Key News
• Paulson Challenges China to Open Markets, Address Its `Unbalanced' Economy  (Bloomberg)
• “An open, competitive and liberalized financial market can effectively allocate scarcer resources in a manner that promotes stability and prosperity far better than government intervention,” Paulson said in a speech today at the Shanghai Futures Exchange.
• Key Reports (WSJ):
8:30a.m. Initial Jobless Claims. Expected: -16K. Previous: +7K.
10:00a.m. DJ-BTMU Business Barometer. Previous: -0.1%.
N/A/ Chain Store Sales.

Quotable

“I don't want to be too sophisticated here, but 2007 is going to suck, all 12 months of the calendar year…”

-- D.R. Horton CEO, Donald Tomnitz

FX Trading – Housing and the R word

While we don’t share Mr. Tomnitz’s pessimism we do think the U.S. economy is looking a little beige in the face.  At least that’s what the Federal Reserve’s Beige Book made it sound like yesterday.  It was a mixed bag of reports from all the different central bank branches. 

But there was nothing mixed about a pathetic housing market standing out as the key weak spot. 

In fact, we think it’s safe to say that, after a much needed breather for us all, housing is back under the gun.  Consequently, we’re being bombarded with the big R-word from all sides.  And whether or not CNBC’s analyst of the hour is playing up or playing down a recession doesn’t seem to matter.  All that matters is that the Fed Funds Futures have gone ballistic from that trigger word. 

As of yesterday this indicator showed a 100% chance the Federal Reserve will lower interest rates by the time their August FOMC meeting rolls around.  The expectations for lower interest rates don’t bode well for the dollar.  And that means Friday’s February jobs report, if shaky, could really lay the smack down on the greenback. 

We got an indication Wednesday that maybe we ought to expect a sour jobs report tomorrow.  The ADP National Employment Report showed private sector job growth added a measly 57,000 jobs – far less than the recent three-month average of 99,000 new jobs.  The difference maker was a 43,000 drawdown in construction jobs.

Spillover?  Likely. 

More to follow?  Likely. 

And by the way, the European Central Bank and the Bank of England report on interest rates later this morning.  Another notch of tightening by Mr. Trichet could prove to be the first round of a dollar double-whammy. 

Stay tuned.

John Ross Crooks III