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Non Farm Payrolls

Mon, Nov 10 2008, 10:03 GMT
by Joseph Trevisani

FX Solutions

October's Non Farm Payrolls brings the job market squarely to recessionary territory. In just one elapsed quarter the three month moving average has more than doubled from -98,000 in August to -217,000 in October. The speed and magnitude of the decline in the job market also underlines the severity of the September credit contraction and its devastating impact on the job market. The relatively modest monthly job losses from January through August (average -81,875) were consonant with weak economic growth but not contraction. Jobs are normally a trailing indicator but a number of indicators (industrial production, retail sales, consumer sentiment, factory orders, ISM) had minor late summer improvements which did not affect payrolls. Have payrolls temporarily become a leading indicator or are the job losses directly related to the extraordinary pressures on business exerted by the credit market freeze in late September and October?

Published on  Mon, Nov 10 2008, 10:03 GMT

The Euro Bubble

Mon, Aug 18 2008, 07:32 GMT
by Joseph Trevisani

FX Solutions

The euro has fallen 8.6% in value against the dollar in month, 4.3% in seven trading days. Currency markets are highly speculative and are not usually spoken of as having bubbles. But what else should we call a market that adjusts at this speed?

The fundamental market view since the credit crisis blew up last August was that the United States economy would be punished by the combined housing, credit and financial crises. This view was responsible for the year long ascent of the euro against the dollar, or if you prefer, the fall of the dollar against all its trading partners.

The US was supposed to collapse, driven to recession by the moribund housing market, job losses and retreating consumer spending; the Eurozone would falter but not fail. Why else buy the euro?

Central bank policies on both sides of the Atlantic would flow from this difference in economic outlook. The Fed governors would have to relent on inflation because of the weakness of the US economy; the European Central Bank (ECB) could retain its traditional German adamancy against inflation because resilient Eurozone economies would deflect criticism of its anti- growth bias. This view was not only prevalent in the currency markets but in many ways this was the Fed and ECB view as well. The potential for reverses in the American economy, in addition to the strains on the financial systems, was the reason Bernanke so quickly and dramatically cut rates. The moderate but steady Eurozone growth relieved the ECB of the need to support its economy and the ECB actually raised rates 0.25%.

The rate cuts by the Fed were not a rescue for the banks but for the economy on which the banks depend. No amount of central bank liquidity in whatever form can rescue the financial system if the underlying economy is bankrupt. The asset backed securities market, which created the initial problem, could not stabilize until the housing market stopped falling. If mortgage default rates had continued to rise then the mortgage potion of the asset backed paper which was spread throughout the market became more and more worthless.

An economy in recession especially a deep recession destroys jobs and the ability to service residential mortgages. In cutting rates the Fed was taking action against the long term scenario that was not evident last August but was a clear threat given the emerging fragility of the financial system.

If the expectation that the Eurozone GDP would be less affected by US problems was plausible maintaining that idea in the face of skyrocketing oil prices was not.

There is no broader measure of an economy's production than GDP. Eurozone GDP was negative in the second quarter. Until Mr. Trichet's admission less than two weeks ago negative EMU growth was not part of the currency market scenario. Now it is.

The Harmonized Index of Consumer Prices, the EMU wide measure of inflation, dropped 0.1% on an annualized basis in July. One tenth of a percent is a minor amount. But remember Trichet's comment of several months ago that inflation will be a hill, with a down slope in the future. The expectation of the ECB planners is that inflation could subside of its own accord if the economy slows and external prices pressures, primarily oil, fade. Is this the beginning of that decline in inflation? The astronomical rise in oil prices has already reversed.

The ECB is no Reserve Bank of Australia (RBA). You will not hear from the heirs of the Bundesbank what traders heard from RBA deputy governor Ric Battelino that "Waiting to see a fall in inflation before we start cutting rates would be too late." But it is true for the ECB as well as the RBA. Second quarter GDP is proof. The ECB needs to change its rate policy. It cannot wait for the return of 2.0% target inflation before it acts. Unfortunately its credibility also needs a discrete interval before it can move to a rate reduction bias.

Facts are stubborn things. American second quarter GDP was 1.9% and will likely rise to 2.5% because exports were stronger than estimated for the original number. Eurozone GDP was -0.2%. These are not facts that support a euro north of 1.5000. The decoupling fantasy has been firmly debunked. Why did it ever become current? Why was oil at 147.00? For the same reason -- the traders, whose cumulative decisions those prices represented made more money long than short. It seems simplistic. But markets use facts as reference points not absolute measuring devices. Rising demand in the oil markets does not predicate a specific price; it means traders would rather bet long than short. When the bet is worn-out, when it is undermined by facts, the market shift is like an avalanche.

The fall in the dollar and the rise in oil prices were not unrelated. The weak dollar did not cause oil to strengthen but it added to an oil trader's disposition to buy futures. The dollar did not rise because of the fall in oil prices; in fact oil started falling well before the dollar began its spectacular ascent. But the collapse in oil prices did help convince currency traders that the weak US/strong Eurozone scenario was without foundation. Sometimes a clear fact can destroy months of unclear speculation. Eurozone GDP was the immediate cause of the euro decline, but the signs had been gathering for months.

Now that the underlying view of the market has changed what is the future of the euro? Mr. Trichet's warning may well come to pass, we may see at least two quarters of negative growth in the Eurozone. If US growth remains moderate, above 1.0%, then the euro will suffer by comparison. What portion of the US second quarter GDP was supported by Federal stimulus checks is hard to tell. But as long as the US remains positive and the EMU does not, the euro will fall.

If American economic growth becomes negative in the last half of the year, the euro will not recover. If both the US and Europe are in recession in quarters three and four the benefit of the doubt will have to go to the US for a quicker recovery. In addition to its structural advantages of flexible labor markets and lighter regulation the US has a growth responsive central bank and the Eurozone does not. Which policy is correct is not the question. But which policy will produce a faster return to economic growth is one of those stubborn facts that cannot be ignored. US growth prospects are better than the Eurozone. And the prospects for the dollar will continue to improve until that changes.

Published on  Mon, Aug 18 2008, 07:32 GMT

Oil Shocks

Mon, Jul 21 2008, 07:55 GMT
by Joseph Trevisani

FX Solutions

The United States financial system had a serious scare, the Europeans meandered through a dismal series of economic reports and oil closed almost $20 lower. For all the cross currents this week it was the collapse in oil prices that holds the most promise for the American economy and the dollar. The epicenter of this oil shock was not the Persian Gulf but Washington D.C. and in response the Dow Jones Industrial Average gained 3.6%, its strongest weekly rise in five years.

Political events gave oil traders and stock short sellers every reason to take profits. President Bush lifted the executive ban on offshore drilling on Monday and by Friday crude prices had completed their sharpest fall in percentage terms since late 2004. Polls in the US show deep support for increasing the supply of domestic energy, drilling in offshore waters and Alaska. But the Bush executive order was symbolic. It is a Congressional prohibition that blocks oil exploration offshore.

Oil traders are betting that this Congressional ban on drilling which covers 85% of US continental waters will not stand. The ban itself expires on September 30th and will have to be renewed by Congressional vote. If Congress does nothing the ban lapses. Technically the ban is an annual Congressional prohibition on appropriations for the Interior Department for processing offshore drilling leases. Congress has renewed the moratorium every year since 1981.

The Democrats who control Congress have vociferously opposed letting US oil companies increase production from offshore supplies. Harry Reid the Democratic leader of the Senate and Nancy Pelosi the Democratic Speaker of the House both refused to consider modifying or lifting the ban. But this is an election year and offshore drilling in some capacity is very popular: 73% of the population approves modification or removal of the ban. Will Congress bend to the popular will? Will Barack Obama change his anti-drilling stance as he seeks middle and working class votes, precisely those voters most affected by high gasoline prices and the voters he needs to get elected?

Crude oil prices fell 11% on the week. Oil traders seem to have a clear opinion on the likely direction of Congressional policy.

Federal Reserve Chairman Ben Bernanke has maintained that slowing growth will eventually reduce inflation. The greatest source of inflation has been skyrocketing energy prices. Core inflation has risen only 0.2% since last June from 2.2% to 2.4%, while headline inflation has nearly doubled to 5.0% from 2.7%. If there were ever a justification for basing rate policy on core rather than headline inflation, it was this week's fall in oil prices.

But executive action in the US was not the only factor weighing on oil prices. The mild tone from the US and the Iranian governments concerning the renewed negotiations over the Iranian nuclear program also helped, as did an unexpected rise in oil stocks. And a world wide economic slowdown, though in many countries not reaching recessionary levels, is also cutting energy usage.

The combination of political and economic events was elementary reading for oil traders: take profits. But events could swiftly reverse the downward direction of oil prices. A military confrontation between Israel and Iran, more stringent sanctions on Iran for their nuclear program or any number of imagined or unimagined events could send oil back to its recent highs and beyond. If crude oil returns to its heights then traders will punish the dollar and this time the euro will probably not stop at 1.6040. The return of a nightmare is often scarier than the original manifestation. So it will be if oil returns to $145.

The US economy has three main problems, commodities prices, (read oil), the housing market collapse, and the fear generated by financial failures. The housing decline, while translating into an enormous problem for the financial sector, has had a muted effect on the economy as a whole and on consumer spending. The financial fear is serious and as more institutions fall under suspicion it damages stocks but in reality it has, as yet, had minimal effect on the consumer except in its effect on consumer sentiment.

Despite all these interlocking problems the US economy has not derailed. But it is directly affected by oil and gasoline prices. The Fed has provided 325 points of rate reductions in less than a year. The Federal government has delivered a large economic stimulus. The question now is have these moves prevented the bottom from falling out of the US economy or are their simulative effects simply taking more time than usual to promote a recovery? And despite all the recent criticism directed at Ben Bernanke for the weakness of the dollar it is that dollar which has spurred US exports providing a large measure of support for American productive firms.

In July 2007 premium gas averaged $3.15 a gallon in the United States; at the beginning of 2007 it had been $2.50. Premium fuel is now $4.30 a gallon. Where would the US economy be without higher gasoline prices? Of course higher gasoline prices and lower economic activity are not a simple trade off. One of the factors driving oil higher was the falling US dollar. The dollar weakened because of Fed rate policy, itself predicated on the housing and credit problems in the US. But the rise in oil prices and thus gasoline has far outstripped the fall in the dollar. And so the punishment inflicted on the US economy by energy prices was far greater than the reflection of the dollar decline.

The betting this week was that if the excess in oil expense is removed then the Fed rate reductions will have a better chance of returning the US economy to prosperity. That was the defensive view in the stock market. It may soon become the opinion in the currency markets as well.

Published on  Mon, Jul 21 2008, 07:55 GMT

The View from the Other Side, the ECB's Inflation Economics

Thu, Jun 19 2008, 09:21 GMT
by Joseph Trevisani

FX Solutions

Wages, wages, wages. If Jean Claude Trichet has never actually paraphrased the real estate cliché he certainly knows what it means. For the European Central Bank (ECB) the inflation fight has been all about preventing consumer inflation from becoming wage inflation. It is a fight the ECB may be losing.

In the first quarter of 2008 total labor costs in the Eurozone were 3.3% higher on the year; in the first quarter of 2007 the gain had been only 2.3%. The rise in labor expense was driven by wage costs which accelerated 1.3% over the year, climbing from 2.4% in May of 2007 to 3.7% in May 2008.

In comparison the non-wage component of total labor costs gained only 0.4%, over the year, rising from 1.9% in the first quarter of 2007 to 2.3% in 2008. Labor costs, which are the largest portion of the price of any good or service, are being driven higher in the Eurozone by a rapid increase in salaries.

These wage costs are the "second round effects" of inflation that keep Jean Claude Trichet awake at night.

Long term union contracts tend to lock inflation expectations into the economy. Instead of responding to the changing inflation environment, a multi-year contract assumes inflation rates for the life of the agreement. The rates are most often based on current inflation conditions. The natural tendency is to seek inflation protection for union members by erring on the side of caution, that is on the side of higher inflation.

A three year contract that incorporates a 2.5% wage increase per year is saying one of two things. Either, our workers are more productive, they produce more goods per unit of cost, therefore a rise in wages is justified. Or, prices will be 2.5% higher a year from now, our workers will need more money to retain their existing compensation level. Reality of course is a combination of the two effects. Workers are somewhat more productive as industry strives to find better and more efficient methods of production. And even in the best of times, inflation is never completely absent.

For the ECB the problem is that Eurozone productivity gains in most industries have not kept pace with wage increases. Unit labor costs have risen more than 3.0% in financial services in the past year and even more in the construction trades. These increases have been spurred by fear of rising inflation.

It might seem eminently fair that with inflation running at 3.6% in the Eurozone, almost twice the official target rate of 2.0%, workers and their unions would seek compensation in line with their actual increase in living costs. But the inflation situation is more complicated.

Because contracts are usually in force for several years and are often uniform across industries, the annual wage increase provides large groups of workers with more cash to spend. If that cash increase is based on productivity improvements there is little effect on inflation. Workers have more money to spend and there are more goods to buy. If however, the wage increase is inflation based, it can institutionalize inflation by providing more money to chase the same number of goods. This remains true even if the original cause of inflation subsides. In effect a temporary increase in prices from a commodity shock becomes ingrained in society's inflation expectations through the wage mechanism, producing a permanently higher inflation rate in the economy.

It is the ECB belief that the current European inflation rate is a product of just such a transitory effect — the rapid rise in the price of oil. And there is more than a reasonable expectation that they are right.

The economics or at least the price effects of the crude oil market are visible to all. But the key historical factor in oil prices is their volatility. One year ago oil was trading at $65 a barrel, less than half its current price. A year hence it may not be $65, but it is a good bet that it will be lower than it is now. This is simple economics, often forgotten in the hue and cry over inflation. High prices for any good brings three things: new supplies; substitution and efficiency. All three inevitably reduce the price of the good. Oil may not return to $65 dollar a barrel by June 2009, (its price in May 2007) but barring a conflagration in the Middle East it will be below its current price.

In planning their long term economic forecasts and rate policy, ECB planners take a traditional approach to oil and commodity prices, the simple scenario outlined above.

Predictions of $200 oil prices notwithstanding, there is little in the current world economic situation to warrant such dire forecasts. The world is not running out of oil. Many of the constraints on oil exploration and production are, or were, cost related. Some restrictions on development are political. The cost factors have been obviated by the rise in oil prices. Oil reserves that were not profitable at $40 or $60 a barrel are suddenly very profitable at $90 or $120. Political restraints may or may not be removed by public pressure but the important fact is that they can be eliminated by a change in law. They are not inherent in the supply and demand equation. Sustained high oil prices will bring increased production from both sources: the marginally profitable fields and from previously off limits productive areas.

Oil and commodity prices have been the main cause of inflation volatility. In one year the Harmonized Index of Consumer Prices, (HICP) the uniform Eurozone measure of consumer inflation has risen from 1.9% in May 2007 to 3.6% in 2008.

The ECB uses the so called 'headline inflation number', which includes energy and food prices, for its inflation calculation. The American Federal Reserve prefers the 'core inflation' number, the inflation rate without energy and food prices.

For comparison, the US 'headline inflation' rate has risen from 2.7% to 4.2% since May 2007, but the core rate has barely budged. Last year it was 2.2%, this year is 2.3%. Similar disparities exist in Europe.

One can easily make the argument that since consumers have to pay the headline rate, the core rate is irrelevant. But when choosing which rate to use for multi year projections, or wage contracts, or central bank rate policy, the core rate is clearly not irrelevant. If oil prices retreat to considerably lower levels by next year, which, though not guaranteed, is certainly possible, a central bank that had based its rate policy solely on headline inflation would be out of step with the economy. If the bank had hiked rates to counter headline inflation, it would have probably caused far more economic pain than necessary.

This is the dilemma that is behind the ECB's rather peculiar threat to hike rates once in July and no more -- once and only by a "small" amount. Since the standard ECB rate move has been 25 basis points, and that has never been called small, does "small" mean the hike will be less than 25 basis points?

The ECB is clearly determined to prevent the writing of price inflation into the Eurozone economy through wage inflation. But their rate threat is really no different than the recent Federal Reserve jawboning against inflation in the US. It is just that ECB spokesmen have remonstrated so often and so vehemently against inflation that they have no way to ratchet up their warnings except to threaten a rate increase. A 'single small rate hike' is just rhetoric by other means.

Published on  Thu, Jun 19 2008, 09:21 GMT

The Oil Bubble?

Mon, May 19 2008, 06:02 GMT
by Joseph Trevisani

FX Solutions

Since the 1973 when the Organization of Petroleum Exporting Countries (OPEC) unleashed their oil embargo during the Arab-Israeli war and engineered the first violent oil price rise, there have been three major oil price spikes. After the first two spikes prices eventually dropped to levels below where the rise began, after the third they fell seventy five percent.

The first spike began in 1979 with the Iranian revolution but prices did not return to pre-revolution levels until seven years later. The 1990 spike was prompted by the Iraq invasion of Kuwait. By early 1992 the price retreat was almost complete, though it did not drop below the pre-invasion price until mid 1993. The third spike which began in early 1999, peaked in late 2000, and by late 2001 had given back 75% of increase, but went no lower.

The 1979 and 1990 hikes, like the earlier embargo were largely supply disruptions. In 1979 the return of the Ayatollah Khomeini, the founding of the Islamic Republic and the Iran Iraq war led to several years of uncertain supply and political and military risk in the Persian Gulf oil producing nations. The 1990-91 spike was closely tied to the Persian Gulf War and prices began a sharp downward run as Operation Desert Storm, the United States led re-conquest of Kuwait began. In both cases as the supply normalized prices resumed pre-disruption levels.

The third spike which lasted from January 1999 until September 2000 was created by a combination of strong worldwide demand and OPEC production cuts. The 2001 recession in the United States and the terrorist attacks in September of that year which sparked fears of a worldwide economic downturn, brought prices to about $17 dollar a barrel by the beginning of 2002 from a high of $30 a year and a half earlier.

The United States and global economic expansions which began later in 2002 still have not ceased and neither has the rise in oil prices. This current price increase, far more than previous three, four if you count the original embargo, is demand driven. But demand is not the only factor driving the price of oil.

Oil is a limited resource. Limited in the sense of the amount that is available at any particular price at any particular time. The world is not running out of oil, but it is running out of immediately accessible inexpensive oil. It has become increasingly hard for oil producers to supplement supply by the 1.4 million barrels a day that is needed annually to keep up with demand. The time lag for bringing new production to the market is long, far to long for the discovery of new sources, as in the Brazilian continental shelf finds, to affect current price

The United States, the world’s largest consumer of oil is also its third largest producer, behind Saudi Arabia and Russia. America has substantial untapped oil and energy resources, on the outer continental shelf, in natural gas, in nuclear energy and in coal. The United States also has the most technically advanced, environmentally regulated energy sector. By refusing to develop its own resources the US has permitted external producers to determine marginal production. The world’s largest oil consumer is hostage to some of the world’s smallest. Unwilling to increase its own production it should not surprise US consumers that others refuse to do so for their benefit.

Oil is the industrial world’s chief raw material and the entire world’s transport fuel. The world is rapidly industrializing, far faster than at any previous epoch, and the model is, whether environmentalists like it or not, the consumer society of Europe and America. The United States today has 250 million vehicles and 307 million people. China has 37 million vehicles, over 1.3 billion citizens and an economy that has grown faster than any other in history. Little imagination is required to predict that these cars will not be powered by wind turbines, biofuels or hydrogen. Even the currently available hybrid engines add a third to the price of an automobile. Tata Motors of India has introduced a basic car for $2500, it is not dual drive. This is not to say that alternative energy sources will not play an increasing part in supplying the world’s energy needs, even in its transport system. Sustained high prices will bring forth more efficient technologies and supply but development takes time and the oil price responds to a short term market.

The third factor in the oil price ascent has been the steady fall in the value of the dollar since 2002. Graphs of the price of oil this decade and the value of the euro in dollars have a striking resemblance. As the dollar has weakened more are needed to buy internationally traded commodities such as oil. But the scale of the decline in the dollar against the euro, approximately 50% since 2002, and the rise in the dollar price of oil, 640% in the same period, are on entirely different scales.

The last factor is the speculative urge fueling trading profits in the oil and commodity markets. At almost any time in the past six years long crude oil futures was the preferred position. A trading market that has vaulted as sharply higher in so short a time as has oil is ripe for profit taking. A ten or fifteen percent rise in the dollar against the euro could be the trigger for traders to reap some of those profits.

But in the long term oil prices are a classic supply and demand question. Demand for oil is rising, supply is not. And, perhaps more importantly for oil prices, the perception of future demand is even stronger. Indian and China are the current industrializers, but there are huge swaths of the world that are waiting their turn to join the consumer future. It is blindness not to see their desire for a better life, and blindness not to understand that the era of cheap natural resources is ending; even if it is a future that only oil traders seem to perceive.

Published on  Mon, May 19 2008, 06:02 GMT

The Sterling Connection

Mon, May 12 2008, 07:05 GMT
by Joseph Trevisani

FX Solutions

England is separated from the continent by the English Channel. It is joined to the United States by a common culture and language but when it comes to economics, ‘La Manche” as the French call the English Channel is a tiny stream and the Atlantic remains an ocean. The United Kingdom and the European Monetary Union (EMU) are far more closely tied to each other economically than either is to the United States. Each is the other’s biggest trading partner and what happens in one economy is mirrored across the stream.

In the past generation England has enacted far more reaching economic reforms than the continental powers. Its economy is more flexible, less protected and more open to outside influences. In that it is much closer to its cousin across the Atlantic, but it remains inextricably tied to Europe. The economic freedom that has let the English economy flourish has also left it open to the dangers that have blown through the world financial system since the credit crisis blew up last August. The Northern Rock failure does not yet have its counterpart on the continent. Has the more open economic system of the British Isles left it more vulnerable, is it simply leading the continent in the economic cycle, or is something else affecting the relative movements of the pound and the euro against the dollar?

Sterling peaked against the dollar last November at 2.1158. To the close on Friday it had fallen to 1.9535 or 7.7% from that November peak. This is not quite the low, in late January it dropped to 1.9335, then returned to 2.0300 in mid March before falling again.

In contrast the euro peaked only two weeks ago (4/22) at 1.6017 and at close on Friday (1.5475) was just 3.4% beneath the high.

Yet the economic statistics for both the European Monetary Union and Great Britain over the past year show a strikingly similar pattern.

Nationwide consumer confidence peaked in the UK in September last year at 99; it was at 70 in April. EMU consumer confidence topped out at -1 in May of 2007; it has been at -12 since January of this year.

The manufacturing Purchasing Managers Index (PMI) scored 56.1 in Great Britain last August; it had dropped to 51.3 by March of this year. In the EMU manufacturing PMI reached it cycle high 55.8 in June of 2007; it has since fallen to 50.7.

Services PMI exhibit a similar pattern. In Britain it peaked at 57.6 in August 2007; by April 2008 it was at 50.4. On the continent PMI for the service industry topped out at 58.3 in July 2007; by April of this year it was at 52.0.

GDP has shown nearly identical declines. In the UK it was 3.3 % (annualized) in the third quarter of 2007, 2.8% in the fourth and 2.5% in the first quarter of this year; a 24% slide in three quarters. In the EMU GDP was 2.7% in the third quarter of last year, 2.2% in the fourth and it likely to be 2.0% or lower in the first quarter of 2008; a potential 25% fall over three quarters. The actual result for the EMU will not be released until June 3rd.

Because we are measuring both currencies against the usd, the effect of developments in the America is not a factor. In the EMU and in Britain the economies peaked in late summer last year. In Britain that economic apogee was followed just a few months later by the high of its currency against the dollar. But that is not so for the euro which continued to climb against the dollar for eight more months.

Two factors have altered the performance of the sterling against the usd. First but not foremost, has been the perceived effect of the credit crisis and housing problems on the UK economy. British housing prices have been falling faster than on the continent and there is greater use of mortgages for home ownership in England. British financial institutions and the economy are more subject to the vagaries of the domestic housing market. In response to this weakness the Bank of England has begun cutting rates.

As we can see from the comparative statistics, the UK and EMU economics are largely in sync. The one thing standing in the way of a comparable fall in the euro against the dollar has been the ECB. The susceptibility of the euro to rate cut speculation was especially evident in February. Over the 5th 6th and the 7th the euro dropped 400 points in anticipation of a change in the central bank’s rate stance. At the ECB meeting of the 7th the bank did move to a neutral bias. But in the days that followed the ECB made a concerted effort to neutralize the effect of its changed bias. Bank spokesman emphasized its inflation mandate in sound bite after sound bite, even and deliberately alluding to the possibility (which few credit) of a rate hike if inflation was not controlled. The ECB expended its rhetorical energy in squelching the dollar rally against the euro because it would have undermined its anti-inflation campaign.

At 3.6% in March and 3.3% (annualized) in April inflation is high in Europe, almost double the ECB target rate of 2.0%. But the economic situation in the EMU and the credit worries worldwide have prevented the ECB from hiking rates. The board of governors is left with only one weapon in their inflation fight: rhetoric. But rhetoric is subject to serious diminishing returns. The more it is used the less effective it will be. The strongly anti-inflation comments in the ECB statement and at Mr. Trichet’s press conference on Thursday had little effect on the euro. Constant use has blunted the ECB rhetorical weapon. Sooner or later, and it now appears sooner, the euro will fall in line with the EMU economic performance. The next ECB rate move is still likely to be a rate cut.

If the euro were to fall a similar amount from its peak as the sterling has, 7.7%, it would be at 1.4775 or so. That is the goal whether or not the ECB continues its rhetorical support of the euro.

Published on  Mon, May 12 2008, 07:05 GMT

Ad−Libbing the Dollar

Mon, May 5 2008, 06:28 GMT
by Joseph Trevisani

FX Solutions

A Federal Reserve hint, a Non Farm Payrolls less damming than feared, a contracting but not deteriorating manufacturing ISM and a barely expansionary GDP were the US ingredients for a major dollar rally this week. In isolation there is little in these numbers to cheer, but in context each allayed a particular worry for the American economy.

From Monday’s open to Friday’s close the dollar gained 1.34% against the European currency. In the past two weeks the dollar has appreciated 2.66% on the euro. That is the best two week performance for the US currency since the beginning of the credit crisis last August. The precipitous dollar decline that began last summer had erased almost 20% of its value against the euro. This week’s return may turn out to be transitory if the US economy slips further into decline. But much as the rally in the US equities envisages economic recovery so the dollar reversal is poised to continue as long there is no substantial deterioration in US statistics; it will not yet be necessary for US statistics to show marked improvement for the dollar to retain its upward trajectory.

Since the credit and liquidity crisis began last August the fear stalking the markets has been of an ever intensifying financial and economic debacle in the United States. Remove that fear and relief may well carry the markets until the Fed rate cuts begin to work in earnest later in the year.

But it was not only the lack of worsening American statistics that propelled the dollar higher.

It was a thin week for European statistics with the Labor Day holiday mid–week (once called May Day) curtailing market activity. Those statistics that were available reflected diminishing expectations for European economic growth and slightly lower inflation. Neither supported the euro. All components of the European Monetary Union (EMU) Economic Sentiment Index fell except consumer confidence which was already at a two year low. The preliminary April EMU Manufacturing Purchasing Managers Index (PMI) was the weakest since August 2005. The harmonized inflation index for April shed 0.3% to 3.3%. It is still well over the 2.0% ECB target rate, but having seen off the March peak of 3.6% it may offer ECB rate hawks some cover in their rhetorical campaign against inflation.

Germany reported lower harmonized annual inflation (preliminary) in April of 2.6%, a notable reduction from the 3.3% reading in March. The final manufacturing PMI number for April sank to 53.6 from 55.1 in March. And in what has become the standard result, retail sales as reported by the Federal Statistical Office, were 6.3% lower in March than a year ago. There is little outright gloom on the continent, but there is precious little cheer.

None of these statistics, on either side of the Atlantic, are more than the first reading of a script that has been in development since the Fed began cutting rates last September. When traders combined the American and European statistics with the FOMC statement on Wednesday that referred to the “substantial easing” of rates that had already taken place, even as the committee cut rates a further 0.25%, the end of the Fed reduction cycle suddenly seemed a lot closer than it had been the day before.

It normally takes from six to twelve months before a program of Federal Reserve rate decreases begins to have a positive effect on the US economy. We are almost midway through that period, if dated from the first cut last September and there has been no discernable economic response.

But we should be careful to date the beginning of the expected effect only from that first FOMC rate cut of 75 bps last September 18th. The Fed has reduced the Fed Funds target rate 3.25% in a series of moves that stretches almost eight months from mid September last year to this past Wednesday.

If we make the assumption that the Fed began a rate pause on Wednesday, half of the total eight month rate cutting period brings us to mid January this year. If we begin look for an economic response six months to twelve months from mid January instead of from last September then nothing might be expected to show up in US statistics before July.

Can the recent economic stall, or the hiatus in the rate of decline, that we have seen in a number of important US statistics over the past few weeks be attributed to the Fed interventions. Possibly. But there are still considerable dangers for the American economy. The housing market has not found a bottom. Though the pace of the fall has slackened somewhat, there are still more price drops to come until the large supply of new and existing homes reaches market clearing price levels. And there are lingering concerns related to the credit crisis that are still tightening credit and probably consumer spending.

But no one should expect the US economy to return to health in one swift bound. Considering the extraordinary events of the past nine months and the yet to be surmounted housing bust, a period of moribund growth is most likely. Since we can logically delay looking for the beginning of a Fed inspired economic recovery until mid to late summer, the trader inclination to ad-lib the dollar recovery before the script is completed is a perfectly good reading.

Published on  Mon, May 5 2008, 06:28 GMT

Dollar Reality

Mon, Apr 28 2008, 06:12 GMT
by Joseph Trevisani

FX Solutions

Before we give the resurgence of the dollar too much credit let’s perform a reality check. As of Friday’s close at 1.5605 the euro had fallen slightly more than four big figures, or 2.5% against the dollar in just four days. The record high for the euro of 1.6020 came this past Tuesday. But since February the euro has risen 9.0% against the US currency. For the past five weeks the euro has been trading between 1.5500 and 1.5900 with one dip below and two attempts at the top; 1.5605 is just 100 points from the middle of that range.

American statistics have not improved. But, except for the housing market, the hope is they may have stooped deteriorating. The April 19th weekly jobless claims were considerably less than forecast, 342,000 versus 377,000, but the four week average remains at borderline recession totals. New Home Sales fell to 526,000 in March, the lowest level since October 1991; sales are 36.6% lower than a year ago. Retail sales have been volatile but whatever the actual effect on consumer spending there is no discounting the effect of falling home prices on consumer attitudes. They are seriously depressed. The median new home sales price fell 6.8% in March, off 13.3% over the year. Similar drops are recorded for existing homes, the repository of the greatest portion of consumer net worth. The University of Michigan April Consumer Confidence at 62.6 shed almost seven points in one month. In contrast builder’s attitudes have been stable for several months, albeit at very low levels. But until the backlog of construction is cleared, and only price reductions can accomplish that, there can be no stability or recovery for prices. And it prices that matter for consumer confidence.

Durable good orders in March fell for the third month in a row. But perhaps more encouragingly for consumer spending the ex-transport sales number rose for their first time in three months, adding 1.5%. This figure excludes the sale of commercial aircraft (new orders for Boeing Corporation dropped from 125 in February to 99) and civilian aircraft whose orders rose 5.5%.

On the European side EMU business confidence figures, particularly the March Belgium Business Survey and the German Ifo have been considerably weaker that expected. Consumer confidence is also at low ebb in most of the major EMU countries.

Is the pending 25 basis point cut in the Fed Funds target rate on April 30th the end or the beginning of the end to the Fed reduction cycle?

Three factors are driving that possibility. First is the time frame. Since last September the American Central Bank has cut its base rate by 3.25% (April 30th included). Rate cuts of that magnitude in a little over eight months should have a pronounced stimulative effect within six to twelve months. The historical evidence is quite strong. Secondly the Fed knows it will have to deal with inflation sooner or later. It is far easier to prevent inflationary expectations from arising than it is to squeeze them out of a market once incorporated into contracts and financial projections. And third, though the credit crisis appears to have subsided, safety for the financial system warrants caution and caution warrants a reserve of rate cuts if needed.

All of these factors are well known. One might say this is now the conservative scenario.

If the US growth bottoms at -0.5% in quarters one and two (this is lower than the median current expectation) and then resumes, it could quickly surpass European GDP which is predicted to be at 1.2% for all of 2008. A US economy, naturally more flexible and responsive than its European counterpart and under the spur of 3.25% in rate cuts, could return to 1.5% – 2.0% growth is the latter part of this year. Clearly this is only a possibility but it cannot be ignored. It is not a possibility that supports a euro worth 1.6 US dollars. In addition, the ECB has striven diligently to remove any expectation of a rate cut in 2008 from market calculations. But even the smallest signs of a slowdown in the EMU and the speculation will seep back.

The two main drivers of exchange rates, economic performance and interest rates, may be shifting to the dollar advantage. There is as yet scant proof: it is all conjecture. But speculation and conjecture are the heart of trading. Returning US growth follows the standard economic cause and effect model—rate cuts produce expansion. It has historical precedent and traders have demonstrated they are unwilling to push the euro above 1.6000. Betting on the dollar may be highly speculative but it has become the only game in town.

Published on  Mon, Apr 28 2008, 06:12 GMT

It's Not the Little Things

Tue, Apr 22 2008, 05:44 GMT
by Joseph Trevisani

FX Solutions

Two events at the end of the week perfectly framed the dollar dilemma. On Thursday the Philadelphia Federal Reserve Survey of Business Activity for April fell precipitously to -24.9, far more than the -15 that had been expected and much lower than the March reading of -17.45. The Philly Fed Survey, as it is known, is a minor indicator poorly correlated with national statistics, but the result spiked the euro 50 points against the usd, and gave a 60 point rise in the yen.

