“We saved the world from disaster,” Ben Bernanke said. Pretty strong words and from the looks of it, it seems that the Fed’s stimulus packages indeed worked now that the economy is on its way to recovery… Recently, Germany and France announced that they are out of the recession as well. Interestingly, they did so despite little quantitative easing measures from the ECB. What’s up with that homies!?
The Fed has probably implemented every possible stimulus package known to man. Troubled Assets Relief Program (TARP), Cash-for-Clunkers, hefty tax cuts, massive injections of liquidity, record-low interest rates… You name it, they’ve used it! More than half a year ago, President Obama unveiled his $787 billion stimulus plan which spanned health care, infrastructure spending, alternative energy production, and a goal to create 3.5 million jobs. He also implemented the TARP, which allows the US government to purchase assets and equity from financial institutions in order to heal the US financial sector. Other programs, such as the Cash-for-Clunkers, and the large discounts in home prices are aimed at a reviving other sectors of the ailing US economy.
The ECB, on the other hand, refuses to budge from its conservative stance in terms of implementing easing policies. Recall that the ECB has been criticized for not being so gung-ho about QE, compared to the rest of the major economies. The ECB has already cut rates to a low of 1% and even implemented a plan to buy €60 billion worth of covered bonds. Still, it keeps getting warned that it might trail behind in the race to recovery if it continues to be tight-fisted about QE. But ECB Chief Jean-Claude Trichet argues that “It is not a race” and that the ECB won’t follow the US Fed and Bank of England in buying government bonds to free up credit. Last March, he said that instead of pushing new easing measures, the euro zone would focus on getting its financial sector back on track to maximize the effects of their stimulus programs.
So, how exactly do all these plans measures out in economic recovery? Let’s do a little bit of data comparison to see which apple is *less* rotten, shall we?
In the euro zone, unemployment in June unexpectedly went up by a mere 9.4% from 9.3%. Economists were predicting it to hit 9.7%. As for US, the unemployment hit 9.5% slightly better than the 9.6% forecast. In July, however, the unemployment rate in the US surprisingly eased to 9.4%. Digging a little deeper, employment numbers reveal also that the average work week of employees increased to 33.1 in July from 33.0 the month prior. In addition, earnings were boosted by 0.2%, higher than the 0.1% rise initially expected.
France and Germany also disclosed a few weeks back that their economies grew 0.3% during the second quarter of 2009 as global demand for their exports picked up. This helped euro zone’s GDP to show only a 0.1% contraction. On the other hand, the US advance GDP came out with a reading of -1%, better than the -1.4% consensus.
As for the manufacturing industry, euro zone‘s July manufacturing PMI came out with a reading of 46.3, which was an improvement from the 42.6 figure in June. The headline reading of a similar report in the US, the ISM manufacturing PMI, showed that the rate of contraction has also eased as it jumped to 48.9 in July from 44.8 the previous month.
The question is… Who is going to crawl out of this recession first? Can consumers sustain the recovery when all the economic stimulus plans run their course? Note that Fed postponed the end of their quantitative easing measures till October, suggesting that they are still somewhat cautious over the short-term recovery. At the same time, while Germany and France did give us a nice surprise with their GDP figures, the fact still remains that the other members of the Euro zone lagged behind significantly.
However, if these other countries show some improvements over the coming months, it might reveal that underlying fundamentals of the euro zone economy may be in a better position than that of the US. The US just has too many problems – unemployment and debt just to name a couple – that could delay their recovery. But then again, if these euro zone participants show continuing weakness, we may hear cat calls of Jean Claude Trichet and the rest of his gang being behind the curve…
So what do all these mean for the EUR/USD – the world’s favorite currency pair?
Amidst the recession, the euro has still managed to gain against the dollar not because of fundamentals but mainly because of it being the “anti-dollar”. There was even a point in time when the euro advanced despite an expansion in the ECB’s QE program. Fundamentally, the euro should get devalued as a result of the increased money supply. But it was sentiment again that lifted the euro – the ECB didn’t expand the program as much as the Fed did. In a way it makes sense since money has to go somewhere, right?
The EURUSD has just been moving sideways during the course of the month. Sentiment was still its main catalyst – it advanced on positive news from both the Euro zone and the US, and slid on the less than stellar ones. This was the case for the most part except for one oddity that happened last August 7. During that day, the US employment figures came out better than expected, but surprise, surprise – we saw the USD rally!
Could a boost in optimism in the US economy cause a shift in fundamentals versus sentiment paradigm? Will the prospect of a prolonged recession cause investors to be more risk averse? I wish I knew for certain too. I want to buy a new house.