Data for US Economy Continues to Disappoint

Reports on the US economy continued to disappoint the recovery bulls this morning. Core retail sales came in at -0.2% worse than the expected positive 0.3%. That meant that the yearly retail sales number was down 6.2%, the worst on record. First time unemployment claims came in higher than expected at 444k versus and expected 438k. Mortgage foreclosures in 2009 set a record 2.82 million as the bear news continued.

No problem for the stock market, however as the market digests the bad news, and then resumes its climb. There seems to be a whole bunch of money out there willing to follow what ever is winning. The dollar's response to the news was muted, but seems to be a bit bearish as time evolves. Bonds did firm a little, knocking the yield down a couple points.

Lingering in the background is concern about the ability to finance the US deficits. Yesterday at the 10 year auction, the indirect bidders (foreigners) bought 29% of the 21B total offered. This is down from 38.8% taken by this group in the last ten auctions, and less than the 50% ownership of the 7.27T United States Federal debt. Does this means that the chilling demand for US Treasuries may develop into a crises of confidence of our debt and our currency?

This morning this issue was addressed in comments on Seeking Alpha, Wall Street Breakfast: Must Know News when the said:

"Mounting debt risks dollar crisis. Having completed its two-year study, the Committee on the Fiscal Future of the United States has warned a dollar crisis is likely unless the government raises taxes or cuts spending to drastically rein in its debt. "In the next year or two, large deficits and more borrowing are unavoidable given the severity of the economic downturn. However, action ought to begin soon thereafter."

2010 could see sovereign defaults. The U.S. isn't the only country with a debt problem. According to a report by the World Economic Forum, one of the top threats facing the world in 2010 is the risk that deteriorating government finances could push economies into full-fledged debt crises. Economies that are already fragile, especially those in the developed world, could overextend themselves, leaving some 'tough choices' ahead."

After the close yesterday, the Treasury reported that the government deficit was $91.9B during December 2009, far exceeding the 2009 deficit of 51.8B. This brings the first quarter 2010 deficit to a record of $388.5B. During December the government paid $104.6B in interest to service the US debt, or 34% of the total December expenditures. While this may be in line with the Treasuries estimate of $1.502T deficit for the year, we wonder if it will not take some higher rates to get the foreign investors to double down on their US Treasury bets, and higher rates will only exacerbate the US deficit.

In the chart of the Euro below you will note the sell off from the high from a little above the 1.51 level failed to retrace back to the 38.2% Fibo handle. Often failure to regroup all the way back is a sign the market might be stronger than perceived. Sure the ECB has some problems with the Greek deficit situation, but they give the appearance they are addressing the problem. Closer to home Timmy G. and Benny B. have their own problems. If they have a solution they are keeping it to themselves. In a less ugly contest, they and the USD may be the losers.




Disclosure: no positions