On Friday Citigroup, the largest American bank by assets, announced a larger than expected first quarter loss of $5.11 billion and the stock rose almost 4.5%. The crucial point in the Citigroup earning report was not the earnings number or even the revenues which were better than forecast at $13.2 billion but the write-downs. At $13.9 billion the losses to Citi’s vast portfolio were in line with predictions but barely half the highest estimates circulating through the market before the release. Coupled with Google’s better than predicted earnings, these results put the two outstanding problems in the American economy in an improved light and the equities and the dollar rallied strongly.

The greatest fear for the markets is that there are more buried mines in the credit crisis. Any indication that banks known to have large securitized portfolios were in danger could cause great damage to investor and trader confidence, particularly now as the fear has begun to recede. But conversely, if those same banks with large positions report smaller write-downs than expected or simply do not produce any unexpected negative surprises the result bolsters market confidence. The second great fear, at least for the equities, and Friday the currency markets took their cues from stocks, is that shrinking consumer spending will curtail corporate profits. Google's better than forecast earnings temporarily put that concern to rest.

This degree of direct trading correlation between equities and currencies is rare. The implication couldn’t be clearer. Any indication that the United States economy is recovering, even if it is from a statistic that does not normally affect the currency markets, has the potential to improve the standing of the dollar.

The US rate and economic cycles are ahead of the Europeans and as the cycle intensifies US GDP and the dollar should outstrip the EMU and the euro. This has been the long term scenario ever since the Federal Reserve began cutting rates last September. But there has been scant statistical support for the conviction that the cycle has begun to turn to the US benefit.

However, some perspective is needed before we write down a turnaround date for the usd. Friday’s bounce in the dollar was mostly reflexive and involved more than a good bit of profit taking before the weekend. The powerful equity run was just the excuse. The all time peak for the euro against the usd was only the day before at 1.5981. Traders may be wary of pushing the euro any higher but until there is sustained improvement in US statistics there will be no turn in dollar fortunes.

Futures have priced out any cut in the ECB rates this year. There is certainly no expectation of a rate increase, no matter the official anti-inflation rhetoric. If there is going to be any change in the rate differential between the ECB and the Fed over the next six months it will only come from the Americans. That is the reason for the far more volatile effect of US statistics on the currency market—change, even dramatic change in the US economic situation or Fed policy is expected, little but economic gradualism and rate status quo is anticipated from Europe.

The euro and dollar have been in a range since early March from 1.5350 to 1.5850 with only this recent spike to 1.5980. Two important levels, if crossed, would confirm positive turn in the usd: 1.5350, the low of the current range, and 1.5200 the 50% retracement of the move up since February, 1.4450 - 15980.

Since early February the dollar has lost an astonishing 10.6% against the euro. Friday’s close at 1.5800 is barely 1.0 % in return. The low of the day at 1.5710 did not even approach the first Fibonacci retracement at 1.5550 (23.6%) of the rise since February. Since last August and the credit crisis the US currency has forfeited almost 20% of its value against the euro. But one could say this is not a new situation.

How long has the dollar been falling against the euro? The difficulty here is in choosing the time frame. Each larger period brings another decline into focus. To take in the longest view, the euro began trading on the world currency markets at 1.1591 against the dollar on the first business day of 1999. It reached its low against the US currency 22 months later in October of 2000 at just below 0.8500. For the next year the euro lingered well below parity. In the first quarter of 2002 it turned higher, crossed parity in the third quarter and has not looked back since. With the one exception of 2005 when the Federal Reserve was raising rates and the ECB was not, the euro has gained against the dollar for six years. Any recovery in the usd must be put into this context. The euro could fall to 1.2500, more than 20% lower than Friday’s close and not even retract 50% of it appreciation over the past six years.

Published on  Tue, Apr 22 2008, 05:44 GMT

The Central Bank Quadrille

Tue, Apr 15 2008, 08:46 GMT
by Joseph Trevisani

FX Solutions

The central banker’s quadrille is an elaborate and elaborate and difficult dance. The rhythm is set in the counterpoint between economic growth and inflation, the orchestra is pick up and the steps change from minute to minute. Today your partner may be an elegant continental bureaucrat, tomorrow a union leader and the day after a galumphing harrumphing politician; and always, every move is watched by the critical wallflowers of the media who never get to dance.

The primary care of the central bankers of the industrial world is the economic well being of their own countries but jointly they also bear responsibility for the economic system of the entire globe. To a far greater degree than ever before the world is linked and served by one financial and economic system. Were the economies of the industrialized world to falter, or the web of financial mediation to collapse there would be no shelter for any nation, whatever world it belongs to.

Monetary and interest rate policy are the bankers’ prime tools and the watch over the financial system is their first consideration. Although the Federal Reserve was criticized last month for supposedly tending the needs of Wall Street before the needs of taxpayers, it was exactly those taxpayers whose interests were best served by the sale of Bear Stearns. The institutions whose balance sheets might have been shot full of holes by a Bear default would have responded with a severe restriction of credit but they would have survived. But the restriction of credit and the vast damage to confidence that would have ensued would have traumatized the American economy and the first victim would have been the overextended US consumer.

Monetary and credit policy are the chief tools because of their application, the relative speed with which they can work and the degree that the bankers can utilize them without resort to the political system. If a political response had been required for Bear Stearns the investment house would have been in default that Monday morning and the world would look very different today.

Fiscal policy, the other class of weapon in the general economic armory, is the province of governments. It is a slow cumbersome tool in comparison to the weapons of the central banks. The political process cannot act with the alacrity, and the response required by a Monday morning market open is not in its nature. The direction and focus of fiscal policy often owes more to electoral considerations than economic logic and the actual effects of policy can be wholly unintended.

The most notorious example of political misdirection and action is of course the Smoot Hawley Tariff law of the early 1930’s which was passed by the American Congress and signed by President Hoover despite universal condemnation from the economists of day. The retaliatory nature of the law was answered in kind by its target countries and the diminution of trade and wealth did much to turn a recession into the Great Depression.

A more recent example is the Community Reinvestment Act passed in the early 1990s in the United States. Its purpose was admirable, to encourage home ownership in communities whose residents had been unable to qualify for mortgages under the standards of the day. But by pushing lenders to make loans which could only be accomplished by relaxing credit standards the result was a boom in weak loans which dissolved at the first serious pressure from higher interest rates and a slowing economy. The law, however, had little to do with the packaging by institutions of sub-prime debt into the vast array of securitized products whose doubtful worth is now clogging the arteries of the financial system.

So how have the Central Banks been doing? The cratering of the American housing market has been in train for more than two years. The securitized products and sub prime mess has been with us since last August, almost three quarters of a year. Consumer confidence in the US has fallen 20 points since last September as the stock market took a dramatic dive early in the year. Retail spending has been volatile but it has not broken.

The dramas and problems of the past nine months are well known. But the economic facts need to be stated as well. European Union GDP is growing at 1.5%--2.0% a year; China and India have hardly paused in their headlong industrialization, the world economy remains vibrant though under increased strain. Even in the United States, the fount of the sub prime debacle, 95% of mortgages continue to be paid on time. A credit crisis, the like of which has never been seen before, has been seen off, at least in its most dire manifestation. If the last three months of job reports signal the beginning of a contraction it is one of the most gentle starts to a recession on record. Doom is not in the air.

The bankers have learned their new steps with speed and facility. There is no better instructor than reality.

Published on  Tue, Apr 15 2008, 08:46 GMT

The Commodity Currencies

Mon, Mar 31 2008, 07:07 GMT
by Joseph Trevisani

FX Solutions

Two of the Asian Dollars, the Australian and the New Zealand and one of the North American, the Canadian, are the currencies of best know and largest of the world’s natural resource based economies. These currencies have tended to rise and fall with the commodity use cycles of global economic growth. In the past, as the industrial world economic growth waxed and waned these currencies would move higher and lower anticipating the state of world commodity usage six months to a year in the future. As the economic growth cycle reached it peak the currencies would decline with the pending drop in economic productivity, anticipating also the central bank rate cycle. In the past, growth cycles were relatively well coordinated across the western industrial world and Japan, with the United States acting as the engine for worldwide economic activity.

Into this simpler world of industrial consumers and resource producers, twinned in economic cycles, has entered the developing world, and the newly industrialized nations of Asia, foremost India and China.

These countries constitute a resource market independent of the older industrial countries. With very large populations and burgeoning consumer classes, they have continued their breakneck economic growth ignoring, so far, the slowdown in the United States. Their internal markets for consumer goods, many of them of their own production, have also grown apace. Their rapid ascent as large resource consumers has outstripped the development of new sources for commodity production. One result has been the commodity price boom, led by the most ubiquitous of all industrial commodities, oil. Resource extractions economies and their currencies have benefited with strong GDP growth and buoyant currencies.

But the situation is about to change. The American economy has stalled, it may have already entered recession, the length and depth of which is unknown. To date there have been few signs of a sympathetic slowdown in Europe, China or India. But some degree of spillover from the United States is still an assumption the currency markets cannot discount.

Will the commodity currencies, dependant as their economies are on resource exports, maintain their current high levels in the face of this potential economic slowdown? What other factors have contributed to the long sustained run in these currencies?

All three currencies have been at or near historic highs against the US Dollar in the past several months. The worldwide commodity boom and the weakness of the US currency have provided much support. But equally important for the two Asian Dollars have been the activist anti inflation policies of their central banks. The base rates in New Zealand and Australia, 8.25% and 7.25% respectively, are some of the highest in the world. But, as with global economic growth change is looming.

The Reserve Bank of New Zealand has not altered rates since last summer and recently moved to a neutral stance. The Australian Central Bank added 25 basis points in March and retains a tightening bias. But as the only major industrial bank still raising rates it is doubtful the policy will continue much longer. As with the ECB, the next move, at whatever timing, will likely be lower. The present rate hike cycle appears to be over. Canada with its much closer ties to the American economy has already begun its rate reductions. The support that had been provided to these currencies by the widening rate differentials will probably begin to reverse over the next months.

The last support factor for these currencies has been the extraordinary speculative run in the so called ‘carry trade'. But that too has been severely diminished in the past six months.

The New Zealand Dollar/Japanese Yen cross peaked at 97.75 last July. At its current level of 79.00 it is almost 20% below the top. Since the massive risk aversion drop in August of last year the currency pair has exhibited a steady if volatile downtrend. Much the same can be said of the Australian Dollar/Japanese Yen cross. It peaked in July at 107.50, fell precipitously at onset of the credit crisis in August, climbed again to 107.85 in late October on strength in the Australian Dollar and has since moved steadily if chaotically down to its current level of 91.00, 16% below the summit. Likewise the Canadian Dollar/Japanese Yen pair reached 125.50 early last November and is now languishing near 97.00, a 22% decline.

A good portion of the weakness in these crosses is attributable to the fall in the US dollar component of the crosses -- the dollar yen -- as the rate of the US dollar against the yen is called by traders. The cross rate for two of these pairs is obtained by multiplying the dollar yen rate by the rate for the Australian the New Zealand Dollar. But the driving force down has been the sustained aversion to speculative risk that has overtaken the currency markets since the beginning of the credit crisis last August.

The steady support these speculative crosses supplied to the non yen component, the Australian Canadian and New Zealand Dollar, as the crosses moved ever higher has been lost. And a return of the dollar yen component, that is a rise in the US Dollar against the yen will not bring these crosses back. Any gain to the cross will likely be balanced by losses in the opposite component; as the US Dollar moves higher the three other dollars will sink; the cross rate will not gain. In other words if the US dollar strengthens then the Australian New Zealand and Canadian Dollar will weaken and the carry trade crosses will continue to fall.

Of the three factors that have contributed to the long bull market in these commodity currencies only one, the demand and price for their resource exports is likely to remain at elevated levels. With the increasing worldwide demand commodity prices will not return to pre boom levels as would normally happen at the end of an expansionary economic cycle. Until high prices bring development of new sources for commodities or substitutes to market, commodity prices are likely to remain above historical norms.

The two remaining factors, the rate advantage over the US dollar and the structural support provided by the rising carry trade to the cross rate and its components have already moved to neutral, the rate advantage, or reversed, the carry trade. Neither will give the commodity currencies any further extraordinary support.

Prediction is risky, but it is likely that all three commodity currencies have peaked and will over the next year revert to more historical levels.

Published on  Mon, Mar 31 2008, 07:07 GMT

The Bernanke Dollar

Wed, Mar 19 2008, 11:29 GMT
by Joseph Trevisani

FX Solutions

A huge Federal Reserve induced equity recovery has occurred in the past two days. After yesterday's market equivalent of a tantrum and today's emotional makeup do we have a bottom in stocks and the dollar? The Fed has cut 3.0% in a little more that six months. Regardless of rhetoric 2.25% is likely near the end of the Fed rate reduction cycle for several reasons. The FOMC vote was 8-2, an uncommon number of dissenters, both negative voters wanted a smaller rate cut. Three probable reasons for the negative votes: first, a steady diet of rate reductions has a diminishing positive return for the economy and on market sentiment, time must be given for the stimulus to take effect; second, inflation and the weakening dollar are damaging for the economy, though since last August both have been judged not equal to the risks of the credit crisis; a stabilization or moderate recovery in the dollar would continue to encourage exports and would draw capital and investment into the United States as investors, no longer fearing an ever falling dollar, quickly realize the great bargains currently on hand in the States; third, if the credit crisis erupts again the Fed will surely want to have as much rate ammunition as possible.

A major spur to the equity rally was simple relief, the hope that the credit and liquidity crisis has passed its peak and that the markets can return to less apocalyptical concerns. Traders want to look to he future, the credit and liquidity crisis has prevented that natural market view. Worries about the housing market, except, and a large exception it is, as they provoke more bank and brokerage failures, will have limited effect. Housing prices can and probably will continue to fall but as long as they do not threaten the financial system they will return to the background, as they were for most of the past two years. For the next few months gradually worsening economic data will also have little effect, as the Fed has already supplied the requisite economic medicine and traders know that time is required for it to bring a cure.

Will the markets now (conditionally) freed of the specter of the credit crisis begin to do what markets always do and turn to the future? Will traders attempt to get a jump on the next trend in both equities and currencies? Psychologically, at least the eagerness to move on is palpable. Barring more bank and financial catastrophes have we seen the bottom in both equities and the dollar?

Joseph Trevisani

FX Solutions

Chief Market Analyst

Joe@fxsol.com

Published on  Wed, Mar 19 2008, 11:29 GMT

Market Directions Sunday, March 16, 2008

Mon, Mar 17 2008, 06:16 GMT
by Joseph Trevisani

FX Solutions

Euro Facts Dollar Hopes

Euro Facts:

The ECB rate differential: European rates are at 4.0%, the ECB has a neutral bias with strong anti-inflation rhetoric; the Fed is at 3.0%, with an easing bias and little rhetorical support for the Usd or against inflation. The Fed will cut again March 18th by at least 50 basis points and while this is priced into the market Federal Reserve Chairman Ben Bernanke has not yet signaled a possible end to reductions. His recent Congressional testimony seemed to favor a declining dollar for the prop it provides US export industries. Rhetorical backing for the dollar from Treasury Secretary Paulson and even President Bush has been discounted on the sensible observation that the official strong dollar policy seems to be a policy of watching the dollar decline while claiming the US has a strong dollar policy albeit one set by market forces. The Europeans have been far more active in criticizing the “excessive movements” of the currency markets, i.e. the strong euro. An ECB rate cut, which a little more than a month ago was considered imminent, has now moved off far into the fall. The balance of interest rate policy has shifted decisively back into the euro’s favor.

The European Monetary Union (the EMU consists of the 15 countries using the euro) has a much stronger economy than the United States. EMU fourth quarter GDP was +2.2% annualized, in the US Q4 was +0.6%. Looking ahead to 2008 (1st quarter advanced GDP figures for the US will be reported April 30th) the US is expected to be flat or negative; EMU growth is forecast to be up 1.5%-2.0%. Economic advantage to the euro.

EMU economies have proven more resilient to the American slowdown than anticipated. The German ZEW survey of financial experts is one of the most closely followed German indicators, its ‘economic expectations’ category rose in March for the second month in a row. February had been the first gain in 9 months. The US slowdown is having less effect on EMU economies than forecast. Is there partial decoupling? It is always possible that as the slowdown in the US grinds on it will take its toll on European industry, that is still the general expectation, but as yet there are few signs of this impact in Europe. EMU Industrial production expanded in January for the first time in nine months, adding 0.9% for the month, a 3.8% improvement over the elapsed year. Economic resilience to the euro.

The financial and credit crisis is primarily a US problem. It keeps returning like the undead in an old horror movie, this week haunting Bear Stearns an investment bank heavily involved with the collapsed mortgage market. Until the markets--equities and currencies--have comfort that the credit and liquidity problems are over a strong recovery in the US economy or the dollar is unlikely. The strong rise in the dollar after the Fed announced its new liquidity programs was an unusual currency reaction to what was basically a credit market fund injection but it gives a sense of the lurking forces for dollar strength if and when the US credit crisis is resolved. Temporary credit advantage to the euro.

Dollar Hopes:

First and foremost the Fed rate cuts will result in stronger US economic growth in Q3 and Q4. 225 basis points (2.25%) in reductions are already working and at least 50 points (0.50%) more are coming on March 18th. "Don't buck the Fed" is an old market saw. Rate cuts of this scale and speed will produce a positive GDP response; they always have in the past. Six to twelve months is the normal delay before results begin to show and the current cycle is already six months old; it began last September 18th . A stronger economy will let the Fed return its attention to inflation.

The EMU economies are unlikely to remain immune to changes on this side of the Atlantic forever. The GDP growth cushion is less in Europe. In the US GDP fell more than 4.0% from the 3rd to the 4th quarter; in Europe a fall of less than half that amount brings them to recession.

American inflation is rising. A 2.3% core CPI rate may give the Fed policy cover but it masks a world of trouble. The core concept excludes the supposedly volatile sectors of food and energy. But the sky high oil price is largely demand driven. You would be hard pressed to find an oil analyst who expects prices to return to $50. Oil prices above $75 will be a permanent factor in the US inflation picture and the headline and the core rates will be driven higher. The Fed must target inflation again the question is when. The answer is probably as soon as it feels the economy can withstand the pressure

The Euro is overextended. Since August 2007 it has risen more than 15% against the dollar, since its most recent low in early February it is 7.5% higher. Currencies do not move unilaterally, profits will be taken. Traders await a trigger.

With all that said the negative dollar trend cannot reverse until the basic economic and interest rate facts have changed. A modern economy runs on credit. The paramount impediment to a economic recovery in United States and in the dollar is the combined credit and liquidity crises in America. Mr. Bernanke has judged, and rightly I think, that the credit system is the crux of the matter. To borrow from Frank Herbert, ‘the credit must flow’. Until that happens all dollar bets are off.

Joseph Trevisani

FX Solutions

Chief Market Analyst

Joe@fxsol.com

Published on  Mon, Mar 17 2008, 06:16 GMT

Market Directions Sunday, March 9, 2008

Mon, Mar 10 2008, 06:29 GMT
by Joseph Trevisani

FX Solutions

The Credit & Dollar Crisis

Confirmation was at hand this week for the ailing United States economy. Though the official notification for the beginning of a recession, if there is one, is still seven weeks away with the release of the advanced GDP report for the 1st quarter on April 30th, one of the last positive American statistics has crumbled to recessionary levels.

Non Farm Payrolls registered its worst result since mid 1993 as the economy shed 63,000 jobs in February far more than anticipated. In fact the details of the report were worse than the headline. Private payrolls, the jobs created in the private sector of the economy fell for the third month in a row, contracting by 101,000. Government jobs had added 38,000 to payrolls. The job rolls for January and December were also smaller than initially thought, losing 46,000 after revisions. Even the unemployment rate which fell by 0.1% to 4.8% was the result of a decrease in the labor market participation rate. That is, fewer people were looking for work, entering the ‘discouraged worker’ category of the survey. The euro set another record high against the dollar at 1.5465 immediately after the release then consolidated a figure lower in the afternoon.

It has been a storm of anti dollar news and developments for the past several weeks. Statistics in the US are either skirting recessionary levels or have tipped into contraction. The Institute for Supply Management Indices, manufacturing and service are below 50. Consumer sentiment surveys are at levels not seen since the beginning of the Iraq war in 2003. Retail sales are slipping and the housing market remains moribund. Job expansion had been the last reason for confidence that the US might avoid a serious slowdown. With GDP barely positive in the fourth quarter, kept afloat by exports—and the lower dollar, the remaining weeks of the 1st quarter are likely to bring further bad news.

When the news is unremittingly negative is just the time to begin looking for a market reversal. There should be a reasonable expectation that the US economy will respond to the 225 basis points worth of Fed rate reductions already in place. In normal markets this anticipation would already be tempering the dollar’s fall. After all the real question for equity and currency traders is where will the economy be in the fall, six months from now? There is however, one complicating factor that may diminish and retard the full effect of the decrease in the Fed Funds target rate-- the credit crisis.

Eight months after its first explosion the combined banking, financial and credit crisis in the United States is still with us. With major financial institutions seemingly unable to clear their books or avoid continuing write downs and with the credit markets operating at much diminished levels for fear of what the future may hold, even excellent credit risk is not being funded by the banks. The Fed announcement that it will add $20 billion in available liquidity to future TAF auctions only underlined the unsolved nature of the banking and credit problems. Credit is the lifeblood of a modern economy. It will be difficult for equity and currency traders to assume the natural forward risk of betting on a turn in dollar when to do so they must also undertake the additional and unknown risk of a credit market meltdown.

The US housing market has been in slow motion decline for more than two years. Until very recently it has had little effect on consumer spending and only marginal impact on consumer sentiment. In fact I would argue it is the contraction in the financial markets and lending since last August that has had a far greater effect on business and job growth in the US than the collapse in housing. Nevertheless, with housing in extreme disarray and job losses now beginning, consumers are not likely to recover their animal spirits sufficiently to push the economy to recovery until the housing decline begins to reverse.

Worldwide commodity price inflation which has been fueled largely by demand forces shows no sign of abating. With the Fed taking a solely economic growth focus in the United States and a quasi-mercantilist position internationally, inflation in the States will get short shrift. It will also get worse. With headline CPI, which is after all what consumers must pay, having more than doubled since last July, consumers are worried about expenditures and not in the mood to increase spending.

Inflation is a known commodity in the financial and currency markets. Eventually, or sooner the central bank begins raising rates, when it becomes apparent that a tightening cycle is starting the currency rises. Recessions also have a known trajectory. Economies respond to lower interest rates and six months to a year after the reductions have begun GDP growth renews itself and the currency rises. The Fed has already supplied a substantial amount of stimulus to the US economy, and the US economy is six months into this rate reduction cycle. GDP growth and inflation will follow.

The US credit crisis has introduced a new and unknown factor into currency market calculations. Traders cannot be certain that the usual course of rate reduction by the central bank will prompt the usual delayed growth from the economy. At least they cannot be sure enough to stake speculative positions on the result. In this situation anticipation based on historical models, on the idea that the economy always recovers when the Fed applies stimulus, is not sufficient. Nor is the progression of rising inflation chased by higher central bank interest rates secure. The Fed is severely constrained by the health and liquidity of the banking system. Inflation is rising fast but Fed spokesman barely seem to have noticed. Rising inflation or a return to prospective economic growth should signal a recovery for the dollar. But until the credit problems in the United States subside any recovery for the dollar will be problematical at best.

Joseph Trevisani

FX Solutions

Chief Market Analyst

Joe@fxsol.com

Published on  Mon, Mar 10 2008, 06:29 GMT

Market Directions Sunday, March 2, 2008

Mon, Mar 3 2008, 10:58 GMT
by Joseph Trevisani

FX Solutions

A Bodyguard of Lies

Federal Reserve Vice Chairman Donald Kohn’s speech on Wednesday broke the stalemate between the dollar and the euro. Warning that slower economic growth is a “greater threat” than inflation, Mr. Kohn helped turn a stop driven run through 1.5000 in the Australian market into a full fledged paradigm shift. And when he was seconded by Federal Reserve Chairman Ben Bernanke’s gloomy Congressional testimony that the economic situation had become distinctly less favorable and that the Fed “will act in a timely manner as needed” the speculation for Fed rate cuts beyond the March 18th meeting moved into high gear. The futures market now expects a 2.00% Fed Funds target rate by May Day; a 65 basis point reduction at the March 18th FOMC meeting and another 30 points by the end of April.

It would be easy but inaccurate to blame the Fed Chairman and Vice Chairman for the dollar’s collapse. But it would be accurate to say that that they and the Fed governors have done little to temper the dollar decline brought on by their policies. The Fed has not so much talked the dollar down as refused to provide rhetorical support. To be fair official dollar policy is not the purview of the Fed but belongs to the Treasury Department headed by Hank Paulson, the former CEO of Goldman Sachs. But in the current economic environment Mr. Bernanke has been the chief spokesman for economic policy and his omissions do not jibe with the standard US strong dollar policy as reiterated by President Bush and Secretary Paulson. When the Fed Chairman says the obvious, that a weak dollar fosters US exports, currency traders hear not the description of a currently weak dollar but a prescription for a much weaker dollar in the future.

Mr. Bernanke’s has long said that the economic facts will dictate Fed policy and he has been uncommonly open in discussing the statistics and methods that the Fed uses to arrive at policy. But his transparency on Fed rate policy ties that policy very tightly to those statistics. Traders know the economic facts, none better. US economic statistics on GDP, business planning, employment, consumer sentiment and inflation are full of distress. If the economy is not in outright recession the signs are not pointing in any other direction. But traders no longer have to wait for Fed pronouncements to ascertain its next policy move they only have to read the economic tea leaves.

Any economic policy can have can have both desirable and undesirable elements. Lower American interest rates are a current necessity for the US economy and financial system. But lower rates devalue the dollar, exacerbate inflation, strain international economic relations, contribute to commodity price inflation and generally undermine the stability of the world financial system. For a central banker, a rapidly devaluing reserve currency is something to be avoided if at all possible. The dollar has depreciated more than 13% against the euro in six months. But at no point in that decline has the Fed spoken convincingly in defense of the US currency. Why?

Central bankers often use rhetoric to ameliorate the undesirable effects of a policy or to push the markets in a direction without employing the bludgeon of interest rate policy. Hectoring the markets can be quite effective in the short term.

However, the policy transparency of the Bernanke Fed has worked to limit the effectiveness of its rhetoric. Currency traders can read economic data almost as well as the Fed, but because Mr. Bernanke has so carefully delineated the logic and evidence behind its decisions they no longer need to wait for the Fed, nor are they checked by doubts as to what that decision will be. Speculative positioning is given a freer rein. Mr. Bernanke has not sought to check the market with rhetoric. Granted, it would not be logical to reduce interest rates and then warn the market that inflation was still a major concern. It would not be logical. But if the goal was to temper the decline of the dollar, it would be effective.

Contrast the Fed policy with that of the European Central Bank under Jean Claude Trichet. At the last ECB meeting the bank’s official statement and pronouncements were universally interpreted to mean that the bank had moved to a neutral rate stance. The euro promptly fell. Worsening economic conditions in the US, if not yet in Europe, would, it was assumed prevent the ECB from raising rates even if inflation accelerated. The ECB neutrality was an acknowledgement of that fact. But a strong euro is a hedge against the ECB’s main concern -- inflation. In addition, European unions are demanding hefty wage increases which are the primary second round inflation effects the bank is trying to prevent. The central bank does not want a sinking euro to complicate its anti-inflation fight. So the ECB immediately turned up the rhetorical heat. Mr. Trichet, Axel Weber and other governing council members were repeatedly quoted in the media warning of inflation and stressing the bank’s determination to prevent the ascent of inflationary expectations. The euro returned to the middle of its range against the dollar. It was not logical but it was effective.

The Bernanke transparency on Fed rate policy has had the perverse effect of limiting the Fed’s options. Because Mr. Bernanke has so carefully outlined the logic of Fed policy and the statistics that it watches and because he has so carefully kept to his open precepts the chairman cannot credibly gainsay the statistics or the Fed policy with rhetoric. He cannot do what the ECB did, adopt a neutral rate stance one week and then deny that it had done so the next.

Mr. Bernanke’s acknowledgement before Congress and a thousand trading room televisions that a weaker dollar bolsters US exports may be true, but it is not helpful. It only worsens the dollar decline. Unless a lower dollar is the Fed’s goal, such talk it is counterproductive. A little doubt about the Fed’s intentions could go a long way right now. Doing one thing and saying another is probably just what the dollar needs. Mr. Trichet seems to know this, Mr. Bernanke does not. To quote Winston Churchill, “In wartime truth is so precious that she should always be attended by a bodyguard of lies”. The dollar could use such a guardian.

Joseph Trevisani

FX Solutions

Chief Market Analyst

Joe@fxsol.com

Published on  Mon, Mar 3 2008, 10:58 GMT

Market Directions Sunday, February 24, 2008

Mon, Feb 25 2008, 06:24 GMT
by Joseph Trevisani

FX Solutions

Stalemate but not Checkmate

• The switchback market

• Philadelphia and the currency market

• Belgium leads the way

The euro and the dollar traversed the bulk of their recent range this week, moving from a low of 1.4613 to almost 1.4900 but came no closer to escaping the trap that has held the pair since mid November of last year. Except for a two week dip below 1.4600 in December and briefer drops in January and February the currency pair has spent seventy five percent of this period trading between 1.4600 and 1.4900. What will it take for a break out?

The old assumptions, old meaning since last August, a weak perhaps recessionary US economy and a rate easing Fed opposed to an economically steady Eurozone isolated from American problems and backed by inflation fighting ECB, are stale but they are still with us. They are incapable of driving the euro any higher or the dollar any lower. The Fed has erased 225 basis points from its funds target rate; the US economy is barely expanding with perhaps worse times ahead; the Eurozone economy has shown few concrete signs of weakness and the one important change, the ECB adoption of a neutral bias, was immediately and deliberately neutered by its own spokesman. The euro and the dollar have traveled back and forth over the same ground for three months because the essential rate and economic situation has not changed.

To paraphrase John Maynard Keynes, When the facts change sir, I will change my mind.. The problem for the currency markets is the facts have not yet changed.

The biggest boost to the euro this week was given by a minor US statistic, the Philadelphia Fed Survey. This is not normally a market moving item, not even on Rittenhouse Square in Philadelphia. That it was, nevertheless, the occasion, or excuse for the largest single hour rise in the euro shows how desperate traders are for news to break the stalemate between the euro and the dollar. One thing seems certain traders will take not the euro to new highs based solely on poor US results but they will require positive Eurozone returns as well.

Even an American recession is unlikely to push the euro far beyond it old peak against the US currency unless there is evidence that the Eurozone economy will not follow America down. The euro recovery this week was not really a vote of confidence in the united currency or for the economic prospects of the Eurozone. Traders have simply pushed the equation between the euro and the dollar back to its midpoint. As the dollar was unable to push higher in the aftermath of the ECB bias adjustment because the US economy has not yet given proof that it has reached bottom, so now the euro now is unlikely to prolong its three day run to reach new highs because there is scant evidence that Europe will avoid a slowdown in turn. It will take far stronger signs of European resilience than we have seen or are likely to see, to push the euro above 1.5000 against the dollar. If the economic information is indecisive so is the market.

Friday gave another indication of the traders' mindset when the Belgium business survey showed unexpected strength in February and the market bought the euro. This small northern European country is, at least for this survey and because of the difficulty of obtaining EMU wide results, occasionally used as an imperfect proxy for the entire Eurozone. The EMU Services Purchasing Managers Index for February also gave a small boost to the euro when it came in two points above forecast.

But the Belgium survey and the services PMI are weak reeds with which to weave a story of European economic prowess. While the services PMI did have an unexpected recovery, manufacturing PMI dropped half a point and the three month average for the composite PMI (services and manufacturing) was at a two and a half year low. With EMU economic sentiment and ZEW indices at their lowest levels in more than 18 months and predicted to drop further in February, with similar dismal results coming from Germany, with Eurozone GDP growth halving from the third to the fourth quarter, with an EMU current account swinging red in December, and retail sales negative in Germany and in the EMU, a euro recovery based on Belgium and services PMI was too much too soon.

Central Banks

Federal Reserve

The minutes of the January 29th - 30th FOMC meeting indicate the governors have reduced GDP estimates for 2008 by 0.5% to a range of 1.3% to 2.0% from their previous 1.8% - 2.5% forecast. Inflation is predicted to remain above the 2.0% target range but there is no chance that this will prevent the Fed from reducing rates at least 25 bps at the March 18th meeting.

European Central Bank

The ECB successfully warned off a rapid depreciation of the euro in the wake of its bias change and with the paucity of statistics this week did not comment further on monetary policy.

Bank of England

The Monetary Policy Committee (MPC) voted 8-1 to cut rates 0.25% at the February meeting noting the balancing of growth risks and inflation dangers. David Blanchflower, the outstanding easy money advocate on the committee, voted for a 0.5% cut, citing the risk of a "very sharp [economic] slowdown".

Australia

Minutes for the February 5th meeting when the board voted to raise the cash rate by 25 basis points revealed that a more aggressive 50 point increase had been extensively discussed. According to the record, board members were concerned that the inflation situation had deteriorated and that inflation expectations had become dislodged. The discussion, in the words of the minutes was "finely balanced" with the board choosing the smaller increase in the end. This is an interesting echo of the oft stated ECB concern that inflation expectations remain anchored.

The Week in Review February 18 - 22

United States

The housing market has ceased to provide anything but bad news so the February NAHB Housing Market Index and January Housing Starts, both slightly better than forecasts, gave no support for the USD. In fact the stability is probably illusory as building permits which give a better picture of future construction declined another 3.0%.

