The equity markets continued to grind higher today, as investors perceive that the Federal Reserve will resume a period of quantitative easing in order to fight deflation and increase growth. The S&P 500 Index rallied 5 points to close the session at 1128 up 6 points.
The Federal Reserve in a statement tomorrow will be focusing their attention on reflating the US economy. During the Japan deflationary tailspin of the 90’s Ben Bernanke suggested a target inflation rate of 3-4% as a measure to spur growth and avoid deflation. Tomorrow’s statement will be watched very carefully.
In Europe, German exports surged in June, confirming a revival in Europe’s largest economy after a severe recession and, until recently, a sluggish recovery. Germany posted strong growth last quarter but the extent of the rebound wasn’t clear until the release of the latest trade data, which showed a 3.8% rise in exports from May and a €14.1 billion ($18.78 billion) trade surplus. The reports which come on the heels of steady declines in unemployment and surging industrial orders point to second-quarter growth in Germany of at least 5%, at an annualized rate. Growth could even approach 7%, some forecaster’s say, which would be among the fastest paces since German reunification.
The Swedish krona remains a market darling. Over the past 3-months it neck-to-neck with sterling as the strongest G10 currency, up about 7.75% against the dollar and about 4% against the euro. It has strong macro-economic fundamentals. The preliminary estimate of Q2 GDP was reported in late July at 3.7% (year-over-year) after a 3% reading in Q1. With the July PMI near record levels, the positive momentum has carried into the start of Q3. The central bank expects 3.8% growth this year and 3.6% next. The government’s estimates a 3.3% this year and 3.8% in 2011. Swedish businesses have been successful in diversifying away from Europe and the US and toward Latam and Asia. About 80% of Sweden’s list companies reported quarterly earnings above expectations. A similar ratio in Germany stands closer to 65%, in comparison. The performance of the krona may challenge those who think that the trajectory of fiscal policy is the main driver of the fx market. Last year Sweden’s budget deficit was about 0.5% of GDP. This year is a little more than 2% of GDP. While this is still modest by international comparisons, it does fit into the category of a country with a larger budget deficit and stronger currency.