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BOJ keeps rates unchanged, but downgrades economic outlook

Tue, Aug 19 2008, 07:32 GMT
by KBC Market Research Desk

KBC Bank


  • US Equities decline (Dow/S&P -1.5%) led by financials on growing concerns about Freddie Mac and Fannie Mae, Asian stocks fall too.

  • Australian Central Bank says it may soon cut rates to avoid a deeper and more persistent slowdown.

  • Crude oil falls as tropical storm Fay may miss oil fields in the Gulf of Mexico.

  • Nationwide, UK’s biggest building society, plans to operate in Ireland, giving it access to ECB funding.

  • German PPI (8.9% Y/Y) accelerates to the fastest pace since October 1981.

  • Pakistan’s president Musharraf resigns, raising concerns about the future of the nuclear-armed country.

  • Today German ZEW survey and US PPI and housing starts on the calendar.


Markets

Yesterday, renewed concerns about the health of the US financial system dragged US equities down. Tensions in the money markets are on the rise again, while Freddie Mac and Fannie Mae, the two mortgage giants, dropped more than 20% each amid growing concerns that they won’t be able to avoid a government bailout. Although this would require a massive government intervention, US Treasuries nevertheless benefited from the negative sentiment on the equity markets and gained further ground to above the July highs. There was a bull steepening of the US yield curve with yields falling between 5 and 2.5 bps. A confirmation of the break higher would further improve the outlook for US Treasuries. In the euro zone, yields declined too (2-2.5 bps) in spite of a warning in the Bundesbank monthly report that slower economic growth may not be enough to curb inflation. The long end however underperformed with German 30-year yields up 1 bps.

The dollar wasn’t really affected yet by the rising concerns about Fannie and Freddie. Although the dollar retreated slightly from the six month high against the euro during the day, the currency pair is again close to this level (1.4645) this morning. Also against the yen and sterling, the dollar is still close to its recent highs. It however remains to be seen whether the dollar can sustain its recent rebound, if the concerns about Fannie and Freddie would further mount.

Besides this, markets will also look closely to the German ZEW indicator in the euro zone and the PPI, housing starts and building permits in the US. This morning, the German producer prices rose much more than expected in July.

SPX

US equities (S&P) decline on concerns about US financial system, as …

FNM

… Fannie Mae (graph) and Freddie Mac drop more than 20% and …

Help

… tensions in the US money market rise again (liquidity spread on 3-month rates).

TYU

US T-Note Future breaks above the July highs. A confirmation would further improve the technical picture.

EUR

US concerns don’t affect the dollar yet. The dollar even set new highs against the euro this morning, as …

CO

… oil (graph) and gold decline this morning.

Published on  Tue, Aug 19 2008, 07:47 GMT


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http://www.kbc.be/dealingroom | piet.lammens@kbc.be

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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.


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