Keep Calm and Have a Fortune Cookie

The last week we saw the Chinese government force the devaluation of their currency by 4.4% in an effort to inject life into their economy after their recent market crash. This started a frenzy of protest on Main St. and Wall St. alike. Both sides of the political aisle in the U.S. claimed this currency manipulation by the Chinese will further weaken U.S. exports. Although it's relieving to see bipartisan action, we would like to highlight this event and others that our readers and clients should also focus on in world markets.

Chinese devaluing their currency, effectively making their products more affordable to the rest of the world, was a foregone conclusion with the recent strength of the US dollar. In March, the Euro hit an all-time high against the Yuan at 0.15274 due to the Yuan's peg to the strong US Dollar. The Eurozone is virtually the same in importance to Chinese exports as the U.S. market. The PBoC devaluation in China to protect their exports has a similar effect to low interest rates and the bond buy-back (quantitative easing) in major markets.

The declining economies in Europe and Japan have caused both central banks to print money and embark on massive bond buying programs. This helped jump start both economies and also devalued their respective currencies. Japan saw over 3% GDP growth but also saw some of the lowest levels in their currency since 2007, closing at less than 124 JPY per US dollar Friday, August 14. This made Japanese exports even more attractive, and lucky enough for Japan, global commodities are so low their cheap currency didn’t hamper growth. Look for Japanese intervention to increase the value of their currency if commodity prices rebound. Virtually the same can be said for the Eurozone.

Funny enough, the move in the Chinese currency caused such speculation that it would hurt U.S. exports, the top performing major currency last week was the EUR, gaining 1.34% over the USD hitting over 1.1150. This month-long high for the Euro and increase in strength for the GBP and CHF was likely aided by the multi-billion dollar deal approved by the Greek parliament to finalize their bailout. Even though the EU only grew 0.3% this quarter (projected 0.4%), the perceived stabilization of the region was enough to convince the market of its relative strength.

With a pending rate decision in the U.S. in September, low commodity prices and shaky global markets, be on the lookout for more government intervention by regions globally. Closer to home, take a look at the article below for some signals coming this week of what might happen in September.

Hints of a Fed Rate Hike Could Come This Week

Today’s release offers one of the early estimates of the macro trend in August. Although the data is focused on the New York Fed’s region within the U.S., the report is the first of several regional updates on manufacturing activity from the Fed banks. As usual, this data will set the tone for expectations for the monthly figures that will follow in the weeks ahead.

In addition, today’s report will be widely read as the first clue of the week for assessing the potential that Yellen & Co. will begin raising interest rates in September for the first time since 2006. The odds that tighter policy is set to begin with next months’ Federal Open Market Committee meeting draw fresh support in last week’s optimistic news on retail sales and industrial output for July. More of the same is expected for the initial peek at August’s profile.

According to consensus forecast from www.econoday.com, the NY Fed Index is on track for a modest rise to 4.75 for this month. If the calculation holds, the benchmark will tick up to its highest level since March. In turn, the news will offer the throng of analysts another reason to think that we'll see a rate hike next month.

Last week’s key economic updates – industrial production and retail sales – delivered positive news. In both cases, strong gains for July marked a turnaround from disappointing comparisons through most of the first half of the year. Are the encouraging numbers a sign that the macro trend is poised to deliver stronger growth in the second half of the year? Those of you in manufacturing know the answer just by looking at your order pipeline.

The view from the perspective of home builders is certainly optimistic these days. In the July update, the mood was clearly resilient. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) remained unchanged at 60 in July, sticking to the highest reading in nearly a decade. “The fact that builder confidence has returned to levels not seen since 2005 shows that housing continues to improve at a steady pace,” NAHB’s chairman Tom Woods said last month. “As we head into the second half of 2015, we should expect a continued recovery of the housing market.”

The bullish narrative is projected to remain intact in today’s release for August. At www.briefing.com, the consensus estimate sees HMI rising fractionally to 61, which would mark another multi-year high. In that case, we’ll have another clue for expecting upbeat news in tomorrow’s report on residential housing construction.