Busch: 5 Things You Need to Know Today

1. According to a top ranking Chinese official from Wikileaks, their GDP figures are “man-made.” Reuters reports that “Li Keqiang, head of the Communist Party in northeastern Liaoning province at the time, was unusually candid in his assessment of local economic data at a dinner with then-U.S. Ambassador to China Clark Randt, according to a confidential memo sent after the meeting and published on the Wikileaks website.” While this is getting the headlines, I would remind everyone that the US revises not only its GDP, but its employment data significantly at times. The best part of this Wikileaks story isn’t the GDP news, it’s what Li Keqiang said about his three data points he uses to gauge actual economic activity: electricity consumption, rail cargo volume and bank lending. For understanding China, start tracking them.

Ben Bernanke, Federal Reserve Chairman
Ben Bernanke, Federal Reserve Chairman

2. Bernanke and other Federal Reserve members are bearish on the US economy.

In this over-reported news story, Federal Reserve chairman Ben Bernanke went on CBS’s 60 Minutes program to state that the economy is close to stall speed (GDP<2.5%) and the QE2 program could buy more than the $600 billion announced. Coupled with the Moody’s downgrade of Hungary, this has led to a “Risk-Off” trade in the financial markets where the US dollar gains, equities are sold and bond yields drop. The best part of this story is that the chairman of the Federal Reserve weighed in on a topic that is normally the province of the executive branch: US dollar policy. ““Keeping the Chinese currency too low is bad for the American economy because it hurts our trade. It’s bad for other emerging market economies. It’s bad for China because among other things it means China can’t have its own independent monetary policy.”

3. Even with soft US employment data, the big supply of paper this week for the fixed income markets drove interest rates higher last week. The US Treasury is auctioning $66 billion of notes and bonds this week. The schedule is $32 billion of 3yr securities on Tuesday, $21 billion of 10yr notes on Wednesday and $13 billion of 30yr bonds on Thursday. Also, there are $13 billion in muni bond issuance this week as well. This dwarfs the $1.5-2.5 billion in buying that the Federal Reserve will do today as part of Bernanke’s QE2. It underscores why the QE2 program will struggle to aid the US economy as supply will overwhelm the Fed driven demand. This is why so many economists, analysts and politicians question the program.

4. The positions in the Bush tax cut debateare fully fleshed out after the series of votes on Saturday and President Obama’s comments. As I warned last week, the tax votes were not to be seen as anything but an attempt to do this for the leaders of both parties. Bottom line: Bush tax cuts likely to be extended for 2 years and expiring unemployment benefits will be extended for another 6 months. What’s interesting is the continued morphing of President Obama into moderate Bill Clinton. President Obama is showing negotiating skills of compromise by limiting what he wants to the tax and unemployment benefits to get a vote done for ratifying START arms control treaty with Russia. Republicans should begin to worry that this new Obama will be formidable in 2012….which by the way starts in 2011. For the markets, Obama=Clinton is a positive and potentially means better than expected outcomes for legislation in early 2011.

5. The major crisis phase for Europeappears to have ebbed at this point similar to last May. Yes, Moody’s just downgraded Hungaryand sovereign European CDS has jumped higher. And tomorrow, the Irish government presents its austerity budget to parliament. However when did ratings agencies lead instead of follow the trend? The spread of German bunds to Irish bonds rose 9 bp today to 537, but remains well below the peak on November 11th at 652. The European sovereign crisis appears to be moving in a six month allergic reaction pattern. The 1st round of hives peaked in May with a bailout of Greece. 2nd round of welts peaked in November with a bailout of Ireland. We should see another bout of raised red marks in April-May for either Portugal or Spain.

Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.