Eurozone

The European Trade Union Confederation (ETUC) is an organization of 82 national trade unions with 60 million members and a designated "social partner" that holds regular "macro economic dialogues" with the ECB, the EMU and the European Commission on economic matters. It has demanded substantially higher wages for its members. "We want a pay raise we want it soon and we want it quickly", said John Monks the Secretary-General of the organization. In the past the unions have been warned by Jean Claude Trichet, the ECB President and other bank spokesman not to seek large wage increases that could spark a round of secondary inflation effects. But that charge was rejected by the ETUC, "There has been wage moderation. We are running out of patience with what is going on", said Monks. The ECB has warned that the bank could raise rates preemptively if it thought the inflation threat warranted. Recent ECB rhetoric has been aimed directly at prospective union wage settlements. The ETUC in its turn has warned of strikes, "Pay militancy has so far been limited. But this cannot continue in the face of rising prices". Is this the normal rhetorical posturing before wage negotiations or is it more indicative of the non-negotiable demands of each side? By historical standards European wage settlements have been restrained in recent years. With gas and food prices rising fast that moderation is under serious strain as union members demand higher wage increases from their leaders. Union membership and militancy is not an ebbing force on the continent. However, the French unions, long some of the most confrontational in Europe, lost their showdown with French President Nicholas Sarkozy last year. Compromise from all sides it the most likely result.

The EU Commission reduced their projection for GDP growth in 2008 to +1.8% from the +2.2% estimate in the November report. The study cited downside risks to growth. This study uses data from the five largest EMU countries, Germany, France, Spain, Italy and the Netherlands which together comprise 85% of Eurozone GDP. The ECB GDP estimates are due in two weeks, the last being for 1.5% to 2.5% GDP growth and 2-3% inflation in 2008. A downward revision in the GDP projections' is expected. The EU Commission information usually correlates well with the ECB.

China

January inflation was 7.1%, the highest in eleven years and a gain of more than 0.5% in one month. Though the Chinese government has raised interest rates, reserve requirements and permitted a faster appreciation of the yuan in response to previous inflation there is some disagreement whether all those policies will be repeated this time. The January CPI increase was again led by food costs. But the food supply suffered serious disruptions in January from severe winter weather. Food prices were forced higher by supply shortages not by rising demand and those supply restrictions have since eased. There is a plausible chance that the People's Bank of China (PBOC) will recognize the one time nature of January's hike in food prices and with a world economic slowdown looming choose to forego higher domestic interest rates. China's rulers have been very good at taking the long view of their economic choices, they will probably do so again. Bank reserve requirement are expected to rise again in 2008 despite 600 bps in increases in 2007.

Economic Releases February 18 - 22

United States

Tuesday: the National Association of Home Builders Housing Market Index rose 1 to 20 in February. This index has now been stable since July, falling only once in December to 18, but it is still less than half the reading of a year ago.

Tuesday: the Consumer Price Index (CPI) gained 0.4% in January, ahead of the +0.3% forecast but lower than the December reading of +0.4%. Core CPI added 0.3%, also 0.1% more than forecast; December had been +0.2%. The +4.3% elapsed yearly CPI figure was the highest since September 2005. The +2.5% core annual rate represents a steep climb from the 2.1% rate last September; in January and February CPI was +2.7%. Housing Starts rose 0.8% in January to 1.012 million units, a bit less than he forecast of 1.020 million. Single family home starts sank 5.2%, the 10th consecutive monthly decline and the lowest level in 17 years. Starts of multi family units rose. Building Permits contracted 3.0% January to 1.048 million, the eighth monthly decline in a row.

Thursday: jobless claims for the week of February 16th slipped 9,000 to 349,000, 345,000 had been predicted. The prior week was revised 10,000 higher to 358,000. The four week moving average has now reached 360,500 the highest since October 2005. At the start of the last recession in March 2001 this average was at 373,000 but the US economy and employment rolls have grown considerably since then and the equivalent level today is probably close to 400,000.

Eurozone

Tuesday: construction production dropped 0.6% in December, the fourth decline in the past six months; the elapsed year fell to -3.3%. In the fourth quarter production contracted -0.3%, in the third quarter it added 0.4% and in the second it lost 0.7%.

Thursday: the seasonally adjusted current account for the EMU 13 dropped sharply into deficit in December to -€10.3 billion from the €2.3 billion surplus in November which was adjusted up from +€0.7 billion.

Friday: industrial new orders plummeted in December falling 3.6% below November's level, leaving them only 2.1% above the base of a year ago. Although a correction had been expected after the strong October and very strong November (+11.4%) numbers, a more modest decline, -1.0% monthly to a yearly level of +8.7% had been forecast. The ‘flash' manufacturing PMI for February was as forecast at 52.3, 0.5 below January's result. The services PMI was ahead of predictions at 52.3, 50.3 had been anticipated; January was 50.6.

Germany

Wednesday: the Producer Price Index (PPI) rose 0.8% in January, four times the expected increase of 0.2%. The +3.3% rate for the year is the highest since December 2006 when it was +4.4%. In December the figures were -0.1% and +2.5% respectively.

United Kingdom

Monday: Rightmove House Prices rose 3.2% in February, 5.8% on the year. It was the first rise in prices since October of last year. In January prices shrank 0.8%; they rose +3.4% year to year.

Thursday: retail sales rose 0.8% in January far more than the median prediction of +0.1%. It was the steepest rise since February 2007 and with the yearly rate now at +5.6%, it appears the British consumer is not impressed by the housing and credit market turmoil.

The Week Ahead February 25 - 29

United States

Monday: Existing Home Sales for January at 10:00 ET; expected 4.80 million, December 4.89 million.

Tuesday: PPI for January at 8:30 ET; expected +0.4%, December +0.3%. Core PPI for January at 8:30 ET; expected +0.2%, December +0.2%. Case-Shiller Home Price Index for December at 9:00 ET; November -2.1% m/m. Conference Board Consumer Confidence for February at 10:00 ET; expected 82.0, January 87.9.

Wednesday: Durable Goods for January at 8:30 ET; expected -4.0%, December +5.2%. New Home Sales for January at 10:00 ET; expected 600,000, December 604,000.

Thursday: Jobless Claims for the week of February 23rd at 8:30 ET; expected 350,000, prior week 349,000. Fourth quarter GDP 1st revision at 8:30 ET; expected +0.8%, prior release +0.6%.

Friday: Personal Income for January at 8:30 ET; expected +0.2%, December +0.5%. Personal Expenditures for January at 8:30 ET; expected +0.2%, December +0.2%. PCE Core Price Index for January at 8:30 ET; expected +0.3%, December +0.2%. Chicago Purchasers Index for February at 9:45 ET; expected 49.8, January 51.5. University of Michigan Consumer Sentiment for February at 10:00 ET, final release; prior release 69.6.

Eurozone

Wednesday: Money Supply (M3) for January at 9:00 GMT; expected +11.4%, December +11.5%. M3 three month moving average for January at 9:00 GMT; expected +11.7%, December +12.1%. Loans to private sector for January at 9:00 GMT; December +11.1%.

Friday: final HICP for January at 10:00 GMT; expected -0.4% m/m, +3.2% y/y, December +0.4% m/m, +3.1% y/y. EMU economic sentiment Index for February at 10:00 GMT; expected 101.1, January 101.7; industry confidence, expected +0.4%, January 1.0%; consumer confidence, expected -12, January -12; business climate indicator, January 0.87. Unemployment Rate for January at 10:00 GMT; expected 7.1%, December 7.2%.

Germany

Tuesday: detailed GDP seasonally adjusted for the fourth quarter at 7:00 GMT; expected +0.3%, prior release (4th quarter) +0.3%. Detailed fourth quarter GDP year to year not seasonally adjusted at 7:00 GMT; prior release +1.6%. IFO business sentiment for February at 9:00 GMT; expected 102.8, January 103.4; current assessment, expected 106.9, January 107.9; business expectations, expected 99.0, January 99.0.

Wednesday: import prices for January at 7:00 GMT; expected +0.3% m/m, +4.7% y/y, December -0.1% m/m, +3.7% y/y. Export prices for January at 7:00 GMT; January 0.0% m/m, +1.3% y/y. GfK consumer confidence for March at 7:00 GMT; expected 4.4, February 4.4.

Thursday: unemployment rate for February at 8:55 GMT; expected 8.0%, January 8.1%. Final CPI for January at 7:00 GMT; expected -0.3% m/m, +2.7% y/y, December +0.5% m/m, +2.8% y/y. Final HICP for January at 7:00 GMT; expected -0.3% m/m, +3.0% y/y, December +0.7% m/m, +3.1% y/y. Total retail sales for January (release time undetermined); December 0.4% m/m, -9.1% y/y. Preliminary CPI for February (release time undetermined); expected +0.4% m/m, +2.7% y/y. Preliminary HICP for February (release time undetermined); expected +0.4% m/m, +2.9% y/y.

United Kingdom

Monday: Hometrack House Price Survey for February at 00:01 GMT; January -0.3% m/m, +2.3% y/y. Nationwide House Prices for February at 7:00 GMT; January -0.1% m/m, +4.2% y/y.

Tuesday: CBI Distributive Trades Survey (reported volume of sales) for February at 11:00 GMT; January 4.

Wednesday: fourth quarter GDP 2nd release at 9:30 GMT; 1st release +0.6% q/q, +2.95 y/y.

Thursday: Land Registry House Prices for January at 11:00 GMT; December -0.4% m/m, +6.7% y/y.

Friday: GfK Consumer Confidence for February at 10:30 GMT; January -13.

Japan

Thursday: Retail Sales for January at 23:30 GMT (prior day); December +0.25 y/y.

Friday: National Core CPI for January at 23:30 GMT (prior day); December +0.8% y/y. Central Tokyo Core CPI for February at 23:30 GMT (prior day); December +0.4% y/y. Unemployment rate for January at 23.30 GMT (prior day); December 3.8%. Household Spending for January at 23:30 GMT (prior day); December +2.2%. Housing Starts for January at 23:30 GMT (prior day); December -19.2% y/y. Construction Orders for January at 23:30 GMT (prior day); December +4.7%.

China

No scheduled releases

Joseph Trevisani

FX Solutions  

Chief Market Analyst

Joe@fxsol.com

Published on  Mon, Feb 25 2008, 06:24 GMT

Market Directions Sunday, February 17, 2008

Mon, Feb 18 2008, 06:15 GMT
by Joseph Trevisani

FX Solutions

The Speculative Urge

• The ECB rate bias fizzle

• European rhetoric and reality

• American gloom

Did Jean Claude Trichet, the European Central Bank (ECB) President really put the central bank on a neutral bias last week? After the bank held rates at 4.00%, citing “downside risks to growth” and Mr. Trichet noted that “4.00% allows price stability” it certainly seemed that the European bankers were preparing the market for a change in policy. From a neutral bias to an easing bias, from stable rates to falling rates and a depreciating euro, is a short step mediated only by a central bank’s need for deliberate and studied movements in policy. The euro fell two figures against the dollar after the ECB announcement and traders were set to take it lower. But without follow through even a central bank pronouncement dies a quick death. European GDP did not show a faltering economy in the fourth quarter. Mr. Trichet and Axel Weber, ECB board member, President of the German Bundesbank and staunch inflation hawk quickly returned to their anti-inflation rhetoric and the euro slowly climbed back to the middle of range it has held against the dollar since late November.

Had the US economy delivered stronger figures this week or the EMU weaker ones, the ECB rhetoric would have mattered little and the euro would likely have continued to fall. A rate neutral ECB is a new factor in currency market assumptions and one that normally leads, in time, to lower interest rates. Declining ECB rates are clearly not priced into the current euro dollar levels, hence the plummet last Thursday. But even without corroborating European and American statistics the euro would probably have continued to fall against the dollar, if Mr. Trichet and company had kept silent. But they did not. Why would the ECB adopt a neutral rate outlook one week and then publicly contradict it the next?

One thing central bankers do not want, if they can prevent it, is for rapid changes in currency rates to become a factor in their own calculations or to add a complicating factor to an already difficult economic environment. Put plainly they do not want the currency markets to anticipate too much or too quickly. The change in ECB bias from tightening to neutral was deliberate-- the next ECB move will be a rate cut. But the subsequent talking up of inflation was just as deliberate.

If the euro rapidly deflates on speculation that the ECB will soon cut, as would be natural after an unchecked change in bias, then the pressure for the bank to act as the market anticipates becomes that much greater. The European bankers are anticipating lower economic growth otherwise why put the bank on a neutral base after months of strident anti-inflation rhetoric. EMU economic activity is supported by exports and exports are curtailed by a strong euro. Market speculation on an impending ECB rate reduction cycle world, if left uncountered, quickly drive the euro lower. Similar speculation on a US economic slowdown after the credit crisis erupted last August drove the euro 12% higher in only three months. And there is nothing to prevent the reverse happening now. However, though the ECB governors may have concluded that they will have to cut rates at some point in the future, they do not want their timetable affected by currency traders, or at least they want to minimize such effects.

If the euro deflates rapidly between now and the March ECB meeting and the governors determine then that the time is not yet ripe for a cut and they do not, then the euro could easily reverse and flood higher. The turmoil that such violent currency moves create in the world financial system confounds the bankers’ attempts to restore calm and insure financial stability. The last thing the world’s central bankers want in the current tense state of the world’s financial system is complication. Calm and deliberate adjustment in currency rates is the bankers’ goal. Unfortunately for them the world’s currency markets are not calm and deliberate places. Thus we have seen the back and forth of ECB rhetoric and the screen of words hiding a true change in intention.

But there is another complicating factor in the central bankers view, uncertainty. The world economy has evolved rapidly in the past ten years. Asia has added huge amounts of wealth and consumer spending to the world’s economy. But whether Chinese and Indian consumers can prevent a US recession is unknown. Add to this the waves of deleveraging losses washing through the banking and financial system and the unresolved crisis of confidence in the credit markets and you have a situation primed for speculative upset.

The G7 meeting last weekend in Tokyo produced small changes in the communiqué and none in economic policy or forex outlook. The general forex statement was unaltered; it has been basically unchanged since 2004. “Exchange rates should reflect economic fundamentals”, and “excess volatility and disorderly economic movements are undesirable”, are the venerable mantras. The wording of this section was identical to that of the prior communiqué. The Chinese were chided ever so slightly to keep yuan appreciation on track. The text of the communiqué from the previous meeting in Washington said “we encourage” the Chinese to appreciate the yuan. This time the text read “we stress its [the Chinese] need to allow accelerated appreciation” of the yuan. It was less than a minor change, in fact it was an acknowledgment of the doubling of the yuan rate of appreciation from 2006 to 2007 and the influence Chinese reserves and debt holdings have with the finance ministers and government officials of western industrialized nations.

Central Banks

Federal Reserve

Federal Reserve Chairman Ben Bernanke’s testimony before the Senate Committee on Banking, Housing and Urban Affairs broke no new ground. He repeated the Fed stance that the economy is beset by credit, housing and employment risks to economic growth but that the governors do not expect a recession. He predicted that the stimulus effect of rate reductions will work through the economy generating moderate growth in the third and fourth quarters. With rates at 3.00 %, the result of a 225 basis point reduction in a little more than four months, the Fed is likely to be approaching, at least in planning, the end point for reductions. Patience is a possible theme for future Ben Bernanke pronouncements though it was not much in evidence this week. Every indication is that more cuts are coming at the March 20th – 21st FOMC meeting.

European Central Bank

Jean Claude Trichet, president and monetarist did not sound like a banker preparing to cut rates when he said, paraphrasing American economist Milton Friedman, that inflation is ultimately a monetary phenomenon. European Monetary Union (EMU) money supply growth, 11.5% in December, is almost 50% higher than the stated ECB target of 8.0%. It is not a statistic Mr. Trichet would draw attention to if a rate cut was in immediate contemplation. Mr. Trichet also tended the economic side of the rate policy argument by noting that economic conditions are not the same in the US and the EMU. And, he said, the ECB is doing what is necessary in its own circumstances by insuring price stability.

Axel Weber, Bundesbank Governor and ECB board member returned to his normal position on the inflation watch warning that inflation and price stability at the only sights on the ECB horizon. “Against the backdrop of these [economic] prospects the current interest rate expectations in financial markets do not—at least not for a stability driven central banker—reflect an appropriate evaluation of the inflation risks’. It was an unusual personalization of his position, but the message could not be clearer, do not factor rate decreases into your positions.

Bank of England

The Bank of England quarterly Inflation Report was a warning that the pace of rate reductions postulated by the market may be overdone. The report predicted that inflation will be just over 2.2% in two years under the current market expectation that rates will fall from where they are now, 5.25%, to 4.8% in the second quarter and to 4.5% by year end and to 4.4% in 2009 before rising again. Inflation would peak at 3.00% in the second quarter of this year under this scenario. At a constant 5.25% rate inflation would be well below 2.0% in two years. The bank’s GDP forecast was reduced below 2.0% for 2008 and with expressed concern for downside growth risks. The best reading of the report is for two more 0.25% cuts, with the timing front loaded in 2008.

As with its American counterpart, the British central bank is more worried about growth than inflation and will probably cut rates again before the May inflation report. But the governors do not want market expectation to get ahead of themselves. “In the central projection higher energy, food and import prices push inflation up sharply in the near term. Inflation then eases back to a little above the 2.0% target in the medium term as the near term rise in energy prices drops out of the 12 month rate and capacity pressures moderate”. “Overall the risks around the central projection to growth lie to the downside while those to inflation are balanced”.

Japan

The Bank of Japan left the overnight call rate at 0.5%; the vote to do so was unanimous. The bank last changed rates one year ago, when it added 25 basis points bringing the rate to 0.5%. It was then only the second hike of its “flexible and gradual” policy which started in July 2006 after a prolonged period of zero percent interest rates. The bank spokesman characterized monetary conditions in Japan as accommodative.

The Week in Review February 11 - 15

United States

The US economy has slowed. Job creation and GDP have dropped and unemployment claims have risen to near recession levels, but retail sales, durable good orders and manufacturing ISM are holding above contraction rates. Unemployment is below 5.0%, a rate that in past economic eras, say 15 years ago, would have been viewed thankfully by all concerned. The recession question is still unanswered.

The joint testimony of Ben Bernanke, the Fed Chairman, and Hank Paulson, the Treasury Secretary, before Congress was sober and economically downbeat. “The outlook for the economy has worsened” said Mr. Bernanke in his prepared statement. With the American economy weaker than previously thought, the Fed’s insurance rate cuts, which began six months ago are beginning look very prudent. Considering his now longstanding commitment to respond to economic conditions, the Chairman’s statement promises further rate reductions. Even though the extant statistics are poor but not terrible, Mr. Bernanke expects worse times ahead.

Eurozone

The EMU trade balance moved sharply into deficit in December at -€2.1 billion, and the November surplus was downgraded by almost 1/3 to +€2.0 from +€2.7 billion. Exports fell 2.5% and imports rose 0.7%. With these new figures it is estimated that exports will not make any contribution to GDP when the revised fourth quarter numbers are issued. The preliminary GDP figure was 2.3% year to year, 0.1% higher than the forecast and could be adjusted lower.

Australia

Buoyant commodity markets and prices have been good for the Australian Dollar. World demand for commodities has been the main driver of prices, but with the world economy set to slow, the downside risk for the aussie has increased. Not withstanding the recent Reserve Bank of Australia’s 0.25% hike, inflation and growth pressures on the Australian economy should subside in the months ahead, bringing the negatives for the currency into sharp relief.

Economic Releases February 11 – 15

United States

Wednesday: retail sales gained 0.3% in January well ahead of the median forecast for a contraction of 0.4%. December’s -0.4% reading was unrevised. Retail sales minus automobile sales, the ‘ex-auto’ number also grew by 0.3% , better than the +0.2% forecast; December’s figure was adjusted 0.1% higher to -0.3%, November and October were each revised down 0.2% , November to +0.8% and October to +1.5%. The January number is not quite as positive as it first appears because gasoline prices pushed up the headline number, without its inclusion the retail sales number would have been +0.1%. If the 2.0% rise in gas station sales is subtracted from the ex auto number the result is flat for the month.

Thursday: the International Trade Balance registered -$58.8 billion in December a surprise 6.5% improvement over November’s $63.1 billion deficit; -$61.5 billion had been forecast. It was the best month to month performance since October 2006 when the deficit shrank 9.3%. Imports fell $2.2 billion, -1.1%, even though the importation of oil and related items rose $1.3 billion as volume fell but the total value rose based on the record price of $82.76 per barrel. Exports rose 1.5%.

Only the deficit with the OPEC nations increased, reaching a record $12.3 billion; in November it had been -$11.8 billion. The gap with China fell to $18.8 billion from $24.0 billion and that with Japan slid to $0.5 billion to $6.6 billion. The non-oil deficit was $34.8 billion, the lowest since November 2003.

Exports are growing a 12% yearly clip, more than three times the growth rate of imports. This disparity could add up to 0.3% to 4th quarter GDP upon revision because the actual trade balance is better than the estimate that was used to generate the advanced GDP figure. In 2007 the total deficit was $711.6 billion, 6.2% smaller than the 2006 deficit of $758.5 billion.

Jobless claims for the week of February 9th dropped 9,000 to 348,000, 340,000 had been predicted. The four week moving average gained 12,000 to 347,250 as the low numbers for early January drop out of the average. It is the highest average since October 2005. The trend higher in the moving average is worrying but it is not yet at recessionary levels of 375,000 or more.

Friday: University of Michigan Consumer Sentiment fell precipitously in February to 69.6 from January’s 78.4 level; 75.0 had been forecast. Except for a few months immediately before the Iraq invasion in 2003 this is the lowest reading since 1993 and it has a recessionary feel about it. ‘Current conditions’ fell to 85.4 from 94.4 and ‘expectations’ sank to 59.4 from 68.1.

The Treasury International Capital System information (TICS) gathered by the Treasury Department recorded 56.5 billion in net Long Term Securities Purchases in December. Foreigners purchased $69.1 billions in US securities and US residents bought $12.6 in foreign instruments. Of the total overseas purchases $33.3 were by private sources, down from $58.5 in November; $35.8 billion were bought by governments or associated entities, almost triple the $11.8 billion bought in November. Foreign governments have not curtailed their acquisition of American debt instruments. In 2007 the average monthly net purchase of long term securities by foreigners was $61.76 billion, more than adequate to fund the monthly average international trade deficit of 59.18 billion.

Industrial production rose 0.1% in January half the +0.2% predicted; Capacity utilization moved up 0.1% to 81.5.

Eurozone

Tuesday: the ZEW Survey “economic expectations’ improved to -41.4 in February from -41.7; ‘current conditions’ plummeted to 21.8 from 47.8.

Wednesday: industrial production contracted 0.2% in December well below the expected 0.6% expansion; November’s result moved up 0.1% on revision to -0.4%. The year on year rate fell to 1.3% in December barely half the +2.7% rate in November, +2.4% had been anticipated. Including revisions the fourth quarter gain of 0.1% was far less than the +1.4% jump in the third quarter. Industrial production has declined 0.9% since August of last year. Flash fourth quarter GDP was up 0.4%, slightly better than the +0.3% prediction and rating +2.3% on the elapsed year, 0.1% better than predicted. There was no currency market reaction to the numbers.

Germany

Tuesday: the ZEW Survey of ‘financial experts’ showed a bit of positive movement in the ‘economic expectation ‘ category rising to -39.5 in February from January’s -41.6; -45.0 had been the median forecast. It was the first rise in 9 months for the expectation index which had been at a 15 year low, but it remains well below the long term average of 30.7. In contrast the ‘current conditions’ component fell for the eighth straight month to 33.7 in February from 56.6, exhibiting the sharpest drop in month to month results since July 2001. It was also the lowest reading since August 2006; the forecast had been for a small decline to 50.0. Most of the data was collected before the ECB moved to a rate neutral stance last Thursday. Total retail sales for December were revised substantially lower to +0.4% from the preliminary +2.2%, with the yearly number falling to -9.1% from -8.3%. Both numbers are seasonally adjusted. In 2007 these sales fell 3.28%. These figures are collected by the German Bundesbank. The response of the German consumer to a real or potential economic slowdown is very different than that of his US counterpart. In the States consumers practically have to be threatened with foreclosure before they curtail their free spending ways, while in Germany they seem to pull back at the first sign of future trouble. The historical and cultural differences are striking. So too is the effect of higher tax rates in Germany which leave much less disposable income in the hands of the German consumer.

Wednesday: wholesale prices rose 1.4% in January, a rather shocking +6.9% yearly rate. Prices had fallen 0.5% in December, which was +5.1% on the year. Flash GDP for quarter four was +0.3% and +1.6% year on year, as expected. It was the slowest quarterly growth since the second quarter of 2007, positive exports and equipment orders were offset by moribund consumer spending.

United Kingdom

Monday: the Department of Communities and Local Government (DCLG) House Price index cooled a bit in December rising 9.1% year on year; the November figure was revised higher to 9.7% from 9.5%. This index is based on completed mortgages rather than asking prices so it provides a better gauge of actual selling price levels. The Producer Price Index for input prices gained 2.6% in January and a hefty 19.1% year on year. Output prices were 1.0% higher, up 5.7% on the year. Core output prices rose slightly less at +0.8% and +3.1% year on year.

Tuesday: CPI in January was better than expected at -0.7% for the month and +2.2% for the elapsed year; +0.6% and +2.3% had been predicted. December’s readings were +0.6% and +2.1%. Nevertheless the January year on year number was the highest since June of last year. Core CPI fell 1.0% in January, far lower than the +1.5% prediction and December’s +1.4% rise. British Retail Consortium (BRC) retail sales rebounded in January with ‘like for like’ sales rising 2.6% after December’s +0.3% fall with ‘total sales’ more than doubling to +4.9% from +2.3%. The BRC warned that the increase could be due to higher prices adding to the value of sales.

Wednesday: the Royal Institute of Chartered Surveyors (RICS) House Price Balance for January sank to -54.7%, its weakest since December of 1992. The record low is -63.0%. The International Labor Organization (ILO) standard unemployment rate dropped to 5.2% in December from 5.3% in November. Average earning including bonuses added 3.9% as expected in December, just under the 4.0% reading of the prior month. With employment rising there can be some question about the degree of economic slowdown predicted for the next several quarters by the BOE and others.

Japan

Wednesday: consumer confidence fell 0.5 to 37.5 in January the lowest in 4 ½ years and the fourth consecutive drop.

Thursday: preliminary fourth quarter GDP was much stronger that expected a t +0.9%, a +3.7% annual clip. Even though the annual rate was more than twice the 1.5% forecast, the BOJ will not be moved to consider a rate response.

China

Money supply (M2) rose 18.94% in January over the same month a year ago. In December the gain was 16.72%.

The Week Ahead February 18 - 22

United States

Wednesday: Housing Starts for January at 8:30 ET; December 1.006 millions. Building Permits for January at 8;30 ET; December 1.080 millions. CPI for January at 8:30 ET; December +0.3%. Core CPI for January at 8:30 ET; December +0.2%.

Friday: Jobless Claims for the week of February 16th at 8:30 ET; prior week -9,000 to 356,000.

Eurozone

Tuesday: Construction production for December at 10:00 GMT; November -0.8% m/m, -0.8% y/y.

Friday: Flash Manufacturing PMI for February at 9:00 GMT; January 52.6 (preliminary). Flash Services PMI for February at 9:00 GMT; January 52.0 (preliminary). Industrial New Orders for December at 10:00 GMT; November +2.7% m/m, +11.9% y/y.

Germany

Wednesday: PPI for January at 7:00 GMT; December -0.1% m/m, +2.5% y/y.

United Kingdom

Monday: Rightmove House Prices for February at 00:01 GMT; January -0.8% m/m, +3.4% y/y.

Wednesday: CBI Industrial Trends Survey for February at 11:00 GMT; January 2.

Thursday: Retail Sales for January at 9:30 GMT; December -0.4% m/m, +2.7% y/y.

Japan

Monday; Revised leading Index for December at 5:00 GMT; November 40.0. Coincident Index for December at 5:00 GMT; November 66.7.

Thursday: Trade Balance for January at 23:50 GMT (prior day); December -20.9% y/y.

China

Monday: Trade Balance for January (release time undetermined); December +$22.69 billions m/m, +$262.2 billions y/y. Exports for January (release time undetermined); December +21.7% ytd, +25.7% y/y. Imports for January (release time undetermined); December +25.7% ytd, +20.8% y/y.

Joseph Trevisani

FX Solutions

Chief Market Analyst

Joe@fxsol.com

Published on  Mon, Feb 18 2008, 06:15 GMT

Market Directions Sunday, February 11, 2008

Mon, Feb 11 2008, 14:31 GMT
by Joseph Trevisani

FX Solutions

• * Selective focus
  
• * The ECB joins up
  
• * Australia in reverse

After weeks of unremitting bad news from the United States economy and an exceptional response from the Federal Reserve, all of which failed to harm the dollar, a few discrete hints from the European Central Bank that the continental scene is not perfect and the euro falls out of bed. As we have noted before, when traders have made up their minds they will find the information to support their view and then act upon it.

The new ECB policy was welcomed by European politicians. Christine Lagarde the French Finance Minister noted, “The change in the language of the ECB marks a more valid assessment of the situation”. Michael Glos the German Economics Minister said that the apparent neutral shift of the bank was “appropriate”. The market assumption that the ECB would have to move to a neutral rate stance has proven true.

However, the euro is not going to break out of the range it has held against the dollar since November until the second leg of the assumption, that the ECB will actually reduce rates, comes closer to reality.

In the United States the current poor economic state has lost emphasis for the currency market. Even if first quarter GDP is negative it will not harm the dollar. Attention is shifting to the economic situation in second and third quarters when the recovery is expected to take hold. But until there is a sign of returning growth a substantial rise in the dollar is unlikely. The euro climb has been blunted by the decline in European economic activity, but that is not enough for the dollar recoup its losses. The expectation is that the Eurozone will slow considerably and that the US will begin to show signs of recovery. Either development will suffice to boost the dollar, but traders will not extend the recent move higher in the usd without supporting evidence. The baseline forecast for the two largest economic zones has the changed with the potential advantage to the dollar. But it remains potential. The world’s two main currencies will continue to move in a narrow range against each other until the new assumption gathers proof.

Central Banks

European Central Bank

No change in the refi rate, but a major change in bias. The ECB’s own words express it best. “Downside risks to growth have increased”. Where have we heard that assertion before? Or Mr. Trichet's words, “4.00% allows price stability”. Interesting. We have been hearing exactly the opposite of that for the past several months as ECB governor after governor has warned of inflation and that the bank would, if necessary, raise rates to contain inflation. The market heard what it wanted and expected to hear from the ECB and promptly sold the euro for more than two figures. Despite all of their recent rhetoric the vote to hold rates was unanimous, with “no call for an increase or a decrease of rates”. There is no doubt the softer language of the statement and the press conference was approved unanimously also. It seems the hawks have flown the roost.

Bank of England

The Monetary Policy Committee cut the repo rate by 25 basis points to 5.25%. “Prospects for growth abroad have deteriorated and disruptions to global markets have continued,’ said the accompanying statement. The governors also cited tightening credit conditions and that “CPI at 2.1% in December was close to the 2.00% target”. The move had been expected by a large majority of surveyed economists, but the bank worked to keep the lid on expectations for future reductions. The statement noted that food and energy prices will boost inflation in coming months but will fade later in the year.

Reserve Bank of Australia

Citing strong consumer demand and significant inflationary pressures the central bank raised the cash rate 0.25% to 7.00% as expected. The accompanying statement maintained a preemptive anti inflation tone, but with global growth set to slow and other central banks cutting rates or on hold, future increases are under doubt.

Japan

The Bank of Japan and the ruling Liberal Democratic Party officials both downplayed the possibility of Japanese rate cuts despite the gathering rate reduction mood in other industrial world central banks, said sources quoted by Market News International..

The Week in Review February 4 - 8

United States

Last week’s Non Farm Payrolls shed jobs and the unemployment rate, recording information from the same month, also fell 0.1%. Can the economy be losing jobs and reducing the unemployment rate at the same time? One explanation for this seeming incongruity lies in the separate sampling and reporting measures of the two surveys. The NFP survey samples 160,000 business and government entities, one third of the available total. Revisions are common for two reasons: first because only 56% of the survey participants have normally responded by the date when first edition of the survey is issued, and second because jobs created by newly formed companies are not extrapolated from actual survey responses but only estimated. As updated information reaches the Federal Bureau of Labor Statistics the new figures are incorporated into the revised second and third versions of the NFP. The unemployment rate surveys a much smaller percentage of households, 60,000 out of an estimated 110 million, but the survey completion rate is over 90% so the accuracy of the initial data is much greater.

More bad news for the US economy, the ISM services report was wildly below expectation at 41.9, much worse than the December reading and the forecast for January This latest in a string of dismal US economic report sent the equity markets into a tailspin with the Dow off 370.03 by the end of the session. But the dollar traders largely ignored the report, losing only 40 points against the euro. It was a premonition for the balance of the week.

Eurozone

Mr. Trichet’s press conference answers and the text of the official bank statement were not very different than previous editions but the market heard what it was meant to hear. "downside risks to growth have increased” . Over the past several weeks traders have refused to take the euro higher even in the face of economic statistics profoundly damaging to the dollar. The market has shrugged off 1.25% in Fed rate reductions, negative NFP, negative Services ISM and rising unemployment claims. Clearly traders have wanted and waited to sell euros. The rationale, a pending ECB rate cut, is closer to enactment but it is not quite on horizon. It is not priced into the euro level yet. But the direction for the euro is well established traders are waiting for the first excuse.

Economic Releases February 4 - 8

United States

Monday: factory orders rose 2.3% in December slightly under the 2.7% gain predicted but almost double the 1.5% accretion in November.

Tuesday: the ISM Services number for January was shockingly bad, 41.9 on a median forecast of 53.0 and a December figure of 54.4. This was the weakest number on record but that is not quite a bad as it sounds since this series only began in 2001. The low during the 2001 recession was 47.9 and this is the first reading under 50 since 2003. Though this number has garnered more attention of late and represents the service sector which is 70% of the US economy, its predictive power for the future course of the economy is not as good as that of its older cousin the ISM Manufacturing Index. The number was released early at 8:55 am by the Institute for Supply Management rather than the normal 10:00 am because of fears that the number had been leaked. A spokesman for the Institute for Supply Management said there was no reason to doubt the weak January data because there had been no change in the sampling method.

