August 11. …if you go carrying pictures of Chairman Mao

“But if you go carrying pictures of Chairman Mao, You ain’t going to make it with anyone anyhow.” – John Lennon, “Revolution” 1968

–By devaluing (1.9%), China just removed another reason for the Fed to hike.  From a Bloomberg article quoting Stephen Roach, China’s action “…raises the distinct possibility of a new and increasingly destabilizing skirmish in the ever-widening global currency war. The race to the bottom just became a good deal more treacherous.”  As mentioned previously, by pegging to the dollar China was effectively ceding export share to other Asian competitors.  Effects now should be deflationary.  As I said in the weekend post, “Any indications of depreciation in the yuan would unleash a new global disinflationary wave.”  Eventually, government intervention to control markets fails.  If China was selling USD reserves (i.e. treasuries) in order to buy stocks and engage in other market propping activities, that source of treasury selling will now abate.
–With the world now depending on the strong US dollar and the propensity of the US consumer to buy more crap, yesterday’s NY Fed survey is unwelcome news.  From the NY Fed: “While earnings and household income growth expectations were largely unchanged, median household spending growth expectations RETREATED SUNSTANTIALLY to their lowest level since the inception of the survey in 2013.”  Today brings the NFIB small business optimism survey which took a tumble last month.  Today’s reading is expected 95.0 from 94.1.  Also out is Productivity, expected +1.6% and Unit Labor Costs, which were 6.7% last (! ), but expected at just 0.5 today.  Retail Sales on Thursday.
–Everything that bounced yesterday- copper, stocks, currencies – are now giving back those gains.  Well, not quite everything, as precious metals hang on to and improve on yesterday’s rally.  In the US, auctions kick off with today’s three year, right into the face of safe haven demand.

Posted on August 11, 2015 at 5:16 am by alexmanzara · Permalink
In: Eurodollar Options

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