures already confronting manufacturers. Oil prices have risen 27 percent this year, while the euro is up 8.6 percent against the dollar in the last 12 months, making European exports less competitive. European manufacturing grew at the slowest rate in almost two years in August and business and consumer confidence dropped to a six-month low.”

Fed Policy Makers Signal Division on Risks, Size of Rate Cut: “Federal Reserve Governor Frederic Mishkin joined San Francisco Fed President Janet Yellen in flagging an increasing threat to consumer spending, differing with officials who still see signs of economic strength.”

Fed watchers are interpreting this as a debate between the 25 basis point cut camp and the 50 basis point cut camp.

“Rupkey said there's no ambiguity in the Treasury market, with the two-year note yield at 3.84 percent, indicating traders anticipate a series of rate cuts. The yield is more than 1.25 percentage points below the Fed's 5.25 percent target rate for overnight loans between banks.”

However, the futures market has a terrible record of predict Fed action. Bespoke Investment Group posted a great post, Fed Fund Futures VS Reality, on just that issue.

(Courtesy of: Bespoke Investment Group)

OPEC Plan by Saudis to Boost Output Opposed by Algeria, Libya: “A Saudi Arabian-backed proposal to temper high oil prices by raising oil production at today's OPEC meeting in Vienna is meeting resistance from Venezuela, Algeria and Libya.”

The Saudis are thinking about the long run. Venezuela, Algeria and Libya, blinded by greed, are thinking for the short run. The global economy is weakening as the global credit bubble deflates. Lower commodity prices, especially oil, would give the Fed significantly more room to maneuver A series of rate cuts now would tank the U.S. dollar and therefore send dollar denominated commodities sky high. The result would be instant, massive inflation AND higher commodity prices would suck the remaining oxygen out of a weakened economy.

“Oil prices above $77 a barrel are a burden to consuming nations, prompting some Persian Gulf producers to discuss a proposal to raise OPEC quotas by 500,000 barrels a day at the meeting at OPEC's Vienna headquarters. The group's biggest producer, Saudi Arabia, proposed an increase, Iraq's oil minister said before the meeting started.”

Should this proposal succeed, expect a violent and broad based short covering rally in equities. Keep your stops tight. With an American election looming, the Saudis are going to get their balls squeezed hard on this.

““There's going to be a lot of pressure, particularly on Saudi from the Americans to do something, and I think the Saudis will listen,” John Hall, the director of U.K.-based energy consultants John Hall Associates, said in an interview in Vienna today. “They recognize that there is an impact on world economic growth if the price is allowed to stay at these very high levels.”

China's Inflation Surges to 6.5%; Trade Gap Widens (Update6): “China's inflation rate accelerated to a 10-year high and the trade surplus widened, adding pressure on the central bank to raise borrowing costs for the fifth time this year.

Consumer prices rose 6.5 percent in August from a year earlier after gaining 5.6 percent in July, the statistics bureau said today. The trade gap widened 33 percent to $24.97 billion, the second-highest monthly total.

Stocks fell the most in more than two months on concern the government will raise rates, curb bank lending and sell more bonds to cool the world's fastest-growing major economy. Premier Wen Jiabao is trying to stop money from record exports stoking consumer-price gains and asset bubbles.”

The numbers from China are starting to get pretty scary. This runaway beast will be hard to tame, if not impossible. Something’s got to give at some point soon. A contracting U.S. economy, especially one led by Democrats, could result in a serious political clash between these two giants with real economic consequences. 2008 will be an interesting year.

Japan Machine Orders Surge Three Times Forecast Pace (Update5): “Japan's machinery orders surged in July at three times the pace forecast by economists, easing concern the economy will contract for a second quarter.

Orders climbed a seasonally adjusted 17 percent to 1.12 trillion yen ($9.9 billion) from June, the Cabinet Office said in Tokyo today. The gain was led by demand for electronic machinery.”

Huh? Yesterday GDP numbers showed an equally surprising 1.2% decline in GDP.

“Corporate spending fell by the most in more than two years in the second quarter. Japan's economy shrank at a 1.2 percent annual rate in the quarter, the largest contraction since 2003, the government said yesterday.”

That is some seriously contradictory data.