Wednesday: Non Farm Productivity added 1.8% in the fourth quarter, well more than the +0.1% forecast, largely on a decline in hours worked. Productivity in the third quarter lost 0.3% on revision to +6.0%. Unit Labor Costs (ULC) in Q4 moved up 2.1%; the Q3 results slipped to -1.9% from-2.0%. In all of 2007 ULC rose 3.1% and productivity 1.6%. Labor costs have not been the main source of inflation which has been pushed higher by commodity prices, mostly for oil and food, so the moderate increase did not translate into quiet core inflation. ULC rise in 2007

Eurozone

Monday: the increase in Industrial PPI decelerated in December to +0.1% as expected, a marked improvement over September, October and November whose increases were +0.4%, +0.7% and +0.9% respectively. The year to year rate of 4.3% remains high as it incorporates the activity of prior months. Energy prices were subdued in December relative to previous months and prices were led by consumer goods. With CPI running at +3.2% in the latest month the ECB is not likely to gather much ease from these reductions. Novembers results were revised up to +0.9% from +0.8% and to +4.2% from +4.1% in the yearly.

Tuesday: retails sales dropped 0.1% in December leaving them at -2.0% for the year. A gain of 0.2% had been predicted with the yearly loss at -0.8%. The November decline became 0.7% from 0.5% on revision; the elapsed year gained 0.2% to -1.2%. The poor monthly totals led to the worst quarterly result since this data series began in 1995. Fourth quarter sales were 0.97% below those of the third which had risen 0.55% from the second quarter. Final services PMI for January was down to 50.6 well below the flash estimate of 52.0 and Decembers 53.1. It was the slowest result in four and a half years. France was the only major EMU economy above 50 in this survey. The euro fell sharply in response.

Germany

Wednesday: VMA Machinery Orders for December doubled the gain in November 14% versus 7%.

United Kingdom

Monday: CIPS construction PMI for January was 53.9, less than December’s 56.0 reading and the weakest since September 2006, but still characterized by the accompanying statement as “remaining] at a level indicative of a solid increase in activity”.

Tuesday: CIPS Services PMI Business Activity Index rose slightly in January to 52.5, ahead of the forecast of 52.0 and 0.1% higher than December. While this reads moderately strong at present the ‘future gauge’ section of the Index sank to 65.4, the lowest since October 2001. Services comprise 75% of the United Kingdom economy.

Wednesday: Nationwide Consumer Confidence in January fell to a record low of 81, 4 below the December result but the timeline on this series only extends to May 2004.

The Week Ahead February 11 - 15

United States

Tuesday: IBD/TIPP Economic Optimism Index for January at 14:00 ET; December 43.2.

Wednesday: retail sales for January at 8:30 ET; expected -0.1%, December -0.4%. Retail sales ex food and auto for January at 8:30 ET; expected +0.2%, December +0.4%.

Thursday: jobless claims for the week of February 9th at 8:30 ET; expected 340,000, prior week -22,000 to 356,000. International Trade Balance for December at 8:30 ET; expected -$61.5 billion, November -$63.1 billion.

Friday: Treasury International Capital System (TICS) for December (net long term securities transactions) at 9:00 ET; November +$90.9 billion. Industrial production for January at 9:15 ET; expected +0.2%, December 0.0%. Capacity utilization for January at 9:15 ET; expected 81.4%, December 81.4%. University of Michigan Consumer Sentiment (preliminary) for February at 10:00 ET; expected 76.0, January 78.4.

Eurozone

Tuesday: ZEW Survey for February at 10:00 GMT; ‘economic expectations’ January -41.7, ‘current conditions’ January 47.8.

Wednesday: industrial production for December at 10:00 GMT; expected +0.6% m/m, +2.4% y/y, November -0.5% m/m, +2.7% y/y.

Thursday: flash estimate fourth quarter GDP (1st issue) at 10:00 GMT; expected +0.3% q/q, +2.2% y/y, third quarter +0.8% q/q, +2.7% y/y.

Friday: preliminary trade balance for December (seasonally adjusted) at 10:00 GMT; November +€2.7 billion.

Germany

Tuesday: ZEW Survey for February at 10:00 GMT; ‘economic expectations’ expected -45.0, ‘current conditions’ expected 50.0, January ‘economic expectations’ -41.6, ‘current conditions’ 56.6.

Wednesday: wholesale prices for January at 7:00 GMT; December -0.5% m/m, +5.1% y/y.

Thursday: flash estimate fourth quarter GDP (seasonally adjusted) at 7:00 GMT; expected +0.3% q/q, third quarter +0.7% q/q, +2.4% y/y (not seasonally adjusted).

United Kingdom

Monday: DCLG House Price Index for December at 9:30 GMT; November +9.5% y/y.

Tuesday: BRC Retail Sales (like for like) for January at 00:01 GMT; December +0.3% y/y. CPI for January at 9:30 GMT; December +0.6% m/m, +1.4% y/y. Core CPI for January at 9:30 GMT; December +1.4%.

Wednesday: RICS House Price Survey for January at 00:01 GMT; December -49.1. ILO Unemployment Rate for December at 9:30 GMT; February 5.3%. Average earnings including bonus for December at 9:30 GMT; November (three month moving average y/y) +4.0%. Bank of England Quarterly Inflation Report.

Japan

Wednesday: consumer confidence for January at 5:00 GMT; December 38.0.

Thursday: preliminary 4th quarter GDP at 23:50 GMT (prior day); 3rd quarter +0.6% q/q, +2.6% annualized. Revised industrial output for December at 23:50 GMT (prior day); preliminary +1.4%. China

Wednesday – Friday: money supply for January; December +16.72 ytd, y/y. New loans for January (yuan billion per month); December 48.5 billion, +3630.0 billion ytd.

Published on  Mon, Feb 11 2008, 14:31 GMT

Market Directions Sunday, February 3, 2008

Mon, Feb 4 2008, 15:27 GMT
by Joseph Trevisani

FX Solutions

Looking for Clues

• * The reluctant euro
  
• * Bad news is good news?
  
• * A trader’s disbelief

Once again what didn’t happen this week was more interesting than what did. Non Farm Payrolls was far weaker than expected, dipping into negative territory for the first time in four years. But despite this disappointment the dollar did not collapse. Against the euro it ended Friday in the middle of the weekly range and a figure higher than where it was before the Non Farm numbers were issued. At 8:15 am on Friday morning the euro was trading at 1.4890, at the release it rocketed to 1.4953. It then spent the rest of the session drifting down to close just below 1.4800.

What are we to make of this? The bad news absorbed by the usd over the past two weeks is considerable, a 75 basis point emergency cut in the Fed Funds rate, a further 50 basis point reduction at the scheduled FOMC meeting and expectations of another 50 point in March. Negative job creation, a barely 50 manufacturing ISM, weak retail sales, a swooning housing market and a hammered stock market. One might ask what else does the market need to see before it takes the euro higher? Or to ask the question another way, is there any statistic that will convince traders that, for one-- the Europeans will not shortly have a slowing economy of their own to contend with and two—the ECB will not soon begin lowering EMU rates. Yes, spokesman for the ECB have been adamant and on message -- inflation is our concern, inflation is the target, price stability is paramount, we will fulfill our mandate. But to judge from the trading levels of the euro there is deep skepticism in the currency markets for that program. Perhaps another factor is the still unresolved accounting of many European banks relating to the American sub prime credit problem. How many more losses are waiting to be unveiled? Certainly the massive Societe Generale trading loss did not help market psychology. Currency traders are not happy buying the euro. Will they soon begin to sell? When the market wants to go in a certain direction sooner or later it finds the necessary rationale and the appropriate trigger.

Central Banks

European Central Bank

There is no market expectation for a change in the ECB rate policy or its unofficial tightening bias at Thursday’s meeting. The refinance rate will remain at 4.00%, the tightening bias will emerge intact.

ECB council members have kept to the bank official position without variance. The latest was Nicholas Garganas Governor of the Bank of Greece who said in an interview with Bloomberg News, that he was “very concerned about the high inflation risk”, noting that core inflation was at 2.3% in December and a year earlier it had been 1.6%. “Our monetary policy is not led [by] what the markets expect. Our monetary policy depends on the assessment we make on the economic situation”.

The market expectation for an eventual ECB rate decrease is not just a wish. Traders and analysts are not simply talking their book knowing that lower rates are good for business or helpful to bank profits or for some other purely selfish remunerative reason. The market 'expectation’ for a lower ECB refinancing rate is an expression of its collective judgment on European monetary policy and on how the ECB will respond to a future economic situation that is deemed to be very likely. If the market’s judgment differs from that of the ECB and its public policy pronouncements, that does not negate its validity. The ECB has several reasons, not all of them economic, for retaining its public anti-inflation mandate. Remember that the US markets had priced in rate cuts long before they occurred and remember too the Fed statements in the weeks between the onset of the financial and sub prime crisis in August and its first rate cut in mid September. Or recall Chairman Bernanke’s very deliberate rhetoric for much of the subsequent time. It is only very recently that the Fed has publicly subordinated inflation to growth. Even so, the Fed has been accused of caving to market desires. The ECB has even more policy strictures because of its inflation mandate so it also has a grater need to preserve its independence and credibility.

Federal Reserve

The Fed Funds target rate has now been reduced by 2.25% since the August sub prime crisis blew up. At 3.0%, with core inflation over 2.0 % and headline inflation much higher real interest rates are just marginally positive. Monetary policy is clearly loose. In retrospect, it slipped out of neutral back in September, but the fact was disguised somewhat by the Fed’s anti inflation flourishes.

In the final analysis the Fed’s ‘expected’ 50 basis point cuts in both the Fed Funds and Discount rate on Wednesday seemed not quite so expected as both the Dow and the dollar sold off after the announcement. The Fed’s statement while it did drop the use of “appreciable” to describe downside risks to growth and added that “earlier actions should help to promote growth over time…”, is not a neutral pronouncement. The rate reduction bias is in place. No other interpretation is possible after the recent events and no Fed rhetoric in the coming weeks will alter that perception. The next FOMC meeting is March 18th and expectations will remain high for further rate cuts, no other future would be rational at this point.

Bank of England

There is little doubt that the Monetary Policy Committee (MPC) will cut rates by 0.25% on Thursday, and equally little doubt that they will mention their serious ongoing inflation concerns.

Mervyn King was reappointed to another five year term as Governor of the Bank of England (BOE) and Chairman of the Monetary Policy Committee. He is know as an inflation hawk and has repeatedly voiced the opinion that rate cuts are not a foregone conclusion. David Blanchflower, the most outspoken dove on the MPC said that the bank should cut rates “to get ahead of the curve”. It appears Mr. Blanchflower will get his way.

The Week in Review January 28 – February 1

United States

The economic news was not nearly as bad as it seemed in the shadow of the Non Farm Payrolls.

Manufacturing ISM at 50.7 was well over expectations and when joined with the strong Durable Goods number of +5.2%, the economy still appears to be growing heading into 2008. The negative NFP result for January will probably be revised into positive territory next month, as was last Augusts’ -4,000 reading. The weekly jobless claims over the next few weeks will clarify whether the employment picture is really weakening to recessionary levels. The current four week average is well below recessionary totals, but the most recent week added 69,000 to 375,000 and that is considered to be on the threshold of recession if sustained. There is one interesting note from the January survey. Purchasing mangers were asked if the turmoil in the financial markets was affecting their firm’s ability to obtain financing, 92.6 said no there was no appreciable effect. In the echo chamber of Wall Street, the financial markets and the media a credit disaster is much feared and discussed but, at least so far, there is nothing to indicate that the economy on as a whole is suffering a credit shortage.

Eurozone

The M3 money supply, one of the ECB’s main inflation indicators, moderated to 11.5% in December, its first reading below 12.0% in three months. Economic sentiment and business climate indicators were much lower than forecasts but inflation was higher, unemployment steady and manufacturing PMI rose. There is nothing in these statistics to precipitate a reconsideration by the ECB of its rate policy. The economic situation will have to become a good deal more gloomy for the ECB to lose its public nerve.

Yet the judgment of the currency markets seems to be that sooner or later the ECB will have to abandon its inflation concerns. Thus the reluctance to take the euro through its old high against the dollar and the continuing skittishness in the yen crosses.

Germany

IG Metall the large German metalworkers union currently in negotiation with German industry has said that its members will strike by mid February if there is no settlement. The union is asking for an 8% wage increase on a twelve month contract for workers in Eastern and Western Germany. Oliver Hobel, the chief union negotiator disregarded ECB warning of a wage-price spiral if the union won it demands, “ I believe that one of the problems of the current economic situation is rather that the share of wages on the overall economic development has declined”.

Finance Minister Peer Steinbrueck said that the expected the financial distress from the US subprime crisis would damage European economies. “The hope that the turbulences will be restricted to the financial market sphere will sadly not be fulfilled”, said Mr. Steinbrueck in a speech at the Frankfurt Stock Exchange on Monday. “One has to assume a marked weakening of growth [in the US]. In Europe and Germany we will also feel it in the real economy”.

Economic Releases January 28 – February 1

United States

Monday: New Home sales continued to drop away, sliding 4.7% in December to 604,000. The November total was revised down as well to 634,000 from 647,000, or 2.01%. Sales are at their lowest level since 1995 and the number of months supply on the market rose to 9.6 from 9.3. That is the highest total this cycle and since 1981. Sales are now down 56% from their July 2005 peak and down 40.7% from December 2006. The median home price dropped 10.4% year on year in December, and though this measure is considered an imperfect measure of selling prices it is the largest decline in this statistic in 37 years.

Tuesday: Durable Goods Orders in December were much stronger than expected at +5.2%, on a median prediction of +1.5% and November’s result was revised up to +0.5% from +0.1%. The ex-transportation number was +2.6%, November had seen a fall of 0.7%. The ex-defense number was +2.9%, November had been +1.2%. The commercial aircraft Boeing obtained 287 new orders in the month, 110 more than in November. The Case-Shiller 20 City comparative Home Price Index dropped 2.1% in November to 188.82. Conference Board Consumer Confidence was a bit higher in January than predicted 87.9 versus 87.0; December was 90.6.

Wednesday: Federal Reserve cuts the Fed Funds rate by 50 basis point to 3.0% and the Discount rate by 50 points to 3.5%. The first release of fourth quarter GDP confirmed a hard slowing of the US economy to which expanded only +0.6%, this was half the median forecast of +1.2%. Third quarter was +4.9%. The GDP number will be revised twice more.

Thursday: Personal Income rose 0.5% in December ahead of the +0.3% forecast and better than the 0.4% gain in November. It was a solid addition for this statistic which underpins consumer spending. Personal Expenditures added 0.2% in December as predicted but a far cry from the 1.1% gain in November. Weekly jobless claims shot up 69,000 to 375,000, an addition of 19,000 to 320,000 had been forecast. The weekly claims numbers are subject to wide seasonal and periodic variation so it is impossible to draw any conclusions from a one week spike. Last year the initial claims number gained 41,000 in the same week. The number of claims had been trending down over the prior weeks. The total number is now at the top of the range of the 350,000 – 375,000 range that has been recorded for several months before every recession since 1980. However, the four week moving average is still 326,000 a level consistent with moderate job creation and below recessionary signals. Chicago Purchasers Index dropped to 51.5 in January from December’s 56.4; ‘prices paid’ rose to 81.7 from 67.4 and ‘new orders’ sank to 44.7 from 56.7. It was the worst of all possible worlds with slowing overall activity and new orders coupled with rising prices.

Friday: The expected decline in January’s ISM Survey did not materialize. The 50.7 reading was well above the median forecast of 47.2, above the revised December number of 48.4 (up from 47.7), and over the 50 demarcation between contraction and expansion. The ‘employment index’ was 47.1, and the December statistic was revised higher to 48.7 from 48.0. ‘New orders’ were 49.5 and December’s result was also revised up to 46.9 from 45.7. ‘Prices paid rose to 76.0 from 68.0. Non Farm payrolls at -17,000 was the first negative reading in four years since August 2003 and it shocked the market. But damage was somewhat ameliorated by the upward revision in December’s number to 82,000 from 18,000. However the November reading was demoted by 55,000 leaving a net gain of only 9,000 for the two months. The NFP numbers are revised twice, once in each of the subsequent months. When the initial statistic is so far from the average in a non random series the revisions will tend to bring the number closer to the average. A likely result for the January number will be an upward revision by 60,000 or so, much at December’s number was boosted 64,000 on adjustment. Net revisions to all of 2007 removed 191,000 from the job rolls. Construction jobs fell by 27,000, manufacturing by 28,000. Average Hourly earning rose by 0.2%, the smallest amount since last spring. The unemployment rate fell 0.1% to 4.9%. Construction spending sank 1.1% in December and November’s result dropped to -0.4% from +0.1% on revision. The final result University of Michigan Consumer Confidence number for January was 78.4, lower than the preliminary reading of 80.5; December was 75.5.

Eurozone

Monday: M3 money supply was 11.5% higher year on year in December. This is the first dip after two months at 12.3%, and is considerably less than the 12.1% that had been predicted. Loans to the private sector rose 11.1% in December and November’s figure was raised to 11.1% from 11.0%.

Thursday: the EMU Economic Sentiment Index dropped to its lowest level in two years in January at 101.7, 103.5 had been expected. The December result was revised to 103.4 from 104.7. All sectors fell led by consumer retails and services. The EMU Business Climate Indicator for January came in 0.78, below the revised December number of 0.89 itself down from 0.93. Flash HICP rose to 3.2% in January, over the 3.1% forecast and December’s result of the same. It was the highest reading since the monetary union began. For an ECB already on alert for secondary inflation effects there is no ease in this number. The union wide unemployment rate was stable at 7.2% in December as predicted. Though this is the lowest unemployment level since 1993 when record keeping began, it contrasts with an American rate of 4.9%% and 3.8% in Japan.

Friday: the final January manufacturing PMI result was 52.8, 0.2 higher than the preliminary result and matching the November reading.

Germany

Wednesday: wholesale sales lost 1.0% in December from November and were part of the generally disappointing holiday season for consumer goods. The November result was revised to -1.4% from -1.7% and the October to +2.2% from +2.1%.

Thursday: retail sales from the Federal Statistical Office (FSO) declined 0.1% in December on a seasonally adjusted basis, a gain of 1.7% had been hoped for. It was the third month in a row with very weak retail sales numbers. The year over year reading dropped 6.9% on an unadjusted basis, a drop of 5.1% had been predicted. Retails sales year to year fell in 10 of the 12 months of 2007. Flash (1st issue) of the Harmonized Index of Consumer Prices (HICP) lost 0.3% in January a yearly rate of +3.0%. The decline was less than the -0.5%, +2.8% predicted.. In December the changes were +0.7% and +3.1%. The ‘flash’ CPI also lost 0.3% in January for a +2.7% yearly rate, -0.4% and +2.6% had been forecast. In December the returns were +0.5% and +2.8%.

United Kingdom

Monday: the Hometrack House Price Survey fell 0.3% in January, limiting the year on year rise to 2.3%. It is the fourth consecutive monthly fall and the weakest reading since may 2006.

Tuesday: the Confederation of British Industry (CBI) distributive Trades Survey for January (reported volume of sales) registered 4% as expected, less than the 8% reading in December, indicating no recovery from that month’s sluggish holiday business. Land Registry House Prices fell 0.4% in January, leaving the elapsed year at +6.7%. In December they added 0.6%, yearly at +8.1%.

Wednesday: mortgage approvals in December sank to 73,000 their lowest number since the series began. November approvals had been 81,000.

Thursday: Nationwide House Prices fell 0.1% in January pushing the year on year gain down to 4.2%. It was the smallest yearly increase since 2005. A fall of 0.3% and a yearly rate of 4.1% had been forecast. GfK Consumer Confidence edged up to -13 in January from December’s -14.

Friday: the manufacturing Purchasing Mangers Index (PMI) for January was adjusted down to 50.6 from 52.4.

Japan

Tuesday: Retail Sales gained 0.2% in December over last year, substantially less than the 1.6% rise in November. For all of 2007 sales were off 0.1% from 2006. It was the first drop in overall volume in five years. In 2006 sales rose 0.1%. Real Household Spending added 2.2% year to year in December much better than the forecast 0.2% decrease and the November reading of -0.6%. The December unemployment rate was unchanged at 3.8% from November. It has now fallen for the fifth year in a row. For all of 2007 the average was 3.9%, for 2006 it was 4.1%.

Wednesday: Industrial Production in December rose 2/3 of expectations, +1.4% against +2.1% but was much improved over November’s 1.6% decline.

Thursday: housing starts were 19.2% lower year to year in December; in November they had lost 27.0% Construction orders gained 4.7% year to year in December; in November they had lost 3.8%.

The Week Ahead February 4 – February 8

United States

Tuesday : ISM Non Manufacturing Index for January at 10:00 ET; expected 53.0, December 54.4.

Wednesday: preliminary Non Farm Productivity for 4th quarter at 8:30 ET; expected +0.1%; 3rd quarter +6.3%. Preliminary Unit Labor Costs for 4th quarter at 8:30 ET; expected +3.7%, 3rd quarter -2.0%.

Thursday: jobless claims for the week of February 2nd at 8:30 Et; expected 340,000, prior week +69,000 to 375,000. NAR Pending Home Sales for December at 10:00 ET; November 87.6

Eurozone

Monday: industrial PPI for December at 10:00 GMT; expected +0.1%, m/m, +4.3% y/y, November +0.8% m/m, +4.1% y/y.

Tuesday: retail trade for December at 10:00 GMT; expected +0.2% m/m, -0.8% y/y, November -0.5% m/m, -1.4% y/y.

Thursday: ECB rate announcement, current rate 4.00%

Germany

Wednesday: total manufacturing orders for December at 11:00 GMT; expected -2.5% m/m, +9.9% y/y, November +3.4% m/m, + 13.6% y/y.

Thursday: trade balance (seasonally adjusted) for December at 7:00 GMT; expected +19.3 billion euro, November +19.8 billion euro. Industrial output for December at 11:00 GMT; expected +1.0% m/m, +4.2% y/y, November -0.9% m/m, 3.5% y/y.

United Kingdom

Monday: CIPS Construction PMI for January at 9:30 GMT; December 56.0.

Tuesday: CIPS Services PMI for January at 9:30 GMT; expected 52.0, December 52.4.

Wednesday: Nationwide Consumer Confidence for January at 00:01 GMT; December 85.

Thursday: manufacturing output for December at 9:30 GMT; expected +0.1% m/m, +0.3% y/y, November -0.1% m/m, +0.1% y/y. Industrial production for December at 9:30 GMT; expected +0.2%m/m, +1.0% y/y, November -0.1% m/m, +0.4% y/y. BOE rate announcement, current rate 5.50%.

Japan

Wednesday: preliminary leading index for December at 5:00 GMT; November 18.2. coincident index fro December at 5:00 GMT; November 30.0.

Friday: machinery orders for December at 23:50 GMT (prior day); November -2.8%.

Published on  Mon, Feb 4 2008, 15:27 GMT

Market Directions Sunday, January 27, 2008

Mon, Jan 28 2008, 06:09 GMT
by Joseph Trevisani

FX Solutions

Sound and Fury

• A trader’s week to remember

• The choices of the ECB

• The mainland dilemma

Considering the size and scope of the week’s events, calamitous equity falls worldwide on Monday, what appeared to be an imminent American plummet on Tuesday, a massive Federal Reserve rate cut and continued intransigence from the European Central Bank (ECB), perhaps the most remarkable development was the relatively small effect all this sound and fury had on the dollar. On Tuesday the euro closed at 1.4627 and on Friday it finished at 1.4670. The Tuesday close did disguise the volatility of a more than three figure move trough to peak on the day. But the most telling fact for the future direction of the euro (and the dollar) was the united currency’s close for the week more than a figure below its peak against the dollar.

Another 50 basis point cut in the US Fed Funds rate is coming at Thursday’s FOMC meeting and it is fully priced into the market. The ECB has made it abundantly clear that it will not be cutting rates in response to equity market turmoil. Jean Claude Trichet, the President, Alex Weber, governing board member and head of the German Bundesbank, and Jurgen Stark another board member took turns diminishing market expectations for an ECB rate reduction. As Mr. Weber said in the most succinct comment such expectations were “wishful thinking”.

Tuesday’s surprise did not deviate from the projected overall US rate scenario, it only altered the timing. 125 basis points in total reductions and a 3.00% Fed Funds rate by the end of the first quarter has been priced into the dollar for several weeks, at least since the December Retail Sales results were released. An ECB rate ease, or even a move to a neutral bias has not been priced. The beginning of such an adjustment to an ECB policy change which had resulted in the euro move down to below 1.4400 was short circuited by Mr. Bernanke on Tuesday.

Equity markets, led by the New York exchanges have been falling since the turn of the year and as the decline became more panicky the dollar benefited. That economic logic has not changed measurably and in that logic is the hope for the Usd. The European central bankers have done their rhetorical best to deny what many traders believe—that the next ECB rate move will be a cut. If the markets truly expected a widening of the US-EMU rate divide beyond what is already priced in, then 1.5000 should be in the rearview mirror; it is not. In the background is the belief, already expressed so dramatically by the equity markets world wide, that a US slowdown will affect the entire globe, and the ECB will sooner or later have to reduce rates.

European and Asian investors seem to be just waking up to the perils of the worldwide financial market. If US bond insurers fail portfolios globally will have to be rewritten. If European banks have been less than aggressive in writing down sub prime debt that does not obviate the final accounting and the ECB’s stalwart inflation stance will not then prevent recession.

Central Banks

European Central Bank

It was the same old story from the ECB this week, inflation, inflation, inflation; or was it? On Tuesday, amid historic equity volatility, Jurgen Stark, governing board member said the crisis in the financial markets should not be overemphasized, “We should not dramatize the situation”. Is the Fed just histrionic? After all, European and Asian bourses have been as hard hit as America’s. The equities markets are speaking with one voice, decoupling is a mirage and the ripples from a US slowdown will effect economies worldwide. A US recession, assuming it gets that far, will seriously damaging economic growth around the globe. That is the inescapable message from the world’s stock traders. All bourses have suffered severe losses in the past several weeks, not one has been spared.

Jean Claude Trichet the ECB president, speaking before the EU parliament, acknowledged the risks to European economic growth. But still, he said, the bank was not ready to change its anti-inflation policy. There is no sign, no hint from the public spokesmen for the ECB that a rate cut is being prepared or even considered. “In demanding times of significant market correction and turbulence, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility in already highly volatile markets”. “We have a baseline scenario and at this stage I’m not going to modify this…”. “I would say that the risks [to economic growth] are on the downside”, stated Mr. Trichet.

There is however another more benign scenario. ECB spokesman have made it patent that their corporate concern is the ‘secondary effects of inflationary expectations’ meaning a wage price spiral where rising prices, and more importantly the anticipation of future price increases, push workers and unions to demand ever higher wages. Since union contracts tend to be multi year, when such expectations are written into a contract they imbed inflationary expectations into the economy. That is precisely what the ECB is seeking to avoid.

By both stressing the need to solidly anchor inflation expectation, that is to prevent European workers from developing inflationary expectations and by emphasizing the transitory nature of the current inflationary pressures, the ECB is speaking directly to Europe’s unionized labor force. “I am not happy with current inflation of more than 3.0% but it is probably temporary”, said Mr. Stark. Translation -- we are determined to prevent inflation, the present spike above 3.0% will pass, there is no need to seek large multi year wage increases. Is there an unspoken addendum that when the ‘temporary inflation’ subsides, the ECB will attend to economic growth?

Federal Reserve

A whiff of panic clung to Tuesday’s surprise 75 basis point cut in the Fed Funds and in the Discount Rate. But by the end of trading on Wednesday the Fed governors had the result they desired, the relentless selling that had gripped the equity markets was over. On Tuesday the Dow managed to erase most of an early 400 point decline finishing off only a little more than 100 points. Wednesday evinced an even more powerful reaction, with the NYSE ending the day up 298 points, almost doubling the opening 300 point decline. Yet the economic outlook had not changed from one day to the next, nor had the Fed added to the total anticipated rate reductions.

The Fed statement explaining the surprise move stressed “ weakening economic outlook and increasing downside risks to growth”, that “broader financial market conditions have continued to deteriorate and credit has tightened for some businesses and households”, and that a “deepening of the housing contraction” exists, and “appreciable downside risks to growth remain”. But the overriding motivation of the Fed governors was to break the panicky psychology of the equities markets and in that they were successful

Bank of England

The Monetary Policy Committee of the Bank of England (BOE) voted 8 to 1 to leave rates unchanged at 5.5% at the January meeting. The chance for another cut at the February 7th meeting of the Monetary Policy Committee is now rated even.

Canada

The Bank of Canada cut the overnight rate 25 basis point to 4.0% on Tuesday in step with the US Federal Reserve. It is likely that there will be two more cuts of 25 points each in February and March. “Financial market conditions have deteriorated since October. The outlook for the US economy is now significantly weaker”. “For Canada the effects of the weaker US economic outlook will lead to additional downward pressure on export growth” said the accompanying statement.

China

The slow revaluation of the yuan is proceeding, it has gained 2 % against the dollar since early December and is worth 6.93% more than it was a year ago. But for Chinese economic planners striving to rein inflation and curb excessive economic growth a stronger yuan is a two edged sword. A rapid appreciation of the yuan could inflict much damage on Chinese exports and industry. A dearer yuan makes foreign goods more expensive, which helps combat inflation but it also draws capital into the country, fueling both economic growth, and inflation. CPI was at 6.9% in November an eleven year high. If the American economic slowdown spreads and if the US enters recession the Chinese economy will not be unscathed. “If the US consumption weakens our country’s exports will be very much affected”, said Zhang Tao, head of the People’s Bank of China (PBOC) International Department quoted by Market New International. The Fed rate cuts have already made it much harder for the PBOC to raise interest rates as investors seek the higher returns in China coupled with the potential for yuan revaluation.

Japan

The Bank of Japan left rates unchanged at 0.5%, to universal expectation and universal disinterest. There is no expectation for a rate increase in the near future and little chance that a rate cut would have any economic effect should the Japanese economy start to recede. The vote of the policy committee was unanimous.

The Week in Review January 21 – January 25

United States

The week was dominated by the equity markets and the policy responses of the world’s central bankers. The ECB declined to join the Fed and its governors and president went out of their way to squash speculation that they would soon shift policy to accommodation. The US economy was largely undocumented for five days, with no important statistics released. Only weekly jobless claims, which at 301,000, were well below levels associated with an actual or pending recession, seemed to belie the economic catastrophe predicted by the stock market. But as the equity panic subsided, the economic logic that had boosted the dollar revived somewhat. If the US is further along the curve to recession, but also to recovery having started first and responded first—with Fed rate cuts, then the dollar should in the long run benefit. Such was the logic behind the market reluctance to push the euro higher despite the week’s unusual events. The six month prospect for the dollar has not changed very much regardless of the fireworks.

Eurozone

The ECB and has made it quite clear that it will not be reducing rates in response to current market or economic conditions. It would likely take a drop in GDP growth to below 1% annually to shake the governors from their anti-inflation stance. But it is also evident, despite rhetoric to the contrary, that the bank will not be raising rates. If the US slowdown materializes and then travels to Europe, the ECB governors will look like unimaginative ideologues. If the US does not does not slow or its effects do not cross the Atlantic then they will be steadfast protectors of the public good. But either way they have taken their stance.

Japan

Only in Japan might a 0.8% monthly rise in CPI be a cause for quiet relief. This underscores the difference between Japan and the rest of the industrialized world. Japan has flirted with price deflation, a phenomenon not seen in the west since the depression, for much of the last 15 years. Plagued by an aging and falling population, the government’s attempt to re-inflate the economy and boost domestic spending have been only marginally successful.

Economic Releases January 21 - January 25

United States

Thursday: weekly unemployment claims fell 1,000 in the January 19th week to 301,000 the lowest total since September 22nd of last year. Median prediction had been for a rise of 20,000 to 321,000. Initial claims often drop in January following layoffs at the end of the Christmas season in late December. But 400,000 or more, is usually associated with the beginning of a recession. Existing Home Sales slipped 2.2% in December to 4.89 million a bit below the median prediction of 4.95 million. In the first nine months of 2007 existing home sales, homes that are normally occupied by their owners, fell an average of 3.76% per month. During October, November and December the pace of decline slowed to an average of 0.97% per month. The median home price in December was $208,400, six percent lower than December 2006.

Eurozone

Wednesday: industrial new orders were almost twice as active in November as predicted gaining 2.7% on a +1.4% forecast. October’s figure was unrevised at +2.5%. The flash (1st issue) composite Purchasing Managers Index (PMI) for January registered the lowest since June 2005 at 52.7, December had been 53.3. Services PMI fell to 52.0 from 53.1, a 53 month low; manufacturing PMI was unchanged at 52.6.

Germany

Thursday: the IFO Index of businesses posted a surprising rise in January with the headline ‘business sentiment’ moving up to 103.4 on expectations of 102.2 and a December reading of 103.0. ‘Business expectations’ gained also to 99.00 on predictions for a fall to 97.3 from December’s 98.2. Only the ‘current assessment’ component was lower in December at 107.9, as opposed to December’s 108.1, though it was ahead of the 107.1 prediction. “On the whole the condition of firms in German industry and trade continues to be robust”, said IFO president Hans-Werner Sinn in a prepared statement.

Friday: GfK consumer confidence was stable in February at 4.5, the same as in January and 0.1 higher than December.

United Kingdom

Monday: Rightmove House Prices complied by the British real estate web site sank 0.8% in January, leaving them 3.4% higher on the elapsed year.

Wednesday: preliminary fourth quarter GDP rose 0.6%, 2.9% year to year. This was 0.1% less than the growth in the third quarter, stronger than the 0.5% expected but below the most recent BOE estimate of 3.2%.

