TRADE DEFICIT
Dollar challenged
By some ways of thinking, the horrific attacks last week on the World Trade Center and the Pentagon were intended to send a message not only to America and its allies but also to those who trade the symbol of financial might: the dollar.
The worldwide traffic in currencies often tops $1 trillion a day, with the bulk of the action involving stocks and other U.S. financial instruments, notably Treasury notes and bonds.
Globally, the greenback has been a store of value, a bulwark for those seeking a safe haven. Its strength in currency markets provides a daily barometer of how much faith foreigners have in this country.
For good or ill, that brings us to Wednesday’s report on the July trade deficit. Economist Sung Won Sohn expects the gap to grow slightly, to $29.5 billion from $29.4 billion in June.
“The bad news is that the figures will show that both imports and exports are falling,” said Sohn, of Wells Fargo & Co. in Minneapolis. “The beneficial effects of global trade are being diminished, as activity is slowing.”
He believes the dollar remains a stronghold. “It hasn’t plunged the way many people predicted after the terrorist attacks,” he said.
Longer term, however, Sohn sees more troubles for the greenback in the months ahead.
“Annually, about $500 billion comes into this country from overseas, in gross terms,” he said. “The concern is that some of this money will start to stay home. America just doesn’t seem as safe as it did. Over time, foreigners will inevitably become more cautious about investing overseas.”
BEIGE BOOK
Road to recession
In the wake of the attacks, economists see a danger that the economy, already weak, will tip into recession. That makes Wednesday’s beige book report from the Federal Reserve doubly significant.
Chicago economist Brian Wesbury believes the beige book will be old news, repeating comments about weak economic growth and a lack of inflation. But he also believes uncertainty caused by the recent events will trim 1 percent from growth in the current quarter, creating little doubt that the country is in recession.
Wesbury, of Griffin, Kubik, Stephens & Thompson, an investment firm, said members of the Fed “could reduce short-term interest rates by a half-point at any time, to a flat 3 percent. In effect, the central bank already has done this, by adding huge amounts of liquidity to the financial system.”
If the Fed doesn’t take steps immediately, he said, it remains likely that action on monetary policy will occur before policy-makers meet again on Oct. 2.
HOUSING STARTS
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Orders stay strong
One of the economy’s strongest pillars, the construction industry, will be on stage Thursday, with August housing starts. Analysts expect a modest boost from the 1.67 million-unit annual rate a month earlier, as builders continue to see strong order books into next year.
Also due out: the August consumer price index on Tuesday, preceded by July business inventories on Monday. The latter report is likely to suggest that companies are continuing to whittle down excessive backlogs, setting the stage for a modest revival in manufacturing
EQUITIES
Anxious reopening
After nearly a week to digest the terrible events that took place on Wall Street’s doorstep, the stock market hopes to begin trading Monday. Many traders will remain grief-stricken, and, needless to say, investors are extremely nervous about what the opening may augur.
Chicago investment manager William Hummer says that, based on history, it would be no surprise if the market fell sharply at the opening, perhaps by several hundred points.
“But we should keep in mind that things could proceed differently this time, partly because of the six-day time lag since the attacks,” said Hummer, of Wayne Hummer & Co.
In any event, any downturn in stocks is likely to be short-lived, he said, because bargain-hunting should follow in rapid order.
“If anything, all the monetary stimulus being applied, with inflation absent, could cause the economy to rebound more quickly than expected,” he said. “That would mean the fundamentals for the stock market will rapidly improve.”