While good US data would be nice, Europe looks better

!! Outlook !!
The third week of a month throws an undigestible amount of data at
markets. Today is preparation for the State of the Union tomorrow amid
talk of another Homeland Investment Act that brought in $600 billion
in 2005 by delivering a giant tax break to multinational corporations.

We know that Pre Obama is going to position the Administration as
pro-business as a cover to promote job-creation, so another corporate
tax break is certainly logical. Longer run, of course, it's an
incentive for companies to move offshore and create jobs elsewhere.
Remember that in 2006, the repatriation of earnings was found not to
have created jobs, its intended purpose. Doing the same thing twice
and expecting a different outcome is not smart. Besides, what the
world wants to hear about is a deficit reduction plan so the debt
ceiling can be raised in March without the threat of default and
rating agency warnings and all that folderol. So far we have no
evidence of the Administration taking this subject seriously, which of
course leaves the playing field wide open for a run by the opposition
all the way to the goalposts.

Tomorrow we also get Case-Shiller home prices for November, Conference
Board Jan consumer confidence, and the Fed policy meeting. On
Wednesday it's the usual Energy Dept inventory report, NAHB new home
sales for Dec, and TreasSec Geithner testifying on TARP. Thursday
it's durables, and Friday a blockbuster trio—Q4 GDP first
estimate, the Q4 employment cost index and the Jan University of
Michigan consumer sentiment index. We guess the biggies are durables
and the Q4 GDP estimate, probably 3.5% from 2.6% in Q3, according to
the median in the Bloomberg survey.

While good US data would be nice, in the Big Picture, Europe looks
better. While many observers still expect Greece and maybe others to
default/restructure, nobody expects it this week. The market is buying
into the idea that the ESFS is sufficient and will be replaced by a
bigger, stronger version. More importantly, the market is buying into
the Merkel statement that Germany will do "whatever it takes" to
ensure the survival of the euro. While this shift in confidence is
going on, Europe is delivering better data than the US. Bloomberg
reports an interesting index of data surprises prepared by Citibank
that "measures how often and by how much economic indicators surpass
Bloomberg median estimates, was at 73 last week for the euro region
and 39 for the U.S. Europe is ahead of the U.S. in tackling deficits
from the global financial crisis and recession. U.S. federal
government debt will climb to 99 percent of gross domestic product
this year from 93 percent in 2010, while the euro region will total 87
percent, according to International Monetary Fund forecasts."
In sum, the eurozone is muddling through while the US may yet face a
deficit crisis of its own. At a guess, this is the real message of the
Trichet interview Sunday in the WSJ. He wasn't really talking about
an ECB rate hike, but rather about how European countries are striving
to rein in deficits and that ameliorates the need to hike rates.

We can be grateful for one thing—now we are supposed to be watching
interest rates to get a feel for where FX rates are going, and not
only dimly related other prices. Assuming the ECB stays hawkish and
the Fed stays dovish, this is fairly simple. The dollar may bounce a
bit on favorable economic news but won't be able to hold gains in
the context of lower real returns.
Source: Fxstreet.com