Japan:

Friday: national core CPI in December rose 0.8% year to year in December, led by gasoline and heating oil prices. A gain of 0.6% had been predicted. In November the index rose 0.4%. Central Tokyo CPI, often take a proxy for the national tendency, moved 0.4% higher in January after a 0.3% rise in December. In all of 2007 this index rose 0.1%, the same as in 2006.

Australia:

Q4 core inflation rose to a 16 year high at 3.6%, well over the Reserve Bank target band of 2-3%, and keeping anticipation rife that the Reserve Bank of Australia will hike rates in February despite the 20% fall in the All Ordinaries Stock Index.

The Week Ahead January 28 - February 1

United States

Monday: New Home Sales for December at 10:00 ET; expected 648,000, November 647,000

Tuesday: Durable Goods Orders for December at 8:30 ET; expected +1.5%, November +0.1%. Case/Shiller House Price index for November at 9:00 ET; October -6.1%. Conference Board Consumer Confidence for January at 10:00 ET; expected 87.0, December 88.6.

Wednesday: ADP National Employment Report for January at 8:15 ET; December +40,000. 4th quarter 2007 GDP (advance, 1st issue) at 8:30 ET; expected +1.2%, 3rd quarter +4.9%. FOMC policy announcement at 2:15 ET; expected 50 basis point reduction in Fed Funds rate.

Thursday: Personal Income for December at 8:30 ET; expected +0.3%, November +0.4%. Personal Expenditures for December at 8:30 ET; expected +0.2%, November +1.1%. PCE Core Price Index for December at 8:30 ET; expected +0.2%, November +0.2%.

Friday: Non-Farm Payrolls for January at 8:30 ET; expected 50,000, December 18,000. Unemployment Rate for January at 8:30 ET; expected 4.9%, December 5.0%. ISM Index for January at 10:00 Et; expected 47.2, December 47.7. University of Michigan Consumer Sentiment for January at 10:00 ET; expected 79.0.

Eurozone

Monday: Money Supply (M3) for December at 9:00 GMT; expected 12.1% y/y,

November 12.3%. Money Supply (M3) 3 month moving average at 9:00 GMT; expected 12.2%, November 11.9%. Loans to private sector for December at 9:00 GMT; November 11.0% y/y.

Thursday: flash HICP for January at 10:00 GMT; expected 3.1%, November 3.1%. EMU Economic Sentiment Index for January at 10:00 GMT; expected 104.0, December 104.7. EMU Industry Confidence for January at 1000 GMT; expected +1, December +2. EMU Consumer Confidence for January at 10:00 GMT; expected -10, December -9. Unemployment rate for December at 10:00 GMT; expected 7.1%, November 7.2%.

Friday: Manufacturing PMI for January at 9:00 GMT; expected 52.6, December 52.6.

Germany

Thursday: Total Retails Sales for December (release time undetermined); November -1.5% m/m, -5.6% y/y. Unemployment rate for January at 8:55 GMT; expected 8.3%, December 8.4%. Preliminary CPI for January (release time undetermined) expected -0.4% m/m, +2.6% y/y, December +0.5% m/m, +2.8% y/y. Preliminary HICP for January (release time undetermined) ; expected -0.5% m/m, +2.8% y/y, December +0.7% m/m, +3.1% y/y.

United Kingdom

Monday: Hometrack House Price Survey for January at 00:01 GMT; December -0.3% m/m, +3.0% y/y.

Tuesday: Land Registry House Prices for January at 11:00 GMT; December +0.6% m/m, +8.1% y/y. CBI Distributed Trades Survey reported volume of sales) for January at 11:00 GMT; expected 4, December 8.

Thursday: Nationwide House Prices for January at 7:00 GMT; expected -0.3% m/m, +4.1% y/y, December -0.5% m/m, +4.8% y/y. GfK Consumer Confidence for January at 10:30 GMT; expected -14, December -14.

Friday: CIPS Manufacturing CPI for January at 9:30 GMT; expected 52.5, December 52.9.

Japan

Tuesday: Unemployment Rate for December at 23:50 GMT (prior day); November 3.8%. Household Spending for December at 23:50 GMT (prior day); November -0.6%. Retail Sales for December at 23:50 GMT (prior day); November +1.6% y/y.

Thursday : Housing Starts for December at 5:00 GMT; November -27% y/y. Construction Orders for December at 5:00 GMT; November -3.8%. y/y.

Joseph Trevisani

FX Solutions

Chief Market Analyst

Joe@fxsol.com

Published on  Mon, Jan 28 2008, 06:09 GMT

Market Directions Sunday, January 20, 2008

Mon, Jan 21 2008, 06:28 GMT
by Joseph Trevisani

FX Solutions

The Stoics of the ECB

• The ECB tests the waters?

• The return (yet again) of risk aversion

• US worries grow

The currency market sensitivity to global economic risk was graphically demonstrated by the reaction to comments by Yves Mersch, European Central Bank (ECB) board member and head of the Central Bank of Luxembourg. He was quoted on Wednesday saying that risks to economic growth in Europe have increased, that the ECB can “look through” the temporary inflation jump, that the ECB should be cautious given the economic uncertainty and that there are factors that mitigate inflation risks.

From the market response you would think no one from the ECB had ever voiced such opinions before. In fact Jean Claude Trichet, the bank president, referred to an “inflation bump” several weeks ago to no discernable interest. But Wednesday was a different day and traders took Mr. Mersch’s comments to heart sending the yen crosses and euro cascading down through a series of stop runs that lasted more than an hour. The euro, the euro/yen and the gbp/yen each lost more than two figures before recovering. This was in marked contrast to the market reaction to the strongly anti inflation remarks of Jurgen Stark and Alex Weber, also ECB board members, earlier, which had spurred little if any movement to the upside in the euro or the yen crosses. Mr. Weber had said that the bank will “counter resolutely” inflation expectations consolidating above the 2.0% target.

The difference between the two market responses is the perceived state of the US economy and the probable effect of its slowing on the rest of the world. When Mr. Trichet made his comment a US slowdown was feared but not supported in statistics. We have since had a dismal Non Farm Payrolls and negative December Retail Sales. The US slowdown looks much more real than it did in December. And Mr. Mersch seemed to verify what many traders now suspect, if the US economy heads south, the Europeans will soon follow. But what really exercised traders’ interest, and why the relatively unknown Mr. Mersch touched off such a slide is the notion that the ECB board may be coming around to the same opinion and that Mr. Mersch was giving its first airing.

When the market hears something that confirms its view it acts and when it hears something that contradicts its opinion it often ignores the information. Until recently traders had punished the dollar for weak US statistics. American figures were very poor this week, much worse than expected and the dollar closed Friday on its high against the euro, more than 300 points below its immediate post Retails Sales peak on Tuesday.

What drove the market lower was stop loss selling in the euro and the yen crosses. But what are stops but market judgment on risk? The risk now lies to the downside for these currencies and conversely on the upside for the US dollar. It is not of great importance that the change in risk perception is generated by an increasingly negative outlook for European growth and the consequently increased chance for an ECB rate cut rather than positive news from the US economy. What is important is that a European slowdown and a potential ECB reduction, and even a possible global slowdown, are not priced into the current euro/usd levels and certainly are not part of the yen crosses. All three eventualities, a European slowdown, an ECB rate cut and more negative US news are more likely than they were two weeks ago. The first two are barely priced. Adjustment to the new reality in the euro and the yen crosses has just begun..

The Week in Review January 14– 18

United States

Headline PPI and CPI were well over expectations but the core numbers were only a bit excessive. Even if Ben Bernanke the Federal Reserve Chairman had not made it clear that growth and the financial markets are its main concern these numbers, particularly the core figure would not elicit rate hike fears.

The Federal Reserve survey of economic condition in the twelve Federal Reserve districts, the ‘Beige Book’, so called for the color of its cover, prepared for the January 29-30 FOMC meeting, showed a further moderating of economic conditions from the prior edition. Seven of the Federal Reserve districts mentioned “a slight increase in activity”, two reported “mixed conditions” and three said “activity… was slowing”. Retail spending was subdued in most areas. Positive observers can take solace that the report still shows expansion and a level of activity higher than one might expect during or leading up to a recession. Pessimists can note the sustained downward trend in activity. Optimists can see the continued expansion, however slight, despite tremendous negative pressure from the housing slump and the credit market meltdown. The survey summarized reports from mid November to January 7th.

Eurozone

In the early part of the week one could view the euro as either strong or weak. Strong because it held up despite the poorest German ZEW survey in 15 years or weak because it fell despite the very poor US retail sales number. The ECB was uncharacteristically uncoordinated with various board members giving contradictory opinions about the immediate EMU future. But in the end traders made up their own minds and sent the euro substantively lower.

China

The Peoples bank of China (PBOC) raised the reserve requirement, the level of deposits that lenders need to keep at the central bank, by 50 basis points. It was the first increase this year. For most commercial banks the requirement is now 15%. “The adjustment is aimed at further tightening monetary policy, continuing to enhance banking system liquidity management and curbing the fast growth of money supply and credit”, said the accompanying PBOC statement.

Economic Releases January 14 - 18

United States

Tuesday: the producer price index (PPI) shed 0.1% in December but was up 6.3% year on year, the largest rise since 1981. A flat result had been predicted for December. The primary culprit in the yearly rate was the 3.2% gain in last month’s PPI. The core rate (without food and energy prices) was 0.2% higher on expectations for a 0.1% addition; November had been +0.4%. The December yearly rate was 2.0%. Retail Sales for December at -0.4% were a major disappointment, the sharpest decline since June of last year (-0.8%) and lower than the flat expectation. For 2007 sales were up 4.2%, which is the softest since 2002 when they rose only 2.4%. In 2006 retail sales were up 5.9%. Excluding purchases of food and automobiles, retail sales still fell 0.4% on expectations for a flat November result. Both prior months were revised lower, November to +1.0% from +1.2% (ex auto to +1.7% from +1.8%) and October to 0.0% from +0.2% (ex auto to +0.2% from +0.4%).

Wednesday: CPI rose 0.3% in December. The 4.1% annual rate was the fastest since 1990. Core CPI, without food and energy prices, gained 0.2%, +2.4% for the year. Both numbers were as anticipated. It is not expected that the core number, though over the 2.0% Fed guideline, will block a rate cut at the next FOMC meeting at month end. The National Association of Home Builders (NAHB) Housing Market Index was 19 in December up one from November’s downwardly revised result of 18. This index has been in a two point range since September of last year, indicating that executives of residential construction companies have not improved their outlook but they haven’t worsened their view either. The Treasury International Capital System (TICS) report for November showed a strong interest in US investment from overseas. Net long term securities purchased by foreigners were $90.9 billion, the breakdown being-- private purchases $58.6 billion, purchases from official sources $11.8 billion and US resident sales of foreign securities $20.6 billion. Net inflow of $149.9 billion was broken out into $79.7 in new long term securities, $36.5 billion in short term and $33.7 in bank net dollar denominated liabilities. The August and September 2007 numbers (August -$70.5 billion, September $15.4 billion) which caused so much hand wringing among commentators and economists that the weak US dollar was causing foreigners to abandon the States as an investment destination seems to have been debunked. Temporary portfolio adjustment and capitulation brought on by the explosion of the sub prime and credit crisis is the most likely reason for the outflow in August and the weak September investment as foreign owners of us securities sold holdings to answer capital requirement and other financial exigencies. Industrial production was flat in December, slightly better than the -0.1% predicted; November had risen 0.3%. Manufacturing production was flat as well for the month. Capacity Utilization fell to 81.4 in December, November had been 81.6. .

Thursday: housing starts crashed 14.2% in December to 1.006 million, falling in all regions of the country. Building permits sank 8.1% 1.068 million, dropping in all regions except the Northeast where they rose 1.6%. Housing starts normally fall in December as the industry pares back for the winter but these numbers are far above seasonal adjustment and seem to predict another acceleration of the decline in housing. In 2007 housing starts fell 24.8%; in 2006 they slid 12.9%.

Initial jobless claims were down 21,000 in the week of January 12 to 301,000, the lowest level since September 12th 2007, when they were 300,000. A rise of 18,000 to 340,000 had been forecast. Continuing claims rose 66,000 to 2.751 million in the January 5th week. The four week moving average was 2.726 the highest since November 2005.

Friday: University of Michigan Consumer Sentiment (preliminary) number for January was unexpectedly higher at 80.5; December had been 75.5.

Eurozone

Monday: industrial production in November fell 0.5%, slightly better than the forecast of -0.8%, the yearly number was +2.7%, 0.1% below the forecast. The October figure was revised 0.1% higher to +0.5%. Consumer durable production slid 1.9%, capital goods dropped 0.7%. The November decline erased the October gain leaving the two month results from October and November just above the 3rd quarter average. DCLG House Price Index rose 9.5% year on year in November and improvement over October’s 11.3% rise. Producer Prices in December jumped 0.5%, +5.0% for the year; +0. 3% and +4.5% were the estimates. Prices remain at 16 year high, led by food and fuel costs. The rise in November had been +0.5% and +4.5%.

Wednesday: the final HICP for December was unchanged from the preliminary, +0.4% for the month and +3.1% for the year. The annual result was the same at November a 6 ½ year high.

Thursday: construction output declined 0.8% in November leaving the year over year rate at -0.8% as well. The yearly rate in October was revised to +2.8% from 2.4%; the monthly rate was unchanged.

Germany

Tuesday: the ZEW Survey of financial experts for January registered a 15 year low in its ‘economic expectations’ at -41.6, 40.00 had been predicted and December had been -37.5. The long term average is far away at +31.0. ‘Current conditions’ at 56.6 was also below expectation, 57.5 and December’s 63.5. It is the 7th consecutive month the survey has fallen. According to the survey the danger of recession in the United States is the largest risk for the German economy, along with the drag from the strong euro. ZEW researcher Matthias Koehler, interviewed on CNBC said, “At the moment it seems that the level of interest rates still are accommodative to economic growth in Europe but the ECB should be aware that further high interest rates rises could negatively impact economic growth in Germany and of course also in Europe

Wednesday: final HICP was unaltered from the preliminary (flash) for December at +0.7%, +3.1% for the year. CPI was also unchanged at +0.5% and +2.8%.

United Kingdom

Tuesday: CPI for December was +0.6%, +2.1% for the year, even with expectations of +0.5% and +2.1% but slightly ahead of November’s +0/3% monthly rate. Core CPI also rose 0.6% in December but the yearly rate was just +1.4%, as predicted. Though the main CPI rate was slightly over the BOE target of +2.0%, and food and fuel prices are set to rise further, these results do not foretell a change in monetary policy. As in the US, the BOE will probably err on the side of growth rather than inflation control.

Wednesday: RICS House Price Survey dropped to its lowest level since 1992 at -49.1, November had been -40.6. Unsold properties increased 7.1% in the month. The unemployment rate was steady in November at 5.3%. Average earnings (including bonus) gained 4.0% in November, the same rise as in October; the consensus estimate had been +3.9%.

Wednesday: November machinery orders fell 2.8%, a far cry from October’s 12.7% increase.

The Week Ahead January 21 - 25

United States

Monday: Martin Luther King holiday, markets closed.

Thursday: Jobless Claims for the week of January 19th; ?????. Existing Home Sales for December from the National Association of Realtors at 10:00 ET; November 5.00 million units.

Eurozone

Wednesday: industrial new orders for November at 10:00 GMT; October 2.5% m/m, 10.9% y/y.

Friday: flash (1st issue) manufacturing PMI for January at 9:00 GMT; December 52.6. Flash services PMI for January at 9:00 GMT; December 53.2.

Germany

Monday: PPI for December at 7:00 GMT; November +0.8% m/m, +2.5% y/y.

Thursday: IFO Survey for January at 9:00 GMT; December ‘business sentiment’ 103.0, ‘current assessment’ 108.1, ‘business expectations’ 98.2.

Friday: GfK consumer confidence for February at 7:00 GMT; January 4.5.

United Kingdom

Monday: Rightmove House Prices for January at 00:01 GMT; December -3.2% m/m, +4.8% y/y.

Tuesday: CBI Industrial Trends Survey for January at 11:00 GMT; December monthly orders balance 2, Q1 business optimism 5.

Wednesday: BOE minutes for January 9th and 10th meeting; 9-0 vote for unchanged rates. First estimate for Q4 GDP at 9:30 GMT; Q3 +0.8% q/q, +3.3% y/y.

Friday: Hometrack House Price Survey for January at 00:01 GMT; December -0.3% m/m, +3.0% y/y. Nationwide House Prices for January at 7:00 GMT; December -0.5% m/m, +4.8% y/y.

Joseph Trevisani

FX Solutions

Chief Market Analyst

Joe@fxsol.com

Published on  Mon, Jan 21 2008, 06:28 GMT

Market Directions Monday January 14, 2008

Tue, Jan 15 2008, 10:14 GMT
by Joseph Trevisani

FX Solutions

The Winds of Change

• * Equity fears
  
• * Central Bank prescriptions
• * The ‘decoupled’ world economy?

The question for the currency markets is what degree of American economic weakness is priced into the current dollar level. It is not a question that can yet be conclusively answered. But it will, over the next two weeks be demonstrated, as figures for December on US Retails Sales, Durable Goods, and inflation (CPI and PPI) are issued and the market responds.

US statistics have not yet confirmed the considerable worry over a consumer led recession that has infected the equities market. If there is one thing holding up--a relative term—the dollar it is the fear that where the US economy leads the rest of the world is sure to follow. Some amount of US economic pullback has been the operating assumption since the sub-prime financial mess blew up this past August. If the US falls to recession the restraint on the euro this week argues that a sympathetic slowdown in the rest of the world is very much on the minds of currency traders.

All of the world’s major central banks agree on the economic diagnosis, but the prescriptions differ widely. Three major banks had their say this week, the European Central Bank (ECB) and the Bank of England (BOE) with their decisions to hold their current rate structure and the Federal Reserve with Chairman Ben Bernanke promising substantial action as needed. In the present economic context a 50 basis point cut at the end of the month if not sooner is now the default Fed position.

The world economic situation is in flux. The basic assumptions of the currency markets which have benefited the euro, the commodity currencies and the pound sterling for six months are under strain. They will not survive the prospective US slowdown or recession and it by no means assured that the dollar will not be the ultimate beneficiary.


Central Banks


ECB


According to Jean Claude Trichet the president of the European Central Bank, the board of governors debated a rate hike prior to their decision to leave rates unchanged at 4.00% Thursday. He made no mention of consideration of a rate cut. The omission was deliberate. If the bank’s decision was fully expected, so was the attendant anti inflation rhetoric. There is no reason to doubt the ECB governors’ concern about inflation.

In Germany the Verdi trade union is negotiating a wage package for more than 2 million workers and asking for an 8.0% increase. These are the second round effects the ECB has often mentioned. The ECB wants to reassure workers and consumers that it will keep a rein on inflation to help defray the pressure for large wage settlements. “I said on behalf of the governing council that we were prepared to act preemptively so that second round effects on upside risks to price stability would not materialize and consequently that inflation expectations would remain anchored”, said Mr. Trichet. He reaffirmed the tightening bias of the bank, “We certainly are not neutral it a good interpretation of what I said”. He also made a point of separating the problems in the money markets and the bank’s response to them, “the risks as far as we see them stemming from a numbers of factors including this [market] correction are on the downside”. “We are seeing signals that are…very mixed”. “Tensions in the interbank markets are probably unavoidable and probably a necessary correction” “We make totally the difference between what we have to decide to deliver price stability...to anchor solidly inflationary expectations, and then that being decided, we have to care for the money market behaving properly”. German workers particularly, but European employees in general, have not pressed for large wage hikes in the past few years, that may be about to change.

It is not necessary for the ECB to cite burgeoning economic worries. With the frequency and stridency of its anti- inflation rhetoric, and its constant waning that it can and might boost rates to ward off inflation, the simple fact that the bank has not raised interest rates, speaks volumes. Despite the rhetoric the ECB is not about to tighten credit any time soon.


Federal Reserve

The last two lines in Federal Reserve Chairman Ben Bernanke’s speech Thursday in Washington tell all one needs to know about Fed policy. “Financial and economic conditions can change quickly. Consequently the committee remains extremely alert and flexible, prepared to act in a decisive and timely manner and in particular to counter any adverse dynamics that might threaten economic or financial stability”. Does that mean a 50 bps cut on January 30th? One would have to say yes, particularly when that statement is combined with the earlier comment, “In light of recent changes in the outlook for and the risks to growth, additional policy easing may well be needed”. Those two statements are about as close as you can come to a promise from the Chairman. The Fed knows well that this speech will have cemented market expectations for at least a 0.5% rate reduction at month end. Would the chairman and the committee have excited that expectation and then not deliver. Very, very unlikely.


Bank of England

The English central bank left its base rate unchanged at 5.5% on Thursday. Sterling rose 60 points on the announcement but the move dissipated quickly. The second thought being that the MPC will surely cuts rates in February. The MPC did not issue a statement, as is their usual procedure. Several factors lay behind the MPC decision: economic deterioration though notable in some areas of the economy and of concern in others, particularly housing, has not been marked enough in the face of inflation pressures to force the banks hand. The quarterly inflation report is due February 13th and the bank governors often prefer to have the latest inflation data before acting. And finally, market pricing had the decision rated even and perhaps the board members did not want to risk alarming the market with a decision that would likely be interpreted as a danger sign for the economy.


The Week in Review January 11 – 14


United States

Statistics did not provide much guidance to the state of the American economy this week. Jobless claims fell when a rise had been expected and the running claims number is still short of levels usually reached in a recession. The trade deficit worsened and not only because of sky high oil prices but because exports barely rose at all. With the dollar close to record lows throughout the month such a small expansion in exported goods speaks directly to foreign demand. Falling consumer demand is the same worry besetting the US economy. The decoupling of the American and world economies is beginning to look fanciful.


Eurozone

European consumers made it quite clear that they are at best distant relations of their American cousins. November Retail sales fell as dramatically in the EMU as they rose unexpectedly on the western side of the Atlantic. The European consumer will not be prolonging the EMU expansion. This is not a positive sign for the decoupling theory that holds the EMU can continue to expand and avoid whatever economic ills may appear in the Americas.

Christine Legarde the French Finance Minister was perfectly clear in her assessment of the policy choices facing the ECB, “ If we have to choose between high inflation and high growth or stable inflation and lower growth I certainly have a preference for temporarily higher inflation and higher growth”. The problem is that her conclusion is exactly opposite from Mr. Trichet and his colleagues.


Economic Releases January 7 - 11


United States

Tuesday: the Pending Home Sale Index fell 2.6% in November to 87.6 but the drop was countered by the +3.1% revision to October’s figure up to 89.9 from 87.2. This is the third consecutive month of relative stability just above the August low of 85.5

Thursday: several large chain stores reported slow or negative sales figures for December: Wal-Mart’s numbers were 2.4% ahead of last year but Target’s sales shrank 5% and Macy’s, JC Penny and Kohl’s reported declines. Initial Jobless Claims for the week of January 6th fell 15,000 to 322,000, a rise to 340,00 had been forecast. The four week moving average fell 3,000 to 341,000.

Friday: the International Trade deficit widened almost 10% in November to $63.1 billion from 57.9 in October. A modest increase to -59.0 had been estimated. Rising oil prices and a decline in aircraft deliveries by Boeing were largely responsible for the much wider than expected shortfall. Imports rose by $6.0 billion, $4.8 billion for oil and related products, exports gained $0.6 billion. The price of imported crude jumped $7.16 almost 10% to $79.65 a barrel, but the volume of imported crude fell only slightly hence the increase in the value of oil imports. The average trade gap for October and November is higher than the average in the third quarter so without a large reversal in December exports will subtract from fourth quarter GDP. Most estimates for fourth quarter GDP have been reduced to the 1.0% – 1.5% range. Import prices rose 10.9% in 2007, the steepest increase since racking began in 1983; non fuel prices rose 3.0% in the year. The deficit with OPEC nations was as record $11.8 billion; it was $11.0 billion in October.

Eurozone

Monday: the EMU ‘economic sentiment’ index lost 0.1 in December to 104.7; the forecast had been 104.0. ‘Industry confidence’ dropped to 2 from November’s 3, ‘consumer confidence’ slid to -9 from -8 and the ‘business climate indicator ‘ skidded to 0.92 in December from 1.03 the prior month, itself revised down 0.1. EMU unemployment continued at 7.2% in November, the lowest reading since the series began in 1993. The Industrial Producers Price Index (PPI) added 0.8% in December a 4.1% yearly clip, +0.7% and +4.1% had been the forecasts; October had been +0.6% and +3.3%. It was the largest monthly jump since April 2006. As has been common with all inflation indices, energy prices were the driver, followed by food. Without energy prices PPI rose 0.1% in November, +3.2% on the year.

Tuesday: Retail Sales suffered a large deterioration in November falling 0.5% from October and settling at -1.4% on the year; +0.5% and +0.1% had been forecast. The yearly number was the weakest in sales since 1996. October’s monthly result was unrevised at -0.7% , the yearly figure was adjusted up to +0.4% from +0.2%.

Wednesday: third quarter GDP added 0.1% on revision to +0.8% due to an unexpected upward adjustment in investment activity; the year on year number was unchanged at 2.7%.
Friday: the Organization for Economic Co-operation and Development (OECD) leading economic indictors dropped to 98.1 in November from 98.3 the prior month. It was the 6th successive monthly drop.


Germany

Tuesday: Wholesale Sales declined 1.7% in November and were down 1.1% on the year. The October results were revised to +2.1% m/m from +0.6% and to +4.0% y/y from +1.8%. Manufacturing Orders jumped 3.4% in November; expectation had been for a 2.0% decline after October’s+ 4.0% surge.

Wednesday: machinery orders slowed sharply in November to +7.0% year on year from 20% in October as reported by the German Machinery Manufacturers Association (VDMA). The three month span ending in November was up 11% y/y; August – October gained 14% and July – September rose 12%. Industrial Output faltered in November coming in at -0.9% and +3.5% yearly; +0.4% and +4.4% were the forecasts. October was revised up to +0.1% from -0.3%. All components fell in November. Retails Sales as collected by the Federal Statistical Office (FSO) shrank 1.3% in November and were 3.2% lower than November last; +1.1% and -1.6% yearly had been predicted. It was the ninth month of negative result in 2007.


United Kingdom

Tuesday: British Retail consortium (BRC) like for like retail sales rose 0.3% month to month in December, far less than November’s 1.2% gain. It was the lowest December reading since 2004 and the smallest for any month since March 2006. Total sales at 2.3% were also well below the November result of 3.1%.

Wednesday: nationwide consumer confidence registered 85 in December, the weakest since February; November had been 86. In September this index scored 102. This series began in 2004.

Friday: industrial production was lower than predictions in November, -0.1% m/m and +0.4% y/y, versus +0.1% and +0.6%; October had been +0.4% m/m and +1.0% y/y. Manufacturing output was also weaker than predictions at -0.1% m/m, +0.1% y/y against +0.2% and +0.4%; October had been +0.3% m/m and +0.3% y/y. These figures make it unlikely that manufacturing will add to 4th quarter GDP.


Canada

Friday: employment fell 18,700 in December a far cry from the +10,000 – +15,000 that the market had expected. The unemployment rate was stable at 5.9%. The Bank of Canada is now expected to cut rates by 25 basis points at its January 22nd meeting. The current rate is 4.25%.

Japan

Thursday: leading indicators registered 10 in November, the coincident indicators 33. They were 18.2 and 70 respectively in October.


The Week Ahead January 14 - 18

United States

Tuesday: Retails Sales for December at 8:30 ET; expected +0.1%, November +1.2%. Retail Sales ex auto for December at 8:30 ET; expected +0.2%, November +1.8%. PPI for December at 8:30 ET; expected +0.1%, November +3.2%. Core PPI for December at 8:30 ET; expected +0.2%, November +0.4%.

Wednesday: CPI for December at 8:30 ET; expected +0.2%, November +0.8%. Core CPI for December at 8:30 ET; expected +0.2%, November +0.3%. Treasury International Capital System (TICS, net long term securities transactions) for December at 9:00 ET; November +$114 billion. Industrial Production for December at 9:15 ET; expected 0.0%, November +0.3%. Capacity Utilization for December at 9:15 ET; expected 81.4%, November 81.5%. NAHB Housing Market Index for January at 13:00 ET; December 19.

Thursday: Housing Starts for December at 8:30 ET; November 1.187 million. Building Permits for December at 8:30 ET; November 1.162 million.

Friday: University of Michigan Consumer Sentiment (preliminary) for January at 10:00 ET; December 75.5.


Eurozone

Monday: industrial production for November at 10:00 GMT; October +0.4% m/m, +3.8% y/y.

Tuesday: ZEW Survey for January at 10:00 GMT; December ‘economic expectations’ -35.7, ‘current conditions’ 59.6.

Wednesday: Final HICP for December at 10:00 GMT; preliminary +0.5% m/m, +3.1% y/y.

Friday: Construction Production for November at 10:00 GMT; October +0.6% m/m, +2.4% y/y.


Germany

Tuesday: ZEW Survey for January at 10:00 GMT; December ‘economic expectations’ -37.2, ‘current conditions’ 63.5.

Wednesday: final CPI for December at 7:00 GMT; preliminary +0.5% m/m, +3.1% y/y. Final HICP for December at 7:00 GMT; preliminary +0.5% m/m, +3.3% y/y.


United Kingdom

Monday: Department of Communities and Local Government (DCLG) House Price Index for November at 9:30 GMT; October +11.3% y/y. Producer prices for December at 9:30 GMT; November output prices +0.5% m/m, +4.5% y/y; input prices +1.7% m/m, +10.3% y/y.

Tuesday: CPI for December at 9:30 GMT; November +0.3% m/m, +2.1% y/y. Core CPI for December at 9:30 GMT; November +1.4% y/y.

Wednesday: ILO Unemployment Rate for November at 9:30 GMT; October 5.3%. Average Earnings (including bonus, three month moving average) for November at 9:30 GMT; October +4.0%

Friday: Retail Sales for December at 930 GMT; November +0.4% m/m, +4.4% y/y.


Japan

Wednesday: Machinery Orders for November at 23:50 GMT (prior day); October +12.7%.

Thursday: Revised Industrial Output for November at 4:30 GMT; preliminary +1.7%.

Friday: Consumer Confidence for December at 5:00 GMT; November 39.8.

Joseph Trevisani FX Solutions Chief Market Analyst
Joe@fxsol.com




Published on  Tue, Jan 15 2008, 10:14 GMT

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Market Directions Sunday, January 6, 2008

Mon, Jan 7 2008, 06:07 GMT
by Joseph Trevisani

FX Solutions





• Worry becomes electric in the United States

• ECB, FED and BOE rate divergence?

• The dollar bides its time

Is the long rumored US slowdown is about to become real and verified by statistics? Do we have a case of sell the rumor and buy the fact for the US dollar?

The Dow fell 4.2% in three trading days this week; the dollar lost only a little more than 1% against the euro during the same period. In general there is little direct correlation between day to day trading in the New York equities averages and the currency market valuation of the US dollar. But this week’s Dow collapse was prompted by two dismal US statistics, a sub 50 ISM Manufacturing Index and a very weak Non Farm Payrolls report. Both seem to presage a much slower if not recessionary American economy. The equities reaction was one of disappointed hopes, but no so the dollar traders.

Has the currency market evaluation of US economic prospects been so negative that the arrival of the slowdown becomes the occasion for a classic reversal? To put it another way, has the ‘recession’ already been priced in and if it now may be here—not yet a fact despite the statistics—has the dollar no where to go but up? Questions looking for answers, truly, and one should be careful of making too much of a short term move but the blasé reaction of currency traders to the dismal and unexpected numbers requires explanation.

There is little doubt that an American economic slowdown has long been the operating assumption for the currency markets; it is has been one of the drivers for the ascent of the euro since August. But the logic for a dollar recovery is straightforward. If an American economic slowdown or a recession is priced into the current dollar level, as I believe it is, then the questions become, what happens to the dollar if the US enters recession, what happens if it doesn’t and where does the dollar go when the issue is decided? There is an objective definition of recession, two successive quarters of shrinking GDP, but since traders must operate with imperfect foresight we can use weakening US statistics in lieu of the formal definition. Will more statistics like the ISM and NFP results drag the dollar down?

Let us examine the possibilities.

If the United States is headed for or perhaps has already entered a recession can the Eurozone be far behind? If the Fed and the BOE are reducing rates can the ECB afford to be the sole anti inflation paladin? Judging by the reaction of the currency markets the answer is no. If traders really believed that the ECB would hold the line indefinitely then the recent US numbers, clearly indicative of further Fed rate cuts and a widening gap in base rates for the two currencies, should have driven the US lower. They did not. My view is that US economic weakness and further Fed cuts were anticipated and already factored into the dollar level. The assumption that the US economy will falter may well have as its unstated corollary that where the US leads the Eurozone will soon follow.

And if the US does enter recession what then? The dollar may weaken marginally as the few remaining optimists are converted but very soon the focus will shift to the second half of this year. As the fall in the dollar from August to the end of the year anticipated, for arguments sake, a recession in the first quarters of 2008, so a dollar recovery, in early 2008 could anticipate a US economic resurgence in the last quarters of the year.

At the end of the first quarter it will be six months from the first Fed cut on September 18th. . That is when traders will expect the Fed stimulus to begin its work. It is also when the ECB lack of attention will begin to bite. Despite the ominous tone of much press coverage of the housing and financial sectors, the conditions which have been threatening to derail consumer spending and business activity will not last forever. The housing collapse has been gathering steam for two years; the asset backed mess will be more than six months old at the end of the first quarter. If for no other reason than short market attention spans and traders’ perennial focus on what is over the horizon both crises will be much diminished as sources for dollar weakness by the end of the first quarter.

