TIC data a wake-up call for Treasury

The Treasury TIC showed a huge net outflow in July and one of the lowest monthly increases in long-term flows in years. The flows were much lower than expected in survey data. The data is clear. Foreign investors did not want to be buyers of US assets. This sent a clear wake-up call to the Fed and Treasury that the financiers of the US debt were willing to walk away from the dollar. Only after action was taken or signalled did we see a rally in the dollar. There should be a rebound in the data with the dollar rally but it suggests that it the US financing position may be much riskier than what some have believed. Global investors are sensitive to credit risk and financing and hey will look for other choices. The credit crisis has shown that even a reserve currency can be subject to change.

We have argued that the recent dollar rally has been associated somewhat with a flight to quality toward the dollar but that is under the assumption that the risk free assets which are being used to park the reserve funds are high quality.

Fed funds freeze a problem

The overnight Fed funds rate rose to 3.75% as banks were unwilling to lend to each other. The lack of movement in the Fed funds market is the sort of gridlock which only happens in a true period of credit uncertainty. This is also the time when the Fed has to behave as the lender of last resort. This is not an issue of what is the price for funds but the basic need for funds. We have talked before about how the quantity side of credit can be the most disruptive. This doe not require the Fed to lower rates but just keep them at the target by supplying funds. I clear signal of being willing to provide funds will stabilize the markets.

Where are the global safe havens?

The usual suspects are appearing in the FX market, Japan and Switzerland. Both countries are net lenders and have started to see money move back home. In times of crisis, the home bias exists. The countries hurt by this move have been the high interest rate low growth countries like Australia and New Zealand.

However, the flight to quality also extends to the dollar, the epicenter of the financial crisis. As a reserve currency, the US is still considered a safe haven by many investors. We can only infer this because we do not have the direct purchase of assets by foreigners for August. Unfortunately the latest data on foreign buying only goes through July and it shows weak buying through July and most of the purchasing coming from central banks. This was a time time of high uncertainty concerning what action would be taken for Fannie and Freddie.

The proactive engagement of the government with the crisis has created dollar demand and a level of irony. The country that has the biggest problems and most risk may have less uncertainty because the size of the issues have been clearly presented. It is dirty laundry but it is being aired and dealt with. Moral hazard is alive and well but this may protect some markets in the short-run.

Granted there is still a fair degree of uncertainty, but the information on the crisis may be more readily available. Additionally, the government is providing support through the Fannie and Freddie bail-out, the involvement of Fed through taking different collateral, and the active engagement by the government in finding partners for failing institutions. In the short-run, this has been dollar positive relative to the rest of the world.

In this crazy credit world, the dollar may still be a safe haven for international money even with the crisis swirling in New York.

So much for US economic euphoria

With retail sales coming in at -.7%, the excitement of a better US growth path than Europe may come to an end. Second quarter numbers were higher given tax rebates but now that the cash has worked through the system, consumers are retrenching.

This retail slowdown is also in the face of a high PPI number. While it was expected that PPI should fall given the swift decline in commodity prices, survey numbers were still showing a 10% increase. PPI was lower than survey numbers at a sticky 9.6%, similar to last month.