Last week was an insane week for the financial markets. It was as if Lost, American Idol and CSI were all on at the same time on the same day.
We had a Bush administration reshuffle, surprisingly dovish minutes from the U.S. Federal Reserve Board's policy-setting committee, and a visit from Chinese President Hu Jintao. Not all were market movers, but all have market implications. Let's TiVo the week to make some sense for the markets.
The new White House chief of staff, Josh Bolten, acted swiftly to shake things up. He reduced Karl Rove's portfolio and jettisoned Scott McClellan, the press spokesman. Why? Because 35- to 37-per-cent approval ratings and congressional Republicans were calling for change.
For an indication of why the President's ratings are where they are, let's look at the eight special reports the Washington Post has listed on its website: The Abramoff Scandal; The CIA Leak Investigation; The DeLay Indictment; The Gulf Coast Hurricanes; The Immigration Debate; NSA Domestic Spying; Budget, Taxes and Spending; and Watergate. Not sure how U.S. President George W. Bush is linked to the last one, but I'm sure the Democrats are working on it.
With all due respect to those who have left or had their job descriptions cut back, it's the speculation over the people remaining in the Bush administration that warrants attention. I'll leave Donald Rumsfeld for all those retired generals who need something to do and focus on Treasury Secretary John Snow. He's been a stalwart for Mr. Bush, but his job is in peril. The news on the economy is great, but it doesn't show up in the President's approval ratings. Mr. Snow gets the blame. If he's forced out, Mr. Bush will have a very tough time getting anyone from Wall Street to do this type of work. My pick would be former Texas senator Phil Gramm. The Republican has financial credibility and an ability to work with Congress. Should Mr. Bush pick another corporate chieftain like Mr. Snow, the financial gods will not be pleased and the U.S. dollar will suffer.
In one of the worst-kept secrets, the Fed released the minutes of the last policy-setting meeting that showed the members weren't as hawkish as the official statement intimated. The markets overreacted and took out some of the perceived tightening beyond the May meeting. Then we had soft housing data and producer price index data. The financial markets began chanting "one and done." Stocks were the biggest winners.
Remember, the cost of money is the 800-pound gorilla in the room of every market. The Fed is rightfully worried that 375 basis points worth of hikes might do more harm than good. One more wafer-thin mint? Head of the San Francisco Fed Janet Yellen said she's worried about going too far, and stated that the Fed is data dependent for its direction. What this means is that the Fed is not going to rely on its econometric models for predictions, but will watch the U.S. economic releases as they come out for clues. In other words, they're clueless. The point is that no one, especially the Fed, knows whether rates are going up beyond May.
Chinese President Hu Jintao paid a visit to the most powerful man in this country. Also, he met with Mr. Bush. Mr. Hu's dinner with Microsoft chairman Bill Gates underscored the important economic relationship between the United States and China and its biggest problem of bilateral trade. Mr. Hu's visit with Mr. Bush had better pageantry with a 21-gun salute, a review of the troops, and the Colonial fife-and-drum corps playing in bright sunshine. Unfortunately, it was downhill from there as no major breakthroughs occurred on intellectual property rights, the trade deficit with China of $200-billion (U.S.) a year, the undervalued yuan, nor the Iranian/North Korea nuclear issues.
However, positive things do happen when leaders meet and talk. I doubt Mr. Bush had a "Putin soul" moment with Mr. Hu, but both sides made their views clear to each other on a range of important topics. This is the fifth time the two leaders have met over the past 12 months. It's important to point out that Mr. Bush's view on China has evolved from "strategic competitor" to a "complicated" relationship to "China and the United States share extensive common strategic interests." This is a good change, not great, but good. It will pay dividends in the future for both countries.
It's fascinating how all three of these can spin around together and shape our perceptions of politics and the financial markets. Each is linked to another important topic affecting the U.S. dollar, gold, and oil: Iran. How that plays out is even more uncertain. Of course, this is when I wish TiVo had a button for the future and not just to rewind.
Andrew Busch is global foreign exchange strategist with BMO Nesbitt Burns. This column first ran in GlobeinvestorGOLD.com.