If on the other hand the US economy does not enter recession, if Non Farm payrolls are revised much higher, as then have been in the past, if consumer spending does not crack, and the economy does not slow to sub 1% GDP growth then the dollar has no place to go but up. Current dollar levels are predicated on serious weakness in the US economy. No economic weakness, no falling dollar.

Either way the economy goes the dollar looks primed for recovery. The dollar is at current levels because it has been struggling under the assumption of a recession. If the recession is here, then it is out of the way and the market will move to the next target. If the recession does not materialize, then the market has been wrong and traders will have to buy back their short dollar positions. Either way the dollar rises. If a US economic slowdown or recession has been priced into the market, then logic dictates the dollar must shortly begin to gain, regardless of whether the recession is or ever will be, real.




Central Banks


ECB

Cyprus and Malta joined the European Monetary Union, as of January 1st, becoming the 14th and 15th European Union member nations to give up their national currencies and join the Euro. The Cyprus Pound and the Maltese Lira will soon disappear from circulation, remembered only by historians. 15 out of 27 EU members now belong to the European Monetary Union and use the euro.

Athanasios Orphanides governor of the Cypriot Central Bank said that the ECB stands ready to raise rates if needed. But his comments, much as recent comments by Jurgen Stark and others, must be taken with certain skepticism. With European economic growth set, by the bank’s own projections, to slow to 2% or less, with the euro close to its all time high against the dollar, with the credit and financial turmoil still unwinding and with a US recession becoming more likely, the chance of an ECB rate hike is negligible. A central bank has two major tools to manipulate markets, interest rates and rhetoric. Sometimes rhetoric is a creditable guide to future action, but in this case, the rhetoric is mere words. The ECB will not change its rate policy on Thursday.

Federal Reserve

ISM and NFP have weighed in and futures pricing makes a 25 basis point cut at the January 30th meeting a near certainty. Speculation that the Fed will cut 50 points or be forced to make an interim reduction before the FOMC meeting now is now heavily entertained.

FOMC minutes of the December meeting where the Fed funds rate was cut by 25 basis points reflected a committee unanimous only in its uncertainty. With economic indicators pointing in several directions and with plenty of overhanging if not yet substantive worry in the financial markets, the housing sector and on consumer spending, the varied opinions of the board members mirrored the lack of consensus in the statistics and in the markets generally. But the minutes also depicted a board more concerned about the state of the economy than the rate of inflation. Or to quote form the minutes themselves, some governors anticipate the need for “substantial further easing of policy”. With that mindset on the board and the weak ISM and NFP numbers, expectations for a rate cut at the end of January will not diminish a whit no matter the intervening statistics.


Bank of England

Market opinion is evenly balanced between a 25 basis point cut and a continued hold at the Monetary Policy Committee (MPC) meeting this Thursday. Though last month’s cut surprised the market and inflation is a major concern, it is possible that the MPC members will wait for the February 13th quarterly inflation report before making their decision. The recent softness in manufacturing and purchasing indices are not thought to be weak enough to force the MPC’s hand and they were balanced by a stronger than anticipated PMI services report.

United Arab Emirates

The central bank of the United Arab Emirates, the source of much capital recently for western financial corporations, has decided, after review, to retain their currency peg to the US Dollar. Given the damage that removal of the peg would have done to their own dollar reserves, the decision was not unexpected. However, in the current weak dollar environment the review had generated a good deal of speculation about the negative consequences for the dollar if the peg had been converted to euro or to a basket of currencies. That worry is now removed.





The Week in Review December 31 – January 4


United States

Two major statistics, the ISM Manufacturing Index and the Non Farm Payroll report painted a much grimmer picture of immediate US economic prospects than had been foreseen a week ago. Particularly worrying was the 0.3% jump in the unemployment rate to 5.0%. In October 2006 and again in March 2007 the unemployment rate was 4.4%; it is now 0.6% higher. Since 1949 the unemployment rate has never risen by that much without the economy being in recession. Sudden large additions to the rate typically happen around recessions. The availability of jobs has been one of the secure supports for consumer spending as housing equity has fallen precipitously in many parts of the country.

Eurozone

The ECB kept on a brave face, even recruiting its newest member the Cypriot Central Bank to talk up the possibility of a rate increase to ward off “second round inflation effects”. But this is whistling in a graveyard. The Fed will cut again at the end of the month; the BOE will cut again this coming week or in February. The ECB will not and cannot buck that trend. Other central banks are not reducing rates because they want to make the ECB anti inflation job harder but because the economics of their own countries and the world warrant the easing. If England and the United States are sickening the EMU will not be immune; the ECB will be forced to cut rates, the only question is when?




Economic Releases December 31 – January 4

United States

Monday: Existing Home Sales rose 0.4% in November to 5.0 million units, besting the 4.96 million predicted and ahead of the revised October figure of 4.98 million (up 0.01 million). Existing Homes Sales is a seasonally adjusted number so the traditionally slower end of the year selling season is not a factor. The inventory of unsold homes dropped to 10.3 months from 10.8 in October which had been a 20 year high.

Wednesday: the Institute for Supply Manages Index for December came in well under prediction at 47.7. It was also below the 50.8 November figure. Most importantly it was beneath the 50 demarcation between contraction and expansion in manufacturing; 50.5 had been forecast. It is the lowest reading since April 2003 at the beginning of the Iraq war. ‘New Orders’ fell to 45.7 from 52.6 in November; ’Prices’ rose to 68 from 67.5 and “Employment’ added 0.2 to 48.0. Though it is long since that manufacturing has been the mainstay of American GDP, the sector is used as a barometer for the rest of the economy. With the dollar low and US exports rising the manufacturing sector should be one of the healthiest in the economy. Is this apparent fall into contraction a statistical outlier or a early sign of recession? Construction spending in November was much more robust than expected at +0.1% against predictions of a fall of 0.4%; October was adjusted up to -0.4% from -0.8% and September to +0.3% from +0.2%. Private non residential and public construction gained in the month while private residential building fell 2.5%. It was the 21st straight monthly fall. Construction of single family homes dropped 5.0%.

Thursday: Factory Orders rose 1.5% in November almost tripling the forecast of +0.4%; October’s figure was boosted to +0.7% from +0.5%. However, the increase was due to higher prices for energy products and did not evidence stronger overall activity.

Friday: Non Farm Payrolls added only 18,000 jobs in December, far less than the 70,000 consensus estimate. Adjustments added a net 10,000 to October and November’s results. The unemployment rate jumped 0.3% to 5.0%, a two year high. The Non Manufacturing ISM Index scored 53.9 in December slightly off the November reading of 54.1. ‘Employment’ rose to 52.1 from 50.8. Over 70 percent of the US economy is generated by non manufacturing activity. The economy is thought to need 150,000 new jobs each month to prevent the unemployment rate from rising.

Eurozone

Wednesday: manufacturing PMI for December added 0.1 in the final issuance to 52.6; November was 52.8. M3 Money Supply expanded 12.3% in November and maintained the record high reached in October; growth of 12.1% had been forecast. Growth in loans to the private sector dipped slightly to11.0%% in November; October had been 11.2%. The official ECB target for M3 expansion is 8% monthly but money supply has not met that target since July of 2006. It has been over 10% for one year, since January 2007.

Friday: Flash (1st issue) HICP for December was 3.1%, the same as in November and as forecast. It is the highest rate since May 2001 and has climbed rapidly since the summer. As recently as August the HICP rate was 1.7%. Services PMI for December was finalized at 53.1, 0.1 below the flash estimate.


Germany

Thursday: the nationwide unemployment rate in December dropped to 8.4% from 8.6% in November; 8.5% had been expected.

Friday: Services PMI for December was 51.2, well below the median consensus of 52.4 and the weakest since February 2005. This series peaked in August at 58.9 and has a long term average of 53.5.


United Kingdom

Wednesday: manufacturing PMI in December fell short of expectation at 52.9, 53.6 had been forecast. The November figure was revised down to 54.3 from 54.4.

Friday: Services PMI in December rose to 52.4, ahead of the forecast of 51.6 and also better than the November result of 51.9





The Week Ahead January 7 - 11


United States

Tuesday: National Association of Realtors Pending Home Sales for November at 10:00 ET; October 87.2. Investor Business Daily/Technometric Institute of Policy and Politics (IBD/TIPP) Economic Optimism Index for January at 10:00 ET; December 44.4

Friday: International Trade Balance for November at 8:30 ET; October -$57.8 billion.


Eurozone

Monday: EMU Economic Sentiment Index for December at 10:00 GMT; November 104.8. EMU Industry Confidence for December at 10:00 GMT; November +3. EMU Consumer Confidence for December at 10:00 GMT; November -8. EMU Business Climate Indicator for December at 10:00 GMT; November 1.04. Unemployment Rate for November at 10:00 GMT; October 7.2%. Industrial PPI for November at 10:00 GMT; October +0.6% m/m, +3.3% y/y.

Tuesday: Retail Trade for November at 10:00 GMT; October -0.7% m/m, +0.2% y/y.

Wednesday: Q3 GDP (second issue) at 10:00 GMT; first issue +0.7 q/q, +2.6% y/y, Q2 +0.3%q/q, +2.5% y/y.

Thursday: ECB rate announcement at 12:45 ET; current 4.00%.


Germany

Tuesday: Total Manufacturing Orders for November at 11:00 GMT; October +4.0% m/m, +10.3% y/y.

Wednesday: Industrial Output for November at 11:00 GMT; October -0.3% m/m, +5.9% y/y. Manufacturing Sector Output for November at 11:00 GMT; October +0.1% m/m, +6.9% y/y.

Friday: Total Retail Sales for November (release time undetermined); October -1.8% m/m, -3.8% y/y.


United Kingdom

Tuesday: British Retail Consortium (BRC) Retail Sales (like for like) for December at 00:01 GMT; November +1.2% y/y.

Wednesday: Nationwide Consumer Confidence for December at 00:01 GMT; November 86.

Thursday: Bank of England rate announcement at 12:00 ET; current 5.50%.


Japan

Thursday: Preliminary Leading Index for November at 5:00 GMT; October 18.2. Coincident Index for November at 5:00 GMT; October 70.0.


China

Release Date Undetermined: Q4 GDP; Q3 +11.5% qtr, +11.5% y/y. PPI for December; November +4.6% ytd, +2.9% y/y. CPI for December; +6.9% ytd, +4.6% y/y. Money Supply for December; November +18.45% y/y.

Joseph Trevisani


FX Solutions


Chief Market Analyst

Joe@fxsol.com

Published on  Mon, Jan 7 2008, 06:07 GMT

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Market Directions Sunday, December 30, 2007

Mon, Dec 31 2007, 05:36 GMT
by Joseph Trevisani

FX Solutions





• A technical recovery for the Dollar?

• Central banks and the New Year

• Pakistan and the price of oil

The recovery in the dollar since late November and its partial submergence this week were end of the year technical plays. From August to November the dollar lost over 11% against the euro, profit taking on such an exceptional trend was inevitable, especially in December. The dollar fall since last Friday was a reversal triggered by the weak durable goods number on Wednesday. Neither move is predictive of market opinion going into the New Year.

In January the constants will return with the state of the American economy and its reflection in Federal Reserve policy paramount, and developments in Europe and the ECB a close second. The primary focus on the US is simply because Fed policy and its next rate decision is undetermined. Ben Bernanke, the Chairman of the Fed would probably like to leave rates at 4.25% at the January 31st meeting. The financial and business communities would passionately like another rate reduction. The run up to the meeting will provide plenty of room for speculation.

The ECB meeting on January 10th will not generate nearly as much interest because the governors have so much less operational room. Inflation has been well over the 2.0% since September and is not likely to subside in the near term. But the ECB’s corporate desire to fulfill its inflation mandate is constrained both by the unresolved financial and credit market debacle and the faltering European economies. Both banks will probably have to rein in their better instincts when they make their January decisions; the Fed will likely cut 25 basis points, the ECB will remain on hold.

For a market primed for better news after last week’s strong retail sales figures, the US durable goods figures were a major disappointment. The dollar slid more than 100 points against the euro in the aftermath. The numbers hit the market at almost exactly the same time as the news of the assassination of Pakistani politician and presidential candidate Benazir Bhutto. An increase in tension in Pakistan and by proxy the oil producing regions of the Middle East should damage the United States economy less than the EMU, the States are far less dependant on Middle Eastern oil than Europe, but with the market already moving against the dollar there was no change in attitude. What transpires in the next few weeks in Pakistan will determine the overall market reaction but the mechanism will be the price of oil. Pakistan has a nuclear arsenal and the government is under great pressure from Islamic radicals, the presumed assassins of Ms Butto. The more radicals can destabilize the Islamabad government the higher the oil price will rise. If there is ever a change of power in Pakistan the sky may be the limit for oil. The ramifications for the world economy of a forced change in government in Pakistan could be devastating.




The Week in Review December 24 - 28


United States

The US economy seems to have a split personality. Consumer spending is strong, employment, wage growth and manufacturing are moderate, witness Friday’s Chicago Purchasers Index and the recent retail sales figures, but the housing sector continues to plummet. There is no lack of consumption but one question has been unavoidable for the past 18 months, 'when will the housing sector drag down the rest of the economy'? Perhaps we are asking the wrong question? If jobs are available and wages are steady or rising must the 72% of the economy made up by consumer spending suffer? Aren't consumers being eminently rational when they delay the purchase of a new house but not the purchase of a new flat screen or dress?

A home is the largest purchase most consumers will ever make, one with a very long mortgage trail and it entails a much longer view of the economy than normal consumer spending. Retail purchases are not usually delayed in the hope of a lower price in the future, in most cases the cost saving doesn’t stand against the immediate desire to own, and our culture encourages instantaneous consumption. But housing isn’t a normal retail purchase. With a house a wait of six months or a year may very well produce a substantially lower cost. That is especially true now. Isn't patience a logical reaction to the current housing market? And isn’t it sensible that moderate consumer spending is a product of the moderate job market? Home prices in many areas of the country have not fallen all that much from their peak, clearly prices must drop to market clearing level before customers will return. If consumers are holding off on the purchase of a new home that doesn’t necessarily mean other spending will diminish. Maybe the correct question is not when will the consumer economy be pulled to recession by the housing market but if?


Eurozone

The ECB continued its war of words against inflation. Jurgen Stark, executive board member promised that “the ECB will not hesitate to act before second round effects emerge”. “Act’ can only mean raising interest rates but the possibility for an ECB hike in the near future is severely undercut by two factors: the still unfolding credit market situation which subsides for a time only to reappear and rekindle fears of a financial system meltdown and the declining GDP growth in the EMU which would be devastated by an unexpected ECB rate hike. Whatever the rhetoric out of Frankfurt, the ECB will wait until the economic picture clears before it puts its words into action.

China

The yuan appreciated 6.4% against the dollar in 2007, that is nearly twice its 3.3% improvement in 2006, and it rose 3.5% against a trade weighted basket of currencies. But the yuan fell 3.7% against the euro in the same period This appreciation of the yuan against the currency of its most vocal critic, the United States, has led to predictions for a further 7 to 10 percent appreciation against the dollar in 2008. Chinese inflation was 6.9% annually in November and the government views yuan appreciation along with domestic interest rates and bank reserve requirements as its prime tools in controlling inflation. Beijing’s economic planners do not issue inflation targets nor do they comment on the specifics of the yuan exchange rate but with the Chinese economy expanding at more than 10% annually and commodity prices at historic highs, it is unlikely the yuan will appreciate any less in 2008 than it did in 2007.




Economic Releases December 24 - 28


United States

Wednesday: Case Shiller Home Price Index sank 1.4% in October to 192.89, the largest one month fall on record. From August to September the index had dropped 0.79%. Prices are down 6.5% year on year in October, in September they were 4.9% lower. In the past three years this series has weakened in the period from July to October.

Thursday: Durable Goods Orders added 0.1% in November far less than the +1.5% predicted, though better than the October 0.4% fall. It was the first positive month since July. Durable Goods ex transport fell 0.7%, the same as last month, the third drop in four months. Durable Goods ex defense rose 1.2%, the second gain in the past four months. Boeing added 177 new orders in November; in October the commercial airplane manufacturer received 56 orders. Conference Board Consumer Confidence for December was revised slightly higher to 88.6 from the preliminary figure of 87.8, ‘expectations’ gained while the ‘present situation’ fell.

Friday: the Chicago Purchasers Index for December was unexpectedly vibrant at 56.6 against predictions of 52.0 and November’s 52.9. “New Orders’ was the strongest component at 58.4, November had been 53.9. New Home Sales fell 9.0% in November to a 12 year record low at 647,000. The October sales figures was revised lower to 711,000 from 728,000. Market supply rose to 9.3 month, resuming the trend higher after the September to October drop from 9.2 months to 8.8 months. Despite the gloomy sales numbers the median sale price is down only 0.4% from a year ago. Whatever price declines have occurred, and there is wide local variation, they have not been enough to tempt people to purchase.

Eurozone

No economic statistics released


Germany

Friday: flash (preliminary) CPI for December was +0.5% m/m and +2.8% y/y, +3.1% had been predicted for the yearly number; November was +0.4% m/m, +3.0% y/y. Flash (preliminary) HICP for December was up 0.7% m/m and 3.1% y/y, a rise of +3.2% had been anticipated; November’s readings were +0.5% m/m, +3.3% y/y.


United Kingdom

Monday: Hometrack Hose Prices fell 0.3% in December, the greatest monthly drop in almost two years, cutting the annual rise to its smallest since June of last year. In November prices fell 0.2% for a yearly gain of 3.6%.

Friday: Nationwide House Prices fell 0.5% in December but are still 4.8% higher on the year. Results of -0.4% m/m, +5.3% y/y had been predicted. November was -0.8% m/m, +6.9% y/y.

Japan

Friday: Retail sales were 1.6% higher in November over a year ago, in October the gain had been 0.8%. Core CPI rose 0.4% year on year in November, the October result had been +0.1%. The Japanese unemployment rate fell to 3.8% in November from 4.0% in October.




The Week Ahead December 31 – January 4


United States

Monday: Existing Home Sales for November at 10:00 ET; October 4.97 million.

Wednesday: ISM Index for December at 10:00 ET; expected 50.0, November 50.8. Construction spending for November at 10:00 ET; October -0.8%. FOMC minutes of the December 11th meeting.

Thursday: ADP National Employment Report for December at 8:15 ET; November +189,000. Factory orders for November at 10:00 ET; October +0.5%.

Friday: Non-farm Payrolls for December at 8:30 ET; expected +75,000, November +94,000. Unemployment rate for December at 8:30 ET; expected 4.8%, November 4.7%. ISM non-manufacturing Index for December at 10:00 ET; November 54.1. Average Hourly Earnings for December at 8:30 ET; November +0.5% m/m, +0.1% y/y.


Eurozone

Wednesday: Manufacturing PMI for December at 9:00 GMT; November 52.8.

Thursday: M3 Money Supply for November at 9:00 GMT; October +12.3% y/y, 3 month moving average +11.7%.

Friday: Services PMI for December at 9:00 GMT; November 54.1 Flash (1st issue) HICP for December at 10:00 GMT; November +3.0% y/y.

Germany

Thursday: Unemployment rate for December at 8:55 GMT; November 8.6%.

United Kingdom

Wednesday: CIPS Manufacturing PMI for December at 9:30 GMT; November 54.4.

Friday: CIPS Services PMI for December at 9:30 GMT; November 51.9.


Japan

No economic statistics released

Joseph Trevisani FX Solutions Chief Market Analyst

Joe@fxsol.com

Published on  Mon, Dec 31 2007, 05:36 GMT

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Market Directions Sunday, December 23, 2007

Mon, Dec 24 2007, 06:01 GMT
by Joseph Trevisani

FX Solutions





Market Directions Sunday, December 23, 2007

• The central bank cavalry

• Year end risks: Liquidity and P/L

• The new year economic outlook

The coordinated central bank actions to supply whatever liquidity the credit markets required probably gave more support to the dollar than any other event this week. To the degree that the credit situation and its sub prime mortgage basis are seen as a greater drag on the United States economy and the dollar, any palliation in the financial markets redounds to the dollar’s benefit. Positive American statistics, particularly consumer spending, also helped push the dollar to levels not seen since late October.

In the immediate future both the euro and the pound are vulnerable. The uncertain liquidity available in the remaining trading sessions this year will exaggerate any movement. The greatest problem for the euro and the pound is that there is still substantial unrealized profit in both currencies. The euro began the post August run at 1.3400, the pound started the year at 1.9200. Both currencies have broken the upward momentum which had been their greatest support.

The economic facts have been changing for several months. The growth prospects of Britain and the EMU are dimming and neither central bank will be able to raise rates in the coming months no matter what their view or the reality of inflation. The aggressive Federal Reserve rate reductions, which began in mid September, will produce economic growth in the US in the second and certainly the third quarter of 2008. The ECB has provided no economic stimulus and growth will continue to slip; when traders return to their desks in January the future for the EMU, the US and the UK will look very different from the past.

Central Banks

United States Federal Reserve

The Federal Reserve Treasury Auction Facility (TAF) first auction of $20 billion elicited $61.8 billion in bids for a bid to cover ration of 3.08. A second $20 billion auction was held on Thursday with demand of $57.7 billion for the $20 billion on offer. The average bid size rose to $790 million from the first auction’s $660 million. The consistent interest was taken as a sign that the funds are being sought by non money center banks. One of the main goals of this facility was to get funds out into the banking system beyond the normal money center banks that participate in the Fed’s open market operations. The number of bidders fell to 73 from 93 in the first auction. Credit market conditions had eased somewhat by week end.

Bank of England

The minutes of the December 6th Monetary Policy Committee (MPC) meeting revealed a 9-0 vote behind the 25 basis point rate cut and discussion of a larger reduction that was eventually rejected because of inflation concerns. Prior market sentiment had not expected a unanimous vote which put the condition of the British economy in a far starker light. Sterling immediately fell 50 points on the news. Credit conditions were the main reason for the cut according to MPC member Kate Barker.

European Central Bank

The ECB provided €348 billion in two week funding to ease the money markets over the year end. The average rate was 4.21%. The ECB approach is fundamentally different than that of the US Federal Reserve in that the European central bank provides as much funding as the market will accept, rather than auctioning a set amount as does the Fed. The results suggests that the majority of banks are relatively well funded and using the facility to store funds for use later in 2008.

Peoples Bank of China

The Chinese central bank raised one year deposit rates by 27 basis point to 4.14% and lending rates to 7.47%, or 18 basis points. It was the 6th hike this year. “The hike will help to prevent the economy from growing too quickly into overheating and structural inflation developing into overall inflation”, stated the PBOC. However with inflation at 6.9% annually in November and up 4.6% for the year this increase still does not bring the deposit rates in positive territory. More rate increases can be expected in 2008 as the PBOC continues trying to cool rampant economic growth and inflation.




The Week in Review December 17 – 21

United States

Foreign investment in the US economy rebounded strongly in October with net long term securities purchases from overseas at $114.00 billion in the Treasury International Capital Report (TIC) from the Treasury Department. Private parties bought $96.2 billion and official sources amassed $21.8 billion; US entities purchased 4.1 billion in foreign securities. This report allayed fears that foreigners would be deterred from investing in the US by fear of an ever weakening dollar. It seems rather that the weak dollar has been seen as an opportunity for good value in US assets. With the purchase volume at more than 4 to 1 by private entities--individuals, companies and organizations--the flow was not a result of foreign central banks using their reserves to support the dollar and the US economy. The United States is still a favored investment destination for much of the world’s spare capital. The inflow was twice what is required to fund the monthly current account deficit.

Strong personal spending in November joined with last week’s retail sales figures has diminished somewhat the talk of pending recession. Most estimates of 4th quarter GDP, not due until January 31st, were raised to the 1% - 2% range. If December’s consumer spending results are comparable to November’s then anticipation of a serious slowdown will be put off until 2008.

Eurozone

Both manufacturing and service PMI predicted a gathering slowdown in production. The average fourth quarter composite PMI is equal to about +0.5% GDP growth quarter to quarter, but taken alone the December numbers drop to +0.45% per quarter.

Jean Claude Trichet ECB president acknowledged the escalating risk that EMU growth in 2008 will be below 2.0%, but he nevertheless defended the ECB focus on inflation. When asked why the ECB has not lowered rates he said, “Our first mandate which the treaty requires of us and our fellow citizens is to ensure medium term price stability is in line with our target that inflation is less than 2.0% and around 2.0%”. There is nothing new in this opinion or its forceful expression but it will provide little comfort to European business planners contemplating 2008 business conditions. And since it seems the ECB is determined to wait out the recent inflation bump before contemplating a pro growth rate reduction, and a rate hike is not in the cards given the credit market turmoil, the ECB anti-inflation policy will not support the Euro even if the Fed cuts rates in January.

Gernot Nerb head of the German IFO Institute called the euro overvalued at current levels and stated that a further rise could prompt an ECB cut. “Everybody agrees that a fair rate is something around 1.2000”, said Nerb in an interview with Market News International.

United Kingdom

When the Monetary Policy Committee is worried enough about economic growth to cut rates in the face of rising inflation there can be no help for the pound sterling from the central bank, though given the effect the pound has had on trade the fall may not be wholly unwelcome. The unpleasant shock of the record current account deficit added to the pressure on the sterling and eliminated the chance of any immediate recovery.




Economic Releases December 17 - 21

United States

Monday: net long term securities transactions from the Treasury International Capital Report (TIC) of the Federal Department of the Treasury recorded an inflow of $114.0 billion, of which $96.2 were private purchasers and $21.8 were from official sources. US entities bought $4.1 billion overseas. In September the net purchases had been $15.4 billion. The National Association of Home Builders (NAHB) Housing Market Index was unchanged in December at 19. This is the lowest this series has scored since its inception in 1985, but it also the third month in a row that the number has been stable.

Tuesday: Housing starts fell 3.7% in November to 1.187 million. This was slightly better than the median prediction of 1.180; October’s figure was revised a trifle higher to 1.232 from 1.229. The rate of decline has slowed from that in the third quarter but it is still down 24% from last November. Building permits also dropped to 1.152 reversing the October rise. Here too the October--November rate of decline has moderated somewhat; it is also 24% lower than last November. The International Council of Shopping Centers (ICSC) store sales for the second week of December were characterized as ‘reasonable’ by US retailers despite severe storms during the week in the middle part of the country.

Thursday: third quarter GDP was unchanged at 4.9% in it final issue. Core PCE prices in the third quarter were adjusted higher to +2.2% from +1.8%. The increase was 1.4% in the second quarter. The Fed target range is 1% - 2%.

Friday: Personal Income improved 0.4% in November a bit less than the anticipated +0.5%, but Personal Consumption Expenditures (PCE), at +1.1% were almost double the forecast of +0.6%. It was the largest jump in consumer spending in 2 ½ years and gave support to those who do not expect the economy to slip into recession. PCE core prices jumped 0.2% in November as they did in September and October but the year on year rate rose to 2.2% from 1.9% in October and 1.8% in September. This is the Fed’s favorite inflation gauge and November is the first month since May where the reading has been at or above the 2.0% target. The saving rate sank to -0.5%, the first negative reading since the summer of 2006. University of Michigan Consumer Sentiment for November edged up to 75.5 in the final release from 74.5. November had been 76.1. This series peaked at 96.9 in January of this year.

Eurozone

Monday: the flash (1st) manufacturing PMI at 52.5 was modestly better than forecast, 52.3, but still lower than the November result of 52.8, which itself was a surprise increase over October’s 51.5. Services PMI measured 53.2, below the 53.7 median prediction and November’s 54.1. It was the lowest services figure since June 2005.

Wednesday: Construction Production in October gained a much stronger than expected 0.6%, +2.4% on the elapsed year. The September figures were downgraded to -0.1% from 0.0% and to +0.9% from +1.5%.

Friday: Industrial new orders ran up 2.5% in October a surprisingly strong 10.9% yearly pace. A gain of 2.0% and +6.6% had been forecast. September was raised to -1.0% from -1.6%, August reduced to +0.7 from +0.8 and July revised up to -2.9% from -3.2%

Germany

Wednesday: the IFO Survey of business attitudes resumed its year long decline in December after a small up tick in November: business sentiment 103.0, expected 103.8, November 104.2; current assessment 108.1, expected 109.7, November 110.4; business expectations 98.2, expected 97.6, November 98.3. Business sentiment peaked in April at 108.6. The Producer Price Index shot up 0.8% in November, almost three times the +0.3% predicted, and an eight month high. The yearly rate gained 2.5% well more that the +2.0% forecast. The October rates were +0.4% and +1.7% respectively.

Thursday: GfK Consumer Confidence for January rose slightly to 4.5, December was 4.4 revised from 4.3 and 4.0 had been forecast. It was the first rise in six months. “The consumer climate has stabilized as the year draws to a close”, said GfK.

United Kingdom

Monday: Rightmove House Prices as complied by the British real estate website fell 3.2% in December leaving them ahead only 4.8% for the year. It was the steepest fall since the survey began in 2002. However this survey is not seasonally adjusted and December is historically a slow month for home sales. The government reporting requirement on homes which begins in January may have also contributed to the price decline as owners of small homes rushed to complete sales before the year end reporting deadline. The Confederation of British Industry, a UK trade group, reduced its GDP forecast for 2008 to 2.0% from 2.2%. The group noted oil prices, credit market turmoil and sagging global demand as the chief determinants.

Tuesday: November CPI and core CPI arrived largely as predicted: CPI +0.3% m/m and +2.1% y/y, the same as forecast, October +0.5%, +2.1% y/y; core CPI +1.4% y/y, forecast +1.5%, October +1.5%. The Bank of England’s +1.9% inflation forecast for the fourth quarter is sure to be breached. With one month to go and October/November at an average of +2.1%, December inflation would have to be 1.5% or less to meet or better the inflation target.

Thursday: third quarter GDP was little changed on its third revision at 0.7%, the annual Rate was raised by 0.1 to 3.3%. The current account deficit for the third quarter set a record at £20.04 billion, far ahead of the second quarter deficit of £13.703 billion. At 5.7% of GDP and with much of the deterioration coming in the capital account, the surprising result put additional pressure on the pound sterling.

Friday: November retail sales climbed 0.4% up 4.4% over last year. The three months to November gained 1.1%, not as robust as the three months to October +1.3% but nowhere near the collapse that had been feared by many commentators. GfK Consumer Confidence fell in December to -14 the lowest reading since December 1995. November had been -10.




The Week Ahead December 24 - 28

United States

Tuesday: markets closed for Christmas

Wednesday: Case-Shiller Home price Index for October at 9:00 ET; September 195.62.

Thursday: Durable Goods Orders for November at 8:30 ET; October -0.4%. Conference Board Consumer Confidence for December at 10:00 ET; expected 86.0, November 87.3.

Friday: Chicago Purchasers Index for December at 9:45 ET; expected 52.0, November 52.9. New Home Sales for November at 10:00; expected 720,000, October 728,000.

Eurozone

No economic statistics released

Germany

Friday: preliminary CPI for December (release time undetermined; November +0.4% m/m, +3.0% y/y. Preliminary HICP for December (release time undetermined); November +0.5% m/m, +3.3% y/y.


United Kingdom

Monday: Hometrack House price Survey for December at 00:01 GMT: November +0.2% m/m, +3.6% y/y.

Friday: Nationwide House Prices at 7:00 GMT; expected -0.4% m/m, +5.3% y/y; November -0.8% m/m, +6.9% y/y.

Japan

Thursday: Housing Starts for November at 5:00 GMT; October -35.0% y/y.

Friday: National core CPI for November at 23:50 GMT (prior day); October +0.1% y/y. Central Tokyo Core CPI for December at 23:50 GMT (prior day; November +0.1% y/y. Unemployment rate for November at 23:50 GMT (prior day; October 4.0%. Retail sales for November at 23:50 GMT (prior day; October +0.8% y/y.

China

No economic statistics released

Joseph Trevisani

FX Solutions

Chief Market Analyst

Joe@fxsol.com

Published on  Mon, Dec 24 2007, 06:01 GMT

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Market Directions Sunday, December 16, 2007

Mon, Dec 17 2007, 06:30 GMT
by Joseph Trevisani

FX Solutions





Market Directions Sunday, December 16, 2007

• The uncooperative American consumer

• Recession and the inverted yield curve

• Inflationary expectations in the US and Europe

The euro climb against the dollar, intact since the beginning of August, broke down conclusively on Friday with the united currency closing below 1.4450 for the first time since early November. Surprisingly it was the American consumer that shoved the euro lower. All the recent doomsday scenarios for the dollar run have through the spending habits of the US consumer. Battered by falling house prices and frightened by the credit crisis, US consumers were supposed to begin a retreat from their free spending ways. Consumer spending is 70 percent of the US GDP, as it fell, production and jobs would ebb away, inhibiting consumer spending even more, and the whole cycle was due to end in a severe slowdown or outright recession. Notwithstanding that it was these same terrified consumers who powered 3rd quarter GDP to a 4.9% expansion, the currency markets have been waiting confidently for the collapse in consumer spending, the US economy and the dollar.

Thus far the US consumer has not cooperated. Retails sales in November, released on Thursday, were much stronger than anticipated. The euro began to move lower with the sales figures but it was the CPI inflation numbers on Friday that delivered the heaviest push. With core CPI 2.3% higher than last year, consumer spending strong and industrial production buoyant the prospects for another Fed rate cut at the end of January diminished appreciably and euro selling began in earnest.

The financial markets have been traumatized by the credit crisis. The seizing of the medium term credit markets and the inverted yield curve are troubling signs for the US economy. An inverted curve, with long term rates lower than short term rates, is a traditional precursor of recession. This is true despite the fact that all inversions have not been followed by recessions and all recessions have not been preceded by an inverted yield curve. The logic of inversion is simple. Falling economic growth elicits rate reductions from the Fed, the farther end of curve drops as expectation for a reduction cycle takes hold. Since the end of the cycle is not in sight when the rate cuts begin anticipation keeps future rates low until signs of economic recovery are apparent. The current problem, though it is not really a problem, is that the economy has not yet faltered. The Fed has begun to reduce rates to ameliorate the unusual economic circumstances, a prolonged housing decline coupled with a credit crunch that could, if extended, deny credit to business, and to head off the anticipated economic slowdown. Mr. Bernanke is taking out insurance, as he has said, but as in any insurance purchase the insured circumstance has not yet occurred.

