There are two widely followed American manufacturing indices issued by Markit Economics and the Institute of Supply Management. In June, the indices diverged with one continuing to rise while the other began falling. Even though both organizations released their data today, guess which one the mainstream media is choosing to write about and which one is being ignored?
The optimistic numbers from ISM are winning the news battle 41,000 google news search results to 8,500. This morning, I saw several articles hyping the ISM’s data but none reporting Markit’s. None of this criticism should be construed as supporting one index over the other. In fact, they are both probably right adding to the rest of the decidedly mixed data that defines the New Normal.
The table above illustrates the relative advantage or disadvantage of the country’s euro membership, and it is all you need to know in order to correctly predict the ECB’s next move. Germany is essentially running the ECB, so the bank delivers the monetary policy that the Germans want. As long as inflation remains low and the value of the euro is weak enough for Germany to maintain its export subsidy, then Draghi will hold the course steady. If the euro begins to rise above $1.45, Germany will allow a rate cut to weaken the euro.
An expensive euro is not as unlikely as you think. Eurozone banks are busy selling assets to raise their capital levels before the ECB stress tests. As long as this process continues, their will be steady buying pressure on the euro. In the meantime, the ECB is not matching the rest of the world’s central bank printing programs. As such, the euro will continue to strengthen:
The Chinese financial system will blow up someday, though it won’t be today. Whenever the PBOC attempts to stop printing yuan, liquidity dries up and interest rates rise. In response, the PBOC prints yuan and adds it to the system to ameliorate liquidity problems. The unintended consequence of this action is a credit bubble, which is particularly evident in the frothy Chinese housing market. Sooner or later, the Chinese will realize that holding empty apartments in empty cities is not an efficient use of capital but, again, not today.