U.S. Trade Gap Widens as Egypt Considers its Future

Trade data from the U.S. are out today and provide great hints on what is going on with the economy today. Leaving aside monthly fluctuations, we discover that the 2010 gap has widened at the fastest pace of the past two decades, with consumer spending on imported goods constituting the biggest driver of the trend in spite of the fact that exports have performed similarly strongly on ongoing demand from China and neighboring Asian economies. Put together with consumer confidence numbers released today, these figures confirm the understanding that the Fed was able to turn the economy around by its controversial and aggressive tactics. What remains to be seen is whether this success can sustain itself once the central bank`s support is withdrawn, and in that respect the data is inconclusive so far.

What we find more interesting from a longer term perspective, and also with respect to the USDCNY debate and related protectionism worries is the 17% jump in exports which is reported to be the largest gain since 1988. Car sales, and industrial machines are the main driver of the trend boosted by the fall in the value of the USD against most emerging market currencies in the same period. With manufacturing contributing an ever increasing share of U.S. economic growth it is becoming clear that the appreciation of the yuan will remain a top issue for the U.S. administration even if it doesn`t feel itself bound to pursue the Congress` timetable on the problem.

Meanwhile, before the release of these pieces of data equity markets around the world were doing well in part in a reaction to news that Egypt`s Hosni Mubarak has handed over the country`s day-to-day affairs to his deputy Omar Suleiman and left for the resort town Sharm al-Shaikh even as he refuses to step down as demonstrators have been demading. Coupled to this incentive, the leadership has been threatening the demonstrators too, with the Finance Minister speaking to the BBC`s Radio 4 about the possibility that the stalemate between the army and the demonstrators cannot "go on forever", and that fire may have to be used at one point. We don`t think that the army will shed blood in order to keep the bankrupt and corrupt Mubarak regime in place, so the minister`s worries seem to be exaggerated. It is most likely that the army will keep protecting the person of the president from any harm while doing nothing to openly alienate the protesters. Of course, in such a volatile situation anything may be possible, but the possibility of a general bloodbath of the sort that would happen in the 70s and 80s seems very low now.

Gold is slightly higher, oil almost unchanged as the USD shows a lacklustre performance in this bullish atmosphere. We expect US stocks to close higher as well, bringing the week to a fitting conclusion.