In all of these considerations the simple fact remains that the economy has not slowed yet. The housing slump has been an economic reality for more than 18 months, the credit crisis for four, two of which were in the third quarter but the economy grew at a blistering 4.9% in that quarter. Job creation remains moderate and real wages, taking into account health care and other services, are expanding at more than 3.0% annually.

Housing wealth does contribute to the consumers’ overall asset picture but it may not be as important to daily spending habits as many economists and commentators have surmised. Jobs, rising wages, low interest rates and available consumer credit may be far more important and may yet keep the seven year US expansion in moderate forward gear. An American economy at 2.0% or 2.5% GDP growth in the next two quarters is not a scenario for a falling dollar. Traders have begun to entertain the possibility of a far more resilient US economy and a far less crippled US dollar.

The rapid decline of the dollar against the euro since August has been predicated on two linked assumptions: first that the American economy will bend if not break under the accumulated weight of the housing collapse and the credit crisis and second that in order to alleviate the worst of these potential developments the Federal Reserve will push rates lower for the first half of 2008. Both assumptions were called into question by the economic data this week and the dollar had its best two days in over three months. There is a good chance that the direction of the dollar for the remainder of the year has been set and it will see further gains into the New Year holiday.

Central Banks

The American Federal Reserve dropped the Fed Funds target rate for the third time since September to 4.25%. The 0.25% cut made the total reduction 1.0% in less than three months. The discount rate, the cost for banks to borrow directly from the Fed, was cut 0.25% to 4.50%. The rate reductions were the minimum expected by the market. The FOMC statement cited "intensification of the housing crisis and some softening in business and consumer spending" as reasons for the cut. It also mentions inflation, but the FOMC made its decision about inflation vs. growth back in September so the notice that price risks are still evident is neither here nor there.

Directly addressing the severe shortage of medium term liquidity in the money markets, the Federal Reserve and four other central banks have arranged an auction funding facility. It is hoped that the greater access to funding that this facility will provide will enable many banks which do not have direct access to the Fed’s money market cash injections to secure direct financing from the central banks if they are unable to fund through normal commercial channels. The bankers are clearly still struggling with how to provide liquidity to a market whose private lenders have become extremely risk averse, so much so that normal money market funding between commercial entities has been drastically curtailed.




The Week in Review December 3 - 7

United States

There has been as yet no appreciable spillover into consumer spending from either the eighteen month decline in housing or the much more recent ‘credit crisis’. Retails sales were twice as strong as predicted, and the ex auto was number three times the median forecast. The robust sales numbers in the month before the holiday spending season support higher estimates for GDP growth in the fourth quarter. Inflation concerns reignited with producer prices rising at a 7.2% pace and consumer prices surging 4.3% in November. The prices rises were spread across all categories of goods, led by energy costs. The combination of strong consumption and burgeoning inflation may be enough to keep the FOMC on hold at their next meeting January 30th.

Eurozone

The inflation concerns of the European Central Bank (ECB) proved well grounded as the November harmonized inflation index reached the highest level since monetary union began in 1999. ECB rhetoric over the past several months has not countenanced even a hint at rate reduction but financial market worries will prevent a rate increase any time soon. The bank is likely to be on hold well into the spring of next year.


China

Faster yuan appreciation and higher interest rates will be part of a new “tight” money policy in China according to a spokesman for a Chinese government think tank. The Ministry of Commerce estimated that a 1% drop in US GDP growth would slow Chinese export growth by 6.0% . “ The Chinese government’s biggest concern is continued dollar depreciation, it has put too much pressure on the yuan to appreciate”, said Zhu Baoliang from the State Information Center, the government affiliated think tank.




Economic Releases December 10 - 14

United States

Monday: National Association of Realtors (NAR) Pending Home Sales Index for October rose 0.6% to 87.2, the second small monthly gain in a row. This series tracks housing contract activity, a signed contract is not counted as completed until the transaction closes. The index is down 18.4% since last year.

Wednesday: the International Trade Balance deficit for October increased to -$57.8 billion. The deficit with China reached a record -$25.9 billion, with Japan it was -$8.0 billion and with the OPEC countries -$11.0 billion. Exports rose $1.3 billion and imports gained $2.0 billion. The September deficit was revised higher as well to -$57.1 billion from -$56.5 billion. All of the increase was due to the rise in crude oil prices. The volume of oil imports in October rose slightly but the average price in October was $73.49 per barrel, in September it had been $68.51. Excluding energy products the deficit actually shrank in October. With the average price for a barrel of oil even higher in November further increases in the trade deficit are expected. Import Prices jumped 2.7% in November, the largest single boost since October 1990, led by the 9.8% rise in petroleum products.

Thursday: Retails Sales in November proved surprisingly strong gaining 1.2% over October, twice the median forecast and six times the October figure. The ‘ex food and auto’ result was even more pronounced adding 1.8% on expectations of +0.6% and October’s +0.2%. It was the largest rise since January of 2006. There was strength in all categories even building materials posted a gain pf 1.2%. Figures for the prior two months were adjusted higher, the headline ‘sales’ added 0.1% in total and ‘ex auto’ 0.5%. The Producer Price Index shot up 3.2% in November, a +7.2% yearly rate. It was the biggest monthly jump in more than a generation, +1.4% had been predicted. The core rate (without food and energy) added 0.4%, a +2.0% yearly rise, against a prediction of +0.2%. Gasoline prices rose 34.8% in the month and were the biggest driver. But have since fallen somewhat relieving some of the future pressure on prices.

Friday: CPI gained 0.8% in November, far stronger than the expected +0.6% and almost triple the October 0.3% result. The headline CPI is now running at +4.3%. Core CPI added 0.3% for the month, more than the 0.2% forecast and October figure. Core CPI was at 2.3% yearly in November. Industrial Production jumped 0.3% in November, ahead of the 0.2% estimate, but the October number was revised down to -0.7% from -0.5%. Capacity Utilization was 81.5% in November, 81.8% had been forecast, October was 81.7%.


Eurozone

Tuesday: ZEW Survey of economic experts for December fell, 5.7 to -35.7 in the ‘economic expectations’ category and 0.6 in the ‘current conditions’ summary to 59.6. The November readings were -30.0 and 60.2 respectively.

Wednesday: Industrial Production outstripped expectations in October rising 0.4%, 3.8% y/y, on predictions of +0.1% and +3.7%; the September figure was adjusted to -0.8% from -0.7%, the year on year number was unchanged at +3.5%. .

Friday: final HICP inflation for November advanced 0.5% over October and added 0.1% in the year on year reading to 3.1%. The yearly number matches the highest reading since monetary union began in 1999 and matches the May 2001 number.


Germany

Tuesday: ZEW Survey of economic experts for December came in well below forecasts and is at the lowest level since January 1993; ‘economic expectations’ -37.2, expected -35.0, November -32.5; ‘current conditions’ 63.5, expected 66.0, November 70.0. ‘Economic expectations’ are now below the long term average of -31.4.

Friday: final HICP rose 0.5% in November as expected, 3.3% on the year. CPI was slightly higher in the final number +0.5%, +3.1% y/y over the preliminary readings of +0.4% and +3.0%. The HICP figure is at an all time high for this harmonized inflation rate; CPI is at a 13 year peak.

United Kingdom

Monday: output producer prices gained 0.5% in November, the biggest jump in 16 years, and a +4.5% rise since last November. A rate of +0.4% monthly and +4.2% had been forecast. Food and fuel were the main culprits. The Monetary Policy Committee (MPC) of the Bank of England (BOE) did not have these figures when it decided to lower rates by 0.25% on December 6th.

Wednesday: the three month average for average earnings growth dropped to +4.0% in October from +4.1% for September; +4.2% had been forecast. The ILO unemployment rate eased to 5.3% in October, down 0.1% from September.

Japan

Monday: machinery orders rose 12.7% in October more than double the anticipated 6.2% gain. This was this first positive month since June.

Tuesday: consumer confidence scored 39.8 in November, the lowest reading in almost four years, 43.0 had been expected, October was 42.8.

Friday: the Tankan report for the 4th quarter showed a decline in business sentiment. Large manufacturing firms registered 19, less than the forecast of 21 and off the 3rd quarter result of 23. It is the lowest since the 3rd quarter of 2005. Large non manufacturing firms voted at 16, slightly better than the forecast, 15 but substantially less than the 3rd quarter reading of 20. Economy Minister Hiroki Ota blamed the sagging Tankan on high oil and commodity prices and a strong yen. Small firms exhibited the same weaker prospects as their larger brothers.


China

Monday: November PPI was 4.6% ahead of the same month last year.

Tuesday: the November trade surplus measured $26.28 billion, a slight decline from October’s $27.05 billion. The January though November surplus was $238.13 billion an astonishing 52% more than the same period last year, $156.52 billion. November CPI was 6.9% higher than a year prior. Once again food prices were the main driver. A gain of 6.4% had been the median prediction; October prices rose 6.5%.

Wednesday: Retails sales were 18.8% stronger in November than a year previously; in October the growth was +18.1%.





The Week Ahead December 17 – 21

United States

Monday: Treasury International Capital System (TICS) net long term securities transactions for October at 9:00 ET; September +$26.4 billion. TICS total flows for October at 9:00 ET; September -$14.7 billion. NAHB Housing Market Index for December at 10:30 ET; November 19.

Tuesday: Housing Starts for November at 8:30 ET; October 1.229 million. Building Permits for November at 8:30 ET; October 1.170 million.

Thursday: third quarter GDP (final); preliminary 4.9%, advanced +3.9%.

Friday: Personal Income for November at 8:30 ET; October +0.2%. Personal Expenditures for November at 8:30 ET; October +0.2%. PCE Core Price Index for November at 8:30 ET; October +0.2%. University of Michigan Consumer Sentiment for December at 10:00 ET; November 76.1


Eurozone

Wednesday: construction production for October at 10:00 GMT; September 0.0% m/m, +1.5% y/y.

Friday: industrial new orders for October at 10:00 GMT; September -1.6% m/m, +2.0% y/y. ‘Flash’ (1st issue) PMI for December at 10:00 GMT; November manufacturing 52.6, services 53.7.


Germany

Wednesday: PPI for November at 7:00 GMT; October +0.4% m/m, +1.7% y/y. IFO Survey for December at 9:00 GMT; November ‘business sentiment’ 104.2, ‘current assessment’ 110.4, ‘business expectations’ 98.3.

Thursday: GfK Consumer Confidence for January at 7:00 GMT; December 4.3.


United Kingdom

Monday: Rightmove House Prices for December at 00:01 GMT; November +0.7% m/m, +7.9% y/y.

Tuesday: CPI for November at 9:30 GMT; October +0.5% m/m, +2.1% y/y. Core CPI for November at 9:30 GMT; October +1.5% y/y.

Wednesday: minutes of December 6th MPC meeting where the committee voted 7-2 to cut rates 0.25%. CBI Distributive Trades Survey (reported volume of sales) for December at 11:00 GMT; November 13.

Thursday: third quarter GDP (3rd issue) at 9:30 GMT; prior issue +0.7% q/q, + 3.2% y/y.

Friday: Hometrack House Price Survey for December at 00:01 GMT; November +0.2% m/m, +3.6% y/y. Retail Sales for November at 9:30 GMT; October -0.1% m/m, +4.4% y/y. GfK Consumer Confidence for December at 10:30 GMT; November -10.

Joseph Trevisani


FX Solutions


Chief Market Analyst

Joe@fxsol.com

Published on  Mon, Dec 17 2007, 06:30 GMT

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Market Directions Sunday, December 9, 2007

Mon, Dec 10 2007, 09:35 GMT
by Joseph Trevisani

FX Solutions





Market Directions Sunday, December 9, 2007

• * The dollar between fear and disinterest
• * Do three central banks make a trend?
• * End of the year trading

The US Dollar remains stifled between predictions of imminent decline in the American economy and slowly dissipating pro euro trading momentum. The immediate question is whether the still largely technical pressure on the euro will be sufficient to counteract the support for the currency created by the underperforming American economy. US statistics, though in most cases far better than the dire forecasts, have been moderate. But slow economic growth in the United States is the existing market assumption; confirmation of this assumption will not generate new support for US currency and the two currencies ended the week almost exactly where they had begun. It is not enough to be tired of the euro without at least some corresponding affection for the dollar.

Fear of a pending catastrophe in the credit markets is still strong. It could easily be said that this is just fear of the unknown since there have been no new developments for several weeks. Though the American housing sector decline is now 18 months old and has produced few effects in the real economy, these effects are still widely anticipated. They are still the stuff of widespread commentary and concern in the financial media. These opinions, mostly unsubstantiated, are a real and current impediment to the dollar’s recovery. In effect the market is waiting for the dire predictions for the US economy to come true. This realistic fear combined with traders’ intense dislike of assuming new risk at the end of the year has been sufficient to keep the currency markets waiting and worrying, nervous but unable to move.

The market has focused on the dollar and the US economy rather than the euro and the Eurozone because the US economy is perceived to be in more danger, and because there has been little variation in European statistics of late. Only EMU inflation, at last measure 3.0%, has provided any new information. And that statistic has simply reinforced the current market view that the European Central Bank (ECB) is on indefinite hold for interest rates. Eurozone GDP, consumer and business sentiment and purchasing indices have all been close to market forecasts. European statistics do seem to provide fewer surprises than their American counterparts. Surprises move markets and traders have stopped looking to the European Commission Statistical Office, Eurostat, for their inspiration.

There is no reason to expect a notable deterioration in the US economy in the weeks ahead. Consumer sentiment numbers, which have been the weakest category of US statistics, are not overly reliable in predicting real economic activity. It is quite plausible for consumers to be depressed by high gasoline prices and still spend avidly for the holidays. The costs of gasoline and heating oil have risen fast but for most families they are not a substantial portion of the household budget. Gasoline prices will cut into discretionary spending for some US households but they will not significantly reduce overall consumer spending while jobs remain plentiful and wage growth is strong. Any prediction for a Victorian swoon in the US economy will likely remain unfulfilled. There is still plenty of liquidity in the consumer economy.

As we move further into the year end withdrawal of liquidity, the potential, and also the historic fact of volatility rises. It is not a myth, currency markets are more volatile in December. The recent retracement of the euro’s post August climb against the dollar has not yet reached twenty five percent and profit pressure can only mount as the end of the year approaches. This technical pressure on the euro should escalate as the year wanes.

Central Banks

It was a strangely quiet denouement for a week with a surprise rate cut from the Bank of Canada, a reduction from the Bank of England that was unanticipated by half the market and one status quo result from the European Central Bank.

The Bank of England’s and Bank of Canada’s 0.25% rate cuts added to the expectation that the next ECB move will be a cut, but they do not necessarily increase pressure on the ECB to reduce rates in January. With the EMU economy performing more than adequately in the ECB view and with inflation rising, the sole remaining concern that might spur a rate cut consideration by the ECB is the drag on European exports from a strong euro. But without a collapse in US statistics the euro is unlikely generate any substantial upside momentum on its own in the next three weeks. And within that time there is a good chance that internal market positioning will produce the weakening of the euro that ECB desires. To put it simply the market is still very long euros; there is still a great deal of year end profit sitting on the table.

The governors of the ECB and the Federal Reserve are well aware of the market tendency to overplay any direction and then suddenly change its mind. If there is a reasonable possibility the market is going to work in your favor, why not give it a chance? The central bankers are now playing a waiting game trusting that currency traders own self interest will work to their advantage.

The Week in Review December 3 - 7

United States

The “Beige Book’ that the Federal Reserve governors will have on their conference table this week when they make their rate decision perfectly describes the US economic moment, and it’s ‘moderate growth’ message was seconded by every statistic released this week except one. In fact, what did not happen statistically this week was far more important than what did. The Institute for Supply Management Manufacturing Index did not fall below the recessionary 50 level; Non Farm Payrolls did not plummet, the three month moving average rose slightly to 103,000 in November from 77,000 in September. Likewise, the unemployment rate was steady at 4.7% and the ISM Services Index did not dip precipitously, it barely dropped at all. Average Hourly Earnings maintained its 3.8% yearly growth rate. Only Unit Labor Costs fell a much greater than expected 2.0%. The University of Michigan Consumer Sentiment Index did reach a cycle low at 74.5, but, as has occurred in the past, this indicator tends to quickly reverse when the headline prices factors like gasoline recede.

There is nothing in these American statistics that presages cessation of economic growth let alone a recession. The speculation that the US will suffer a severe drop of economic vitality in the coming quarters remains speculation. It has not yet been proven by economic fact.

Eurozone

The ECB was true to its Bundesbank heritage and retained its 4.0% base rate and its anti- inflation bias. Jean Claude Trichet the bank president, sprinkled concessionary allusions that more tightening might not be necessary throughout his prepared statement and his news conference replies. But he also made clear that the bank had not considered cutting rates. In the US the collapse in the housing market has the Fed worried about an impact on consumer spending and future growth that has not yet occurred. In Europe the central bank does not fear this particular consumer reaction and its response to a potential slowdown is to hold rates steady rather than raise them to forestall inflation. The active tendency in the US is to cut rates to promote growth in Europe it is to prevent inflation.

For the ECB a prolonged rate hold in the face of a looming economic slowdown is almost as useful to its anti inflation reputation, especially when its major trading partners are cutting rates, as a rate hike. By the middle of January the ECB will have demonstrated its inflationary nerve and any further deterioration in European growth could elicit a rate reduction. The rhetorical ground has been prepared by Mr. Trichet and his colleagues, if economic conditions warrant, the ECB will follow suit with the Fed, the BOE and the Bank of Canada.

United Kingdom

The Bank of England cut its base rate 0.25% to 5.5% citing slipping economic activity, house price declines, financial market liquidity dangers and a medium term inflation rate likely to hit the 2.0% target as the major reasons. It was the first rate cut in two years and although a majority of economists polled had not predicted the move, the market had priced in a twenty one basis point reduction prior to the announcement.

As with the logic of other central banks the Monetary Policy Committee stressed that economic fundamentals were behind the decision and that the cut was not a response to specific financial markets conditions but to the risks that such conditions engender in the wider economy. The sterling closed on Friday slightly higher against the US Dollar.

Canada

The Bank of Canada (BOC) dropped it main interest rate 25 basis points to 4.25%. Low inflation, a strong economy, ongoing credit market concerns and the fall surge in the Canadian Dollar against the US Dollar were the major quoted rationales. Unstated but very much in the immediate background was the alteration in the United States – Canada terms of trade from the unanswered Fed rate cuts. In the aftermath of the unexpected move the Canadian Dollar reached a temporary three month high against the US currency.

Economic Releases December 3 - 7

United States

Monday: ISM survey for was November 50.8, expected 49.8; October 50.9. It was the weakest reading since January. ‘New Orders’ were 52.6, Octobers 52.5. ‘Prices Paid’ were 67.5, October 63.0. ‘Employment’ was 47.8, October 52.0. This was the first sub 50 reading for employment this year. Export orders rose. The 67% correlation between the ISM survey and GDP over the past 15 years is a solid vote for a diminished economic output in the last quarter of this year.

Wednesday: revised Non Farm Productivity for the third quarter gained +6.3%, expected +5.7%, preliminary +4.9%. It was the largest quarterly jump since 2003. Until Labor Costs for the third quarter were revised to -2.0% from -0.2%, -1.1% had been predicted. Non Manufacturing ISM for November was 54.1, expected 54.5, October 55.8. ‘Employment’ was 50.8, an eight month low, October 51.8. ‘Prices Paid’ recorded 75.5, October 63.5. ‘New Orders’ were 51.1, the weakest since April 2003, October 55.7. Factory Orders for October gained 0.5%, expected 0.0%, October +0.2%.

Friday: Non Farm Payrolls for November added 94,000 jobs, +75,000 had been predicted. The October result was revised up 4,000, September was revised down 52,000. The unemployment rate was steady at 4.7%. Average Hourly Earnings rose 0.5% in November, +3.8% yearly, the same as in October. Considering the strong negatives from the housing sector and the incessant distractions from the financial and credit sectors, it was a positive report. It was characterized as with much US economic new of late, more by the lack of negative news than by arrival of the positive. With this level of job creation there is no reason to expect consumers to desert store this shopping season. The University of Michigan Consumer Sentiment result for December was revised slightly lower to 74.5 from 76.1.

Eurozone

Monday: Purchasing Managers Index (PMI) for November was adjusted slightly higher to 52.8 from the ‘flash’ (preliminary) version at 52.6.

Wednesday: Retail Trade (Sales) for October lost 0.7%, the lowest total since May, September +0.3%.

Germany

Tuesday: Services PMI for November registered 53.1, October 55.1. Manufacturing orders for September were revised to -1.6% from -2.5%, October +4.0%.

Friday: industrial production for October fell 0.3%, gaining 5.9% on the elapsed year, +0.5% and +5.9% had been predicted. It was the first fall in production in three months. September was revised to -0.1% from -0.3%.

United Kingdom

Monday: Manufacturing PMI for November was 54.4, October revised to 52.8 from 52.9. Orders gained in aircraft and shipbuilding.

Wednesday: Nationwide Consumer Confidence for November scored 86, October 98. It was the largest month to month fall since this series began in May 2003. Manufacturing output for October gained 0.3%, +0.3% year on year. September was -0.6%, -0.1% year on year. Industrial Production for October rose 0.4%, +1.0% yearly, September -0.4%, -0.2% yearly.

The Week Ahead December 10 – 14

United States

Monday: NAR Pending Home Sales for October at 10:00 ET; September 85.7.

Tuesday: FOMC Rate Announcement at 2:15 ET.

Wednesday: International Trade Balance for October at 8:30 ET; September -$56.5 billion.

Thursday: Retail Sales for November at 8:30 ET; expected +0.6%, October +0.2%. Retail Sales ex Food and Autos for November at 8:30 ET; expected +0.6%, October +0.2%. PPI for November at 8:30 ET; expected +1.4%, October +0.1%. Core PPI for November at 8:30 ET; expected 0.0%, October +0.2%.

Friday: CPI for November at 8:30 ET; expected +0.6%, October +0.3%. Core CPI for November at 8:30 ET; expected +0.2%, October +0.2%. Industrial Production for November at 9:15 ET; expected +0.2%, October -0.5%. Capacity Utilization for November at 9:15 ET; expected 81.8%, October 81.7%.

Eurozone

Tuesday: ZEW EMU for December at 10:00 GMT; expectations November -30.0, current conditions November 60.2.

Wednesday: Industrial production for October at 10:00 GMT; expected +0.1% m/m, +3.6% y/y, September -0.7% m/m, +3.5% y/y.

Friday: Final HICP for November at 10:00 GMT; expected +0.5% m/m, +3.0% y/y, October +0.5% m/m, +3.0% y/y.

Germany

Tuesday : ZEW Survey for December at 10:00 GMT; ‘economic expectations’, expected -35.0, November -32.5; ‘current conditions’, expected 66.0, November 70.0.

Friday: Final CPI for November at 7:00 GMT; expected +0.4% m/m, +3.0% y/y, preliminary +0.4% m/m, +3.0% y/y. Final HICP for November at 7:00 GMT; expected +0.5% m/m, + 3.3%, preliminary +0.5% m/m, +3.3% y/y.

United Kingdom

Monday: DCLG House Price Index for October at 9:30 GMT; September +10.8% y/y.

Wednesday: ILO Unemployment Rate for October at 9:30 GMT; September 5.4%. Average earnings including bonus at 9:30 GMT; September +3.7%.

Thursday: RICS House Price Survey % prices balance for November; October -22.2%. CBI Industrial Trends Survey for December at 11:00 GMT; November 8.

Japan

Monday: Machinery Orders for October at 23:50 GMT (prior day); September -7.6%.

Tuesday: Consumer Confidence for November at 5:00 GMT; October 42.8.

Friday: Quarterly Tankan Business Sentiment Survey at 23:50 GMT (prior day).

China

Monday: PPI for November (issue time unreleased); October +3.2% ytd, +2.8% y/y.

Tuesday: CPI for November (issue time unreleased); October +6.5% ytd, + 4.4% y/y.

Wednesday: Retails Sales for November (issue time unreleased); October +18.1% ytd, +16.1% y/y.




Joseph Trevisani

FX Solutions

Chief Market Analyst




Joe@fxsol.com

Published on  Mon, Dec 10 2007, 09:35 GMT

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Market Directions Sunday, November 25, 2007

Mon, Nov 26 2007, 11:49 GMT
by Joseph Trevisani

FX Solutions




• The year end Euro or the end of the Euro year?
• Transparency fails to make the Fed’s case
• Isolationist Europe ?

Several major currencies have retreated from their early November peak against the US dollar. The British Pound topped out on November 9th, the Australian, New Zealand and Canadian Dollars on November 7th. All of the speculative Yen crosses are dramatically lower. Only the Euro and the Swiss Franc linger near their highest levels against the US Dollar. The Euro ascent to record on Friday took place in extremely thin Asian trading. Japan and the prior US market were both closed for holidays. And as is usual in such conditions, stops drove the market with little or no hindrance from normal liquidity. More telling than the upside run was the market’s reaction to a comment from the Governor of the Bank of Spain Miguel Ordonez. He said that the sees a stronger than expected slowdown in the Eurozone. Within 90 minutes the Euro had fallen more than a figure and a half against the Usd.

The currency markets are entering the least liquid trading month of the year. For many of the large players it is also the end of their accounting year. The Euro is at the end of a long and explosive rally; it is ripe for profit. The market reaction to Mr. Ordonez’s comment illustrates the vulnerability of the underlying assumptions that have bolstered the Euro since August: that the EMU will not be buffeted by the winds of economic slowdown and perhaps recession that are beginning to blow through the US economy, that European economies will remain insulated from any serious economic fallout from the continuing financial and credit market problems and finally that the EMU economies will only benefit from the strong Euro.

If the assumptions are all true then the ECB will not have to take out a rate insurance policy against its immediate economic future. Is that an overly optimistic view, does it jibe with the facts and with history? In the worldwide financial, commodity and consumer markets demand is driven by the sum of national markets. American and European consumers pay more for gasoline because demand is rising in new markets in India and China and consumer demand in the US fuels the manufacturing and service economies in both countries. The relationship is no less reciprocal between the States and Europe. If the US economy slows appreciably the ripple effects will cross both oceans. Rather than an isolated EMU economy unscathed by a US decline, a far more plausible scenario is that the more US growth slows, and the longer restricted credit and a strong Euro last, the less likely the Europeans will be able to escape their measure of economic pain. The world of the strong Euro is not as secure as it seems.


The Week in Review November 19 - 24

United States

The minutes of the Federal Reserve Open Market committee (FOMC) meeting of October 30-31 when the committee voted 9-1 to ease the Fed Funds target rate by 0.25% showed considerable discussion of the state of the economy. The balanced economic and inflation risk portrayed in the FOMC statement of the 31st was overshadowed by the emphasis in the meeting on the parlous state of the economy. If the Fed had hoped to remove some of the certainty the market attaches to a rate cut on December 11th by the release of the minutes it has failed. After the release the Euro shot up to what was then a new high against the Dollar. The new Fed central projections for 2008, updated since the last issuance in June, added to the Dollar’s needy state. Real GDP growth projections were lowered to 1.8% to 2.5% from 2.5% to 2.75%, inflation projections were reduced and “financial markets [were still viewed] as fragile and [susceptible] to an adverse shock such as a sharp deterioration in credit quality or the disclosure of an unusually large and unanticipated loss [that] could further dent investor confidence and significantly increase the downside risks to the economy”.

The key to market perception of future Fed policy is the actions they have already taken. Even though the FOMC minutes contained numerous statements as the following: “Participants viewed the downside risks to growth as somewhat smaller that at the time of the September meeting, but those risks were still seen as significant”; and that “Financial market functioning was judged to have improved somewhat…”, the impression left by the discussions amongst the committee members was that the Fed will reduce rates again if the economic conditions warrant. The committee will have to look no farther than their own detailing of the current economic risks to justify a 0.25% reduction in December. The market will credit action over rhetoric every time and the futures have priced the chance of at rate cut in December at 80%. The calculus is simple. The potential risks involved in not easing are considerably greater than the risks attendant upon another cut. A rate cut is easier to retract and is not likely to change the long term inflationary expectations in the economy, while delaying a rate cut could tip the economy into recession. With the housing and financial sectors already in severe contraction the potential for a reinforcing economic downturn as job losses curtail consumer spending which further inhibits production and jobs is not a risk the Fed may want to take. The FOMC has shown no affinity for monetary theory over economic practice. Clearly Mr. Bernanke and his colleagues would rather take a few inflationary notches out of an expanding economy than pumping up a collapsing one. If the Fed has made two rate withdrawals so far, the market cannot see why it will not go to the bank at least once more.

Eurozone

Jean Claude Trichet, the head of the ECB, is not happy with the currency markets but unless he changes his script his comments will have no more effect on the Euro level than they did this week. He repeated his view that the ECB does not welcome “brutal “ currency moves, that abrupt FX gyrations do not favor growth and that US officials say they support a strong dollar. There was nothing new here. European statistics in construction, industrial new orders and purchasing managers indices indicate an economy with substantially more to worry about than expected; these statistics will have more effect on the Euro than a month’s worth of central bank rhetoric.

Germany

Peer Steinbrueck the Finance minister said there was currently no need to worry about the Euro trading rate. His view is optimistic. He cited two main points about the German economy. First, he stated that more than 40% of German exports are to the Eurozone and unaffected by the external Euro exchange rate. While that is strictly true, the 60% of exports that are external to the EMU are the high value items that drive corporate profits and all exports will be affected if Germany loses ground in non EMU exports. Second is that a strong Euro forces German firms to become more efficient and that is a benefit for the entire economy. And though that is also true, the adjustment period brought on by a strong currency is long and often costly in jobs. The German economy is highly unionized and inflexible, the idea that an expensive Euro will spur productivity without social and political costs is naive. High value German goods have many competitors throughout the world.

United Kingdom

Bank of England (BOE) minutes for the November meeting revealed a 7-2 vote to keep rate unchanged, as opposed to the 8-1 vote that had been expected. The case for a rate reduction in the first quarter next year was strengthened slightly but only slightly. As with the FOMC meeting there seems to have been substantial discussion of the state of the economy. The November report projected inflation to remain above the 2.0% BOE target through the second quarter of 2009 under the current market assumptions of two 25 basis point rate cuts. This prediction helps to explain why the Monetary Policy Committee (MPC) did not ease rates earlier this month. The committee seems to have a bias towards cutting rates as most discussion was about when to cut rates not whether to cut rates at all. But members said they wanted more evidence of economic slowing before acting.

China

The People’s Bank of China (PBOC) is the latest official fan of the US dollar. At the G-20 meeting in Cape Town South Africa Central Bank President Zhou Xiaochuan joined previous bank representatives in distancing the central bank’s policy from remarks last month by a non bank Chinese official who had suggested that China should diversify its currency reserves out of US Dollars. That view does not necessarily reflect the view of the PBOC. “The People’s Bank has its own analysis”, he said, “We support a strong dollar”. It is hard to find a central banker who doesn’t back a strong Dollar. The G20 is a group of 19 of the world's largest economies, plus the European Union whose purpose is to serve as forum for consultation on the international financial system. Mr. Zhou also stated that because of the high liquidity in the Chinese economy the bank will continue to raise reserve requirements and would not rule out further rate increases. “So we don’t think we need to use too frequently the interest rate adjustment but we don’t exclude the possibility”, he said in the best tradition of central bank speak.

Economic Releases November 19 - 24

United States

Tuesday: Housing starts rose 3.0% to 1.229 million in October, something of a surprise in the general gloom in the home construction industry. When combined with the better than expected result and revision in the NAHB index last week is this a tentative sign of stability? But before optimism sets in building permits fell 6.6% to 1.178 in October and they are considered a better gauge of prospects in home construction. The gain in housing starts was due to a large jump in investment type multiple unit properties. Starts of single family homes dropped 7.3%.

Wednesday: the University of Michigan Consumer Sentiment poll gained 1.1 in the final release to 76.1; October was 80.9. This index is more than 21% lower than its January 2007 peak. The economic projections of the Fed governors and presidents were changed as follows: real GDP growth for 2007 was raised to 2.4 to 2.5 from 2.25 to 2.5%; 2008 was lowered to 1.8% to 2.5% from 2.5% to 2.75%. The unemployment rate for 2007 was raised to 4.7 to 4.8% from 4.5% to 4.75%; 2008 was raised to 4.8 to 4.9% from 4.75%; core PCE inflation for 2007 was reduced to 1.8% to 1.9% from 2.0% to 2.25%; 2008 was lowered to 1.7% to 1.9% from 1.75% to 1.9%. With substantially reduced GDP, higher unemployment and lower inflation the FOMC has the economic specifics in hand should the members feel another rate cut is warranted.

Eurozone

Monday: Construction Production was flat in November and ahead only 1.5% on the year. Augusts’ numbers were revised down to +0.3% monthly and +2.6% yearly from +0.4% and +2.7%. Of the five months prior four were adjusted lower by small amounts, only July exhibited a minor rise. This indicator is composed of two parts, ‘building construction’ and ‘civil engineering’, and the building construction component information only goes back to last year.

Friday: Industrial New Orders fell 1.6% in September, leaving the yearly growth just 2.0% ahead of last year. When combined with the 2.6% drop in July this is the first quarter with two down months since the beginning of 2006. Augusts’ statistic was revised up to +0.8% monthly from +0.3% and to +5.3% from +5.1% yearly. Flash manufacturing PMI for November at 52.6 was slightly better than the 51.0 forecast and the October result of 51.5. However the services sector continued to falter dropping to 53.7 from 55.8 in October. It was the lowest reading for this year.

