Update

Of the few economic releases this week none carry much mkt-moving potential. So perhaps best to reflect on other events, center stage, which may impact US growth.

Key among these is Obama’s sudden conversion from gov’t planner to free-market maven. “It’s amazing how far he has moved off his campaign promises to the left, and moved over to the center-right,” noted one St observer. Of course we and future generations have paid his tuition; the cost - outrageous. We know he is looking to the election but at least he’s become practical, perhaps even useful.

This has not been lost on major employers. For example, manufacturers have become more optimistic. These were already cheered by results of Nov/2; they are now all the more buoyant given the new business-friendly attitude in the WH. Intel’s Paul Otellini noted the other day, “In 2011, everything gets better. The economy is forecast to improve.” Otellini like so many others had been a critic of Obama’s past fetish for throwing encumbrances on employers.

There are other reasons to be constructive. Well-advertised, higher commodity prices (food, metal, oil, etc) reflect stronger demand, US and abroad. This is a good thing. The other side is the inflation threat but as Zach Pandl with Nomura notes today, “U.S. companies in aggregate aren’t as affected by the rising commodity prices because they spend far more on wages and worker benefits than they do on commodities.” Maybe. Certainly the Fed agrees. The Fed of course “ex’s out” these price pressures, preferring the core CPI measure which excludes food and energy, as their guide.

Background: Major world commodities are priced in dollars. Countries earn these dollars through trade with the US. We run a trade deficit with most of these countries so they have plenty of dollars, more than ever nowadays given the Fed’s expansionary policies. These countries - many now expanding rapidly - buy food, metals and oil with these dollars, bidding up the price. So loose policy here (core CPI as the excuse) translates to commodity inflation in countries abroad.

This leads the discussion to China. China has more of these dollars than anyone; to keep this hoard safe a good chunk is in US treasuries. So much in fact that China has a lever over US policy - if they sell, up go US yields. This is why the Chinese have in the past gotten away with linking their yuan to the dollar. This keeps Chinese exports cheap but fuels Chinese domestic inflation, and by contagion eventually that in the US, biting into household pockets. This is one reason the US has warned China to speed the appreciation of the yuan to the dollar. This too will be a major part of this week’s discussion with Chinese president Hu.

Robert Craven