Germany

Tuesday: the Producer Price Index in October was a bit ahead of expectations at +0.4% for the month and +1.7% year on year; predictions had been +0.3% and +1.6%. August was unrevised at +1.0% yearly. Increases were led, as in the US and elsewhere, by food and oil products.
United Kingdom

Monday: Rightmove House Prices fell 0.7% in November, leaving the elapsed year 7.0% higher. The October results were +2.7% and +10.4%.

Tuesday: Confederation of British Industries (CBI) Industrial Trends Survey rose unexpectedly to +8% in November; October was -6.0%.

Friday: business investment was flat in the third quarter and is now ahead only +4.6% for the year. Growth of +0.5% and +6.0% had been predicted.

The Week Ahead November 26 – 30

United States

Tuesday: Case-Shiller Home Price Index for September at 9:00 ET; August 197.16

Wednesday: Durable Goods Orders for October at 8:30 ET; September -1.7%, ex transport +0.4%. Existing Home Sales for October at 10:00 ET; expected 5.00 million units, September 5.04 million. Federal Reserve Business Survey the ‘Beige Book’.

Thursday: preliminary (1st revision) GDP for the 3rd quarter at 8:30 ET; expected 4.9%, the advanced (initial release) was 3.9%. New Home Sales for October at 10:00 ET; expected 750,000, September 770,000.

Friday: Personal Income for October at 8:30 ET; September +0.4%. Personal Expenditures for October at 8:30 ET; September +0.3%. PCE Core Chain Weight Price Index for October at 8:30 ET; September +0.2%. Chicago Purchasers Index for November at 9:45 ET; October 49.7. Construction Spending for October at 10:00 ET; September +0.3%.

Eurozone

Wednesday: M3 Money Supply for October at 9:00 GMT; expected +11.5% m/m, +11.5% 3 month moving average; September +11.3% m/m, +11.5% moving average. The official ECB target of +8.0% was last satisfied in July 2006.

Friday: Flash (1st issue) HICP y/y for November at 10:00 GMT; expected +2.8%, October +2.6%. EMU economic sentiment index for November at 10:00 GMT; expected 105.0, October 105.9. Third quarter GDP (1st details) at 10:00 GMT; expected +0.7% q/q, +2.6% y/y.

Germany

Tuesday: IFO Survey for November at 9:00 GMT; business sentiment, expected 103.1, October 103.9; current assessment, expected 109.0, October 109.6; business expectations, expected 97.8, October 98.6. Preliminary CPI for November (time not determined); expected +0.1% m/m, +2.6% y/y, October +0.2% m/m, +2.4% y/y. HICP for November (time undetermined); expected +0.1% m/m, +2.9% y/y, October +0.2% m/m, +2.7% y/y.

Wednesday: GfK consumer confidence for December at 7:00 GMT; expected 4.3, November 4.9.

Thursday: ILO unemployment rate for November at 8:55 GMT; expected 8.6%, October 8.7%. Total retail sales for October (time undetermined); September +1.6% m/m, -0.3% y/y.
United Kingdom

Wednesday: Land Registry House Prices for October at 11:00 GMT; September +0.4% m/m, +8.7% y/y. Monday

Thursday: GfK Consumer Confidence for November at 10:30 GMT; October -8.

Japan

Wednesday: Retail Sales for October at 23:50 GMT (prior day); September +0.5%.

Friday: Notional Core CPI for October at 23:30 GMT (prior day); September -0.1% y/y. Central Tokyo core CPI for November at 23:30 GMT (prior day); October 0.0%. Unemployment Rate for October at 23:30 GMT (prior day); September 4.0%. Household Spending for October at 23:30 GMT (prior day); September +3.2%.

China

No statistical releases.

Joseph Trevisani
FX Solutions
Chief Market Analyst

Published on  Mon, Nov 26 2007, 11:49 GMT

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Market Directions Sunday, November 18, 2007

Mon, Nov 19 2007, 13:39 GMT
by Joseph Trevisani

FX Solutions






• The timing of bad news

• Commodity currencies lose their shine

• Federal Reserve transparency and currency volatility

Consolidation in the Euro this week gave no comfort to advocates for the return of the Dollar. Weak economic statistics from the US and a partial return to US investing by foreign purchasers kept traders from capitalizing on the relatively strong position of the Dollar early in the week. The best level for the US currency against the Euro came on Monday, a day when US markets were closed. European statistics point to a slipping industrial base coupled with rising inflation, a central banker’s nightmare. But future consumer spending on the continent is not thought to be hostage to a collapsing housing market and thus less likely to damage future economic growth. Nor has the European Central Bank (ECB) been forced to lower interest rates to ward off serious economic problems. Estimates for American economic growth in the last quarter of this year and the first of next are now between 1 and 2%, a long way from the projected 5% growth in the third quarter. It is not that the future does not look troubled in Europe, it does. But the view in Europe is mostly of worry; in the US worry is starting to become reality.

Sterling depreciated sharply pressured by concerns over financial sector weakness, an inflation report from the Bank of England that seemed to predict two 25 basis point rate cuts in 2008 and poor retail sales and housing numbers. The financial sector in the city of London is the largest single creator of jobs in the British economy. Contraction there will have a disproportionate on unemployment in the country.

After this week the case is strong that the economic bad news for the Sterling and Dollar is priced into the market; the vulnerability for the Euro is that it is not. European statistics have only started to report what US and British figures have already revealed. Due to both the later reporting of many EMU statistics -- for instance October retail sales for the Euro area will not be released until December 5th, (US retail sales for October were out November 14th), EMU industrial production for October is not issued until December 12th (US industrial production for October was released on November 16th) and Euro area consumer confidence for November is reported November 30th (University of Michigan consumer confidence for November was reported on November 9th) -- and because the number of Euro area statistics is far less and so less frequent, the Euro can benefit from this relative economic opacity when the news is poor. Because any decline in EMU statistics is reported later, bad news from the US for the same month affects the Dollar first and is not counterbalanced from Europe until weeks after. Because there are fewer statistics for the EMU as a whole than for the US, there is simply less bad news to report. The psychological impact on the market of the continual update of poor US statistics against the relative sparsity of EMU statistics should not be underestimated.

The commodity currencies, the Australian, New Zealand and Canadian Dollars all recovered from their precipitous declines which began on November 7th, but with economic growth estimates shrinking worldwide the immediate future for them remains downcast. The Yen crosses augmented the change in fundamental outlook for these currencies adding their highly speculative liquidity to the cascade of positions looking for an exit.




The Week in Review November 12 – November 16

United States

Ben Bernanke the Federal Reserve Chairman has promised greater transparency for the Fed’s deliberations and economic projections. The central bank under his leadership has already greatly altered its relations with the press and the market. And though his predecessor Alan Greenspan is best remembered for his cryptic comments and witty asides, rare in public economists, he had also done much to open the Fed to outside scrutiny. It is only in retrospect that Mr. Greenspan appears close with his communication. The question for market participants is will this new transparency add or detract from volatility. Many factors have worked to lower volatility in currency markets in the past fifteen years but one of the most effective has the spread of information. Volatility thrives in the absence of knowledge. The more the Fed reveals of its information gathering and analysis the more traders will be able to discern correctly its future policies. The more traders know the less room there will be for speculation. The unexpected development will never disappear, witness the almost overnight eruption of the credit crisis in August, but the speculative charge given to the market as it anticipates Fed policy will continue to diminish.

The immediate response to CPI and Core CPI at +3.5% and +2.2% was the thought that such levels would limit the Fed’s ability to reduce rates if further reductions become necessary. However, as Mr. Bernanke has clearly proven, in such a case the Fed would probably lower rates anyway, even if immediate inflation prospects would argue restrain in a normal economy. In a perverse way the higher inflation represented by the CPI numbers confirms the basic Fed scenario, faster growth in quarters two and three may have spurred inflation, slower growth should keep inflation in check.

Industrial production and capacity utilizations fell unexpectedly in October, reinforcing the market pricing of a Fed 0.25% rate cut at the December 11th meeting. Part of the fall in industrial production was due to weather related declines in electric and natural gas production from warmer temperatures, much like a similar drop in industrial production in January. All categories of production fell, manufacturing, autos and housing and related industries.




Eurozone

Nicholas Sarkozy, the French president, pushed for more public participation in debates on monetary policy, including with the ECB. “Europe has chosen democracy and in a democracy one must be able to debate everything: monetary policy, budget policy, trade policy industrial policy, fiscal policy, all policies whatever they may be”. In the past the ECB has always responded vigorously to attempts by European politicians to pressure its decisions. This time there was no response. The EU is seen by many European voters as bureaucratic and without much popular legitimacy or loyalty. Voter loyalty in even the long established members of the EU lies with the national government and not with Brussels. Officials of EMU institutions, including the ECB have consequently felt a need to vehemently defend any threats to their independence from national politicians.

Barclays Bank will write down £1.3 billion, $2.66 billion in losses associated with credit products. UBS was reported in the Wall Street Journal to face more than $7 billion in similar write downs but neither story swayed market conviction that the risk center of the credit crisis is in the United States.




United Kingdom

The inflation report of the Monetary Policy Committee of the Bank of England predicted that CPI would be well below the 2.0% target if rates are kept at the current 5.75% level and that it would be at 2.0% two and three years out at market rate assumptions. Since market pricing assumptions have rates at 5.5% by the first quarter of 2008 and 5.2% in the first quarter of 2009, the report’s implication of at least two 0.25% rate cuts was more of an admission than expected and contributed to the Sterling sell off.




Japan

In November the yen has traded in almost a 6 % range against the Dollar, rising almost 4.5% on the week to Fridays close. Normally this type of volatility brings Japanese officials leaping to the microphones to decry ‘excessive currency volatility’ or some other such complaint. In the context of this rising Yen the comments from Chief Cabinet Secretary Machinura are most striking. “From the long term perspective…a rising Yen should not be rejected, but I emphasize, long term”. “I think that Yen appreciation is desirable for the economy”. The yen has not yet improved so much that it is a drag on Japanese exports and a strong Yen does serve as a backstop against inflation, should it arise. 110.00 Yen per Usd is probably near the center of the range that Japanese manufacturers and economic planners find comfortable. Since by several measures the Yen is as undervalued or more so than the Chinese Yuan and Japanese competitiveness benefits as the Yuan rises, and the Chinese government has faced increasing criticism from other industrialized nations for the value of the Yuan, now does not appear to be a politic time for Japanese officials to complain about currency movements or the appreciating Yen.




Central Banks

The Bank of Japan voted 8-1 to leave rates at 0.5% at its regular policy meeting on Monday. The last rate change by the BOJ was the 25 basis point increase in February.




Economic Releases November 12 - 16

United States

Tuesday: National Association of Realtors (NAR) pending Home Sales gained 0.2% in September to 85.7, a much better performance than the 2.5% decline that had been predicted. But the index remains off 21% since last September.

Wednesday: Retail Sales rose 0.2% in September as expected; the September result added 0.1% on revision to +0.7%. Sales minus food and automobiles added 0.3% also as expected. The increases in both numbers were due to the gasoline and food components which reflected higher prices not higher volumes. The Produce Price Index was benign in headline and core numbers in October. The core rose only 0.1%, less than the +0.2% predicted and the headline number gained 0.1%, a quarter of the 0.4% gain anticipated. The yearly rate was +1.1%.

Thursday: CPI rose 0.3% in October. The 3.5% yearly rate was the highest since last August. The core rate added 0.2% in the month, 2.2% on the year. Both CPI statistics were exactly as expected.

Friday: Industrial Production contracted 0.5% in October against an expected 0.1% rise. All categories of production fell, led by utilities, which suffered from unusually warm weather, but seconded by auto, housing and manufacturing. The September figure was revised 0.1% higher to +0.2%. Capacity Utilization dropped to 81.7%, undercutting the 82.0% forecast and the 82.0% figure in June. Net US capital flows failed to meet the current account deficit for the third month in a row. The Treasury International Capital System (TICS) accounted a net loss in totals flows of $14.7 billion; the September figure was revised up to -$150.7 billion from -$163.0. Net long term securities transactions were positive at $26.4 billion; in August the flow was reversed at -$70.3 billion. The current account deficit, commonly called the ‘trade gap’ has averaged a little more than $59 billion per month this year. Long term securities flows have collapsed in the third quarter averaging -$24.7 billion per month; in the first half of the year they measured +$85.9 on average per month. Since mid June the Dollar has depreciated 10.6% against the Euro. Europeans are the largest overseas investors in the United States economy.




Eurozone

Monday: Industrial Production contracted 0.7% in September, more than three times as much as the predicted -0.2%. In August production had expanded 1.2%. Industrial Production was 3.5% ahead of the level last year but that was much less than the 4.7% gain predicted. The August year on year rate was revised 0.2% higher to 4.5%.

Wednesday: third quarter GDP rose 0.7% as expected, a 2.6% annual rate. Though the monthly addition to GDP was more than twice that of the second quarter (+0.3%, +2.5%) the recovery is forecast to be short lived as the predicted US slowdown and remaining credit market problems exact their toll on EMU growth. .

Thursday: the harmonized inflation index (HICP) for October was unchanged from its flash estimate at +0.5% for the month and +2.6% for the year. These are the highest reading since September 2005. Prices were largely driven by increases in oil products and seconded by rising food prices. Though some analysts see inflation reaching 3.0% annually by the end of the year the ECB is not likely to hike rates, worried by signs of slipping economic growth and repercussions of the credit market contractions.




Germany

Monday: the ZEW survey of financial experts for November turned in some of its lowest reading in a decade. The headline ‘economic expectations’ category registered -32.5, well below October’s -18.1 and the lowest reading since February 1993. It was also the fifth decline in six months and the largest drop since the sub prime and credit problems surfaced in early August. The long term average is 31.8. Wolfgang Franz, ZEW President, blamed the decline on the “financial crisis” and “the depreciation of the US Dollar. ‘Current conditions’ fell slightly in November to 70.0 from 70.2 in October. It was the weakest reading since March.

Wednesday: GDP added 0.7% in the third quarter as anticipated, a 2.4% yearly rate according to the Federal Statistical Office (FSO). It was the fastest quarterly growth this year, (Q1 +0.5%, Q2 +0.3%).

Thursday: HICP inflation reached a six year high in October at +0.2%, +2.7% for the year, confirming the flash estimate. It was the second 2.7% month in a row. As in the EMU, prices were led by increases in oil and food. October oil prices were counted against the much lower price base for oil which existed last October when crude oil was around $60 a barrel.




United Kingdom

Monday: Department of Communities and Local Government (DCLG) House Price Index rose 10.8% in September, a 0.5% drop from the August rate. The Royal Institute of Chartered Surveyors (RICS) saw a 22.2% fall in October prices reported by its members in the prior three months. It was the most negative balance since June 2005. New buyer inquiries fell for the 11th straight month.

Tuesday: CPI added 0.5% in October, breeching the 2.0% BOE target in October by pushing the yearly rate to 2.1%; +0.3% and +1.9% had been predicted. The core rate rose 0.3% for the month and 1.5% for the year, the same as in September; +1.7% had been predicted. Gas and food prices led the way to the highest monthly rate since June.

Wednesday: the ILO unemployment rate was stable in September at 5.4%. Average earnings advanced 4.1% in September over a year prior, greater than the 4.0% predicted and the highest reading since March. Earnings gained 3.7% in August. Private sector earning rose 4.7%.

Thursday: Retail Sales sank 0.1% in October well under the +0.1% median prediction. The 4.4% yearly growth was 0.2% below predictions. Septembers’ results had been +0.6% and +6.3% respectively. Sterling fell on the release.




Japan

Tuesday: 3rd quarter GDP added 0.6% and 2.6% in the yearly accounting; +0.4 and +1.8% had been forecast. 2nd quarter GDP was lowered 0.1% to -0.4%




China

Tuesday: the Consumer Price Index (CPI) was 6.5% higher in October than in the same period a year ago. It was the fastest rate of inflation on the mainland in more than a decade and above the 6.2% rate in September. Food price inflation was the strongest driver with non food CPI gaining only 1.1% for the month.

Wednesday: Retail Sales in October rose 18.1% over a year ago, it was the largest increase this year; in September the year on year rise was 17.0%

Thursday: the yearly gain in Industrial Productions fell slightly in October to 17.9%; 18.5% had been expected; in September the gain was 18.9% over the prior year.

Published on  Mon, Nov 19 2007, 13:39 GMT

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Market Directions Sunday, November 11, 2007

Mon, Nov 12 2007, 14:13 GMT
by Joseph Trevisani

FX Solutions





•  The ECB, BOE and Fed - actions and words

• Dollar crisis, what is a crisis?

• The European inflation ‘hill’

After two successive rate cuts the currency markets will only anticipate more of the same from the Federal Reserve. Mr. Bernanke and the Fed Governors can imply a neutral or tightening bias all they want. They can cite inflation and the potential for future inflation, they can quote the equal balancing of risk between inflation and growth; but in the end, traders will not now price anything but further rate cuts. Currency futures on Friday were, once again, almost unanimous in predicting a 25 basis point reduction in the Fed Funds rate at the December 11th FOMC meeting.

The European Central Bank rate policy is described equally well by their actions, not by their rhetoric. Jean Claude Trichet can recount the inflationary potential of rising oil prices and rehearse the paramount central bank task of ensuring price stability, but in the end the market will not price anything but an extended stay at 4.00%. No matter what the provocation from inflation, it is very difficult to see the ECB governing board raising rates in the near future. Gathering information is as good a public rationale as any.

Both Mervyn King, the head of the Bank of England (BOE), and Jean Claude Trichet, head of the European Central Bank (ECB) do not seem to believe that the economic storms brewing in the new world will reach the old. Or barring that, they have yet more time to contemplate the economic signs before acting. If the United States sinks to recession it is hard to think how the European Monetary Union (EMU) would be unaffected; that has been past history. Perhaps Mr. Trichet and Mr. King are implying their confidence in the US economy and its ability to avoid recession when they stand pat on rates.

Actual economic conditions are the Fed’s stated determinant for policy decisions. But the markets cannot see into the current economic picture anything but problems. Even if all the America news is not bad, and there are some positive influences. Jobs for one remain relatively plentiful and consumer spending has not fallen appreciably. The markets will not change their overall view of the Dollar without real positive developments. Without an end to the dismal news from housing, a stabilization in the equities and a completion of the asset-backed write-downs in the financial sector, the fear of recession will not abate nor will the Dollar recover. Sooner or later, the logic goes, foreclosures, the general drop in housing wealth, and now the dramatic retreat in the equities will force consumers to cut back on spending and then the down cycle leading to recession begins. So far, it should be remembered, this has not happened.

Markets may have short attention spans, but they also have exaggerated focus. Right now the focus is on the negative aspects of the US economy and the Dollar. The continual drumbeat reminds the markets only of the US economic woes and Dollar risk, adding market expectation for more Fed rate reductions to the actual pressure of economic events

The ECB is caught in a defile between inflation risks and sliding economic growth. Record oil prices exacerbate concerns on the inflation side which were already elevated due to the latest 2.6% HICP (Harmonized Index of Consumer Prices) figure. On the economic side the preliminary performance figures from the EMU itself and the now widely expected US economic slowdown and its contagion effects, offer abundant cause for worry. When combined with the as yet unresolved financial sector and credit market problems, the potential for economic damage approaches certainty

The policy predicament is essentially the same for the US Federal Reserve, the European EC and the British Bank of England, though the economic curve is more advanced in the US. The Fed sees more economic risk, or is more willing to do something abut the growth risk, which amount to the same thing, and the ECB sees more inflation risk, and is more willing to do something about that—refuse to cut rates, that is. The BOE is somewhere in the middle Mr. Bernanke’s “delicate balance” of growth and inflation is an apt descriptive for the uncomfortable position of all three central bank policies.

Oil prices, bank and mortgage industry asset write downs and the once and future housing crisis make a positive world economic view hazardous. But perhaps it is the prospect of a genuine Dollar crisis, where the world’s investors abandon the US currency and the tremendous strains that would impose on the world’s financial system that is the real fear lurking in the minds of traders as they contemplate their currency graphs and the slope of the Dollar’s decline. A genuine Dollar crisis would cause severe financial and economic dislocation, perhaps even more than could be handled by the world’s central bankers. Will such visions stop traders from selling the dollar? No. On the contrary such visions could provide great additional leverage, psychological leverage, against the dollar. A dollar contrarian is an extremely endangered species.

Central Banks

The Reserve Bank of Australia hikes the cash rate 0.25% to 6.75% as expected, citing consumer demand, high capacity utilization and inflation challenges. The central bank view is that “the tightening in global credit conditions …has been less pronounced [in Australia] than elsewhere”.

The European Central Bank holds it main rate at 4.00%; the Bank of England does the same at 5.75%. Both decisions were expected.





The Week in Review November 5 – November 9

United States

Quarter two GDP was 3.8%; quarter three was 3.9% with a potential bump to 4.9% or higher when the preliminary (2nd issue) numbers are out November 29th. Even if, as Mr. Bernanke said in his testimony before Congress on Thursday, the economy slows ‘noticeably’ in the fourth quarter, what would that decline entail, growth at 2.5%, or 2.0%? Such quarter to quarter shifts are not uncommon. The last was on either side of the first quarter this year. If fourth quarter GDP is 2.0%, less than half the likely rate of the third quarter, the US economy would still have grown 2.6% for the year. A similar scenario in the EMU would leave GDP at 2.36%.

The ISM non manufacturing numbers do not point to a slowdown in the services sector at the beginning of the fourth quarter. The long term average of this series is 57.7 and the 55.8 reading in October, up from 54.8 a month earlier, remains moderately expansive. And, perhaps surprisingly, the services sector seems largely free of contagion from the housing collapse and the financial market credit crunch. “When you take away a few industries, most notably financial services and real estate, business is pretty good out there”, said Anthony Nieves, head of the Institute for Supply Management (ISM) non-manufacturing survey committee. Wholesale inventories could add a much as 1.0% to third quarter GDP, which would boost the preliminary number issued on November 29th (2nd release) to 4.9% from 3.9%, the strongest quarter since the beginning of 2006 recorded 4.8%. The estimates for additions to inventories in August and September which were included in the advanced GDP number issued on October 31st were much lower than the actual +0.7% and +0.8%. In addition, the increase in US exports represented by the much lower than forecast International Trade Balance, -$56.5 billion, will boost the ‘preliminary’ GDP statistic as well. Estimates currently range as high as 5.2% for the quarter.

Consumer sentiment collected by the University of Michigan plunged in November to 75.0 from 80.9 in October, five points below market estimates. It was the lowest level for this gauge since 1993 excepting the post Hurricane Katrina reading in fall of 2005. This level of sentiment is just above what is usually associated with a recession. But recessionary sentiment numbers are normally seconded by rising jobless claims which is not true currently.

Eurozone

“A hump” is how Jean Claude Trichet, head of the ECB, described near term EMU inflation prospects. He did not discuss the dimensions of the hill but all 'hills' have two sides and the far side is a down slope.

The Services Purchasing Managers Index (PMI) at 55.8 gave ECB officials some hope that the united economy may move fast enough to keep them from having to cut rates in the face of looming inflation. The services sector is not as dominate in Europe as it is in the States but the PMI was cited as a positive result by EU government representatives. However, September’s Industrial PPI, higher than predicted in both the monthly and yearly reading, and Retail Trade, less than half the expected increase, added to the string of economic figures pointing precisely at the ECB’s chief worries, inflation and slipping economic growth.




Economic Releases November 5 – November 9

United States

Monday: the Institute for Supply Management (ISM) non manufacturing Index was 55.8 in October higher than the median forecast of 54.0 and also better than September's 54.8 result. New orders was healthy as 55.7 over September's 53.4; employment dropped slightly to 51.8 from 52.7. According to Anthony Nieves, the head of the ISM non manufacturing survey, the service sector is not overly affected by the problems in the housing and credit areas. Firms in the mortgage banking and real estate sectors are recording difficulties but aside from that, “companies are doing good business at this time”, he said in an interview with Market News International. Export orders were a particular strong point rising to 56 in October from 50 in the prior month.

Wednesday: Wholesale inventories rose 0.8% in September; Augusts’ numbers was revised to +0.7 from +0.1, implying much more production than anticipated in the last two months of the third quarter.

Non farm productivity improved at a 4.9% annual rate in the third quarter far superior to the 3.2% expected and more than double the 2.2% rate in the second quarter. It was the strongest addition to productivity since the third quarter of 2003 when it was +10.4%. Output growth rose to 4.3% but hours worked fell 0.5%, hence the rise in productivity as labor costs are the largest component in most production. Unit labor costs (ULC) in the third quarter fell 0.2%, well off the anticipated 1.0% increase. In the second quarter ULC had gained 2.2%; productivity is now 4.3% higher than it was a year ago. There is little or no wage inflation in these numbers.

Friday: International Trade Balance for September came in at $56.5 billion $2 billion less than the general forecast. The August deficit was adjusted lower to $56.8 billion from $57.6 billion. The timing of oil prices, since September they have moved steadily higher, will add about $10 billion to the deficit over the next three months. Exports without oil rose 1.1% in the month led by food exports and are 13.6% higher on the year. Exports will supply further strength to the GDP revision now expected to be at 4.9% or higher in the third quarter.

The University of Michigan Consumer Sentiment Index fell to 75.0 in November, 80.0 was the median prediction. The October result was 80.9.


Eurozone

Tuesday: the October Purchasing Managers Index (PMI) services moved up 0.2 to 55.8 in the final report. It represented a weak recovery over September’s 54.2.

Retails Trade (sale) for September was a major disappointment coming in at +0.3% monthly and +1.6% year to year; +0.7% and +2.2% had been predicted. August had been lackluster as well at +0.1% and +1.0% respectively.

The industrial producer price index (PPI) for September gained 0.4% on a month or 2.7% over a year earlier. Vaulting energy prices were blamed for the increase; +0.3% and +2.6% had been predicted. Though not one of the headline ECB inflation statistics, the upward pressure energy products place on CPI is one of the reasons behind the ECB’s hesitation on rates.

Germany

Tuesday: October services PMI registered 55.1; September was 53.1.

Wednesday: Industrial output rose more than expected 0.3% in September, a 6.0% annual rate; -0.5% monthly and +5.2% annually had been predicted. The August figure was moved up to +1.9% from +1.7%.

United Kingdom

Monday: Monthly manufacturing output receded 0.6 in September, far below the predicted 0.1% growth. It was the largest manufacturing decline in seven months and along with the 0.4% fall in industrial production, these drops in economic activity could reduce third quarter GDP activity to +0.7% from +0.8% in the second quarter. Industrial production had been expected to expand 0.2% in September.

The CIPS services index registered 53.1 in October, the lowest since May 2003, and much less than September’s 56.7.

Wednesday: Nationwide consumer confidence fell to 98 in October; 97 had been expected, the September reading was 99.

Japan

Tuesday: the Preliminary leading index dropped to 0 in September from 27.3 in August; but the coincident index at 66.7 remained indicative of moderate expansion, though down from 83.5 in August. These indices predict a slowing economy three to six months in the future when the result is below 50 and improving economic conditions when above 50. Opinion is divided whether the divergence of these two indicators presages recession in the second or third quarter of 2007. The last time the leading index was at zero in 1997 a recession did follow but at that time, tellingly, the coincident index was at zero as well.

Friday: September industrial production came in at -1.4%, after production had bounced +3.5% in August

Published on  Mon, Nov 12 2007, 14:13 GMT

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Market Directions Sunday, November 4, 2007

Mon, Nov 5 2007, 09:07 GMT
by Joseph Trevisani

FX Solutions





• On the strength of an idea, the Euro marches on

• The Mid Atlantic rift in GDP

• ECB and BOE ponder their rate future

Dollar worriers abound on both sides of the Atlantic. In the US they fret that the housing collapse and the credit market crisis will terrify consumers. Scared consumers stop spending; GDP growth and job creation falter, consumers have less money to spend and the end result is a US slowdown or even recession. Advantage to the Euro. In Europe they fear that the return of inflation, said to have been imminent for the past year, will so paralyze the ECB that it will not lower rates for growth. Again, advantage to the Euro.

The currency markets have interpreted both the economic and rates side of the Euro US Dollar equation to the detriment of the Dollar for more than a year. If the EMU is growing faster, that is good for the Euro. If inflation is rising on the continent, keeping ECB rates high, that is also good for the Euro. If the Fed reduces rates to protect the American economy that is bad for the Dollar; it means that the US economy is in even more trouble than publicly acknowledged, which is worse for the Dollar. Both interpretations cannot be true for ever. Lower interest rates normally spur economic activity; higher rates eventually suppress it. If the US economic and rate curve is, as it appears to be, six months to a year ahead of the European, then the US will return to higher growth first; central bank rate policy will follow in due course.

Let us look at the economic side first. In the four quarters from April 2006 until the end of March 2007, that is quarters two, three and four in 2006 and quarter one in 2007, the European Monetary Union (EMU) area averaged 3.05% GDP growth. During the same period the US averaged 1.41%. The Euro began rising against the Dollar in the first quarter of 2006 and has continued, accelerating after the September 18th Fed 50 basis point rate cut.

Since the end of the first quarter 2007 the picture has changed considerably. In the second and third quarters the US economy has averaged 3.85% GDP growth. The EMU area registered 2.5% in the second quarter and will not deliver third quarter data until November 14th, but 2.5% or less is expected. The potential gap favors the US by a minimum of 1.3%.

The Fed ceased raising rates in mid 2006, the ECB in mid 2007. The Fed response to the financial market crisis in August has been to cut rates 0.75%. The ECB has, so far, done nothing and is not expected to cut this coming Thursday. Central bank rate policy has a six to twelve month lead time to economic effect. The response in US GDP growth in 2007 to the Fed change in policy in 2006 fits the rate time lag. There is no reason to assume the European economic growth will not obey the same rules. Those rules suggest that even if the ECB is finished raising rates the slowdown in EMU growth from the increases of the past two years is still to come. The Eurozone is still on the top of the economic slope looking down into a valley that the US has already crossed.

Oil prices remain near record levels, even when adjusted for inflation. Oil is the world’s most basic commodity. Record crude oil prices must exert inflationary pressures on the world’s economies. These pressures are the same on both sides of the Atlantic. However, the reaction of each economic area, the US and the EMU, to higher oil prices might not be at all the same.

If record gasoline prices are beginning to affect demand in the developed world, automobile ownership and use is roaring ahead in India, China and the Middle East. The rise in oil prices has been largely demand driven. If amity and coexistence suddenly broke out in the Middle East oil prices would fall $20 or even $30 dollars a barrel. They would not return to where they were ten years ago. The economic fact of rising commodity prices is the same everywhere in the world. But how individual economies cope with these prices changes is not uniform. Economic flexibility, technological innovation, labor mobility, lower taxes and a certain willingness to endure social dislocation are rewarded, the opposites punished. The US has a greater share of all these qualities than its continental competitors.

Economic logic does not prescribe trading decisions and changes in economic logic can take a long time to make their way into the currency markets. One of the truest market clichés is “The market can remain irrational far longer than you can remain liquid”. That caveat applies to the market’s ruling economic assumptions as well at to an individual trader’s equity account. Because economic logic dictates that a currency should move in one direction does not mean it will do so at any given time. For any one economic argument there is always an opposite. For any argument that says the Dollar must necessarily strengthen there is another, often equally well argued if not currently as true, that the Dollar must remain weak. Markets are psychological creatures. Like an individual they tend to stick to the current story until forced to change, especially if that story has been very profitable. But stories age and go out of style and the facts that once supported them may not do so any longer. The signs are gathering that the Dollar story is due for a change.

The ECB and Bank of England (BOE) meet on Thursday for policy decisions. Neither central bank is expected to alter rates from their current 4.00% and 5.75%. Officials from both banks have emphasized the threats from inflation in recent statements and downplayed economic dislocation.





Central Bank Rate Actions

The United States Federal Reserve Bank cut the federal funds target rate 0.25% to 4.5% and the discount rate 0.25% to 5.0%; the vote was 9-1 in favor. The FOMC adopted either a neutral or hawkish ‘bias’ depending on one’s interpretation of the accompanying statement.

BOJ kept rates at 0.5%; the vote was 8-1 in favor.





The Week in Review October 29 – November 2

United States

The Federal Reserve 0.25% rate cut on Wednesday was universally expected and brought little new volatility to the currency markets. If the Fed’s equal balancing of risk between growth and inflation may have signaled a bottom in US rates, you would not know it from the market reaction which set several new lows for the US currency subsequent to the announcement. The crucial phrase in the revamped statement was, “The Committee judges that, after this action the upside risks to inflation roughly balance the downside risks to growth”. In the current economic situation both sides of the growth and inflation policy equation are heavy with risk. The 75 basis points in cuts seems to be as far as the Fed is willing to go without further negative evidence from the economy. Certainly 3.9% GDP growth in the third quarter, two months of which took place after the credit market debacle began in early August, and 166,000 jobs on the October payroll, all of which were created after, will not advise Mr. Bernanke that more rate stimulation is required. The housing market has been falling for 18 months if not more, that is not a new economic fact. It is also not a prescription for further rate cuts this year.


Eurozone

The ECB rate decision is on Thursday, no change in policy expected despite pronounced EMU and German weakness in Manufacturing PMI. The EMU October reading was the weakest in more than a year and the German the lowest in over two. The German PMI was the steepest one month decline in the history of the series. HICP inflation at 2.6% in the latest month will keep the ECB fixated on its inflation guardian role.

United Kingdom

BOE rate decision is on Thursday. Like its counterpart across the channel the central bank is expected to keep rates on hold. Recent inflation numbers and good retail sales are likely to weigh more heavily with the Monetary Policy Committee than economic spillover from housing and the credit market scare.




Economic Releases October 29 – November 2


United States

Tuesday: Case Shiller Home Price Index fell 8.7% in August to 197.16; it was the sharpest plunge since June 1991. This index of year over year price changes had fallen on average less than 1.0% per month since March.

The Conference Board Consumer Confidence slid to 95.6 in October from 99.8 in September. It was the weakest reading in more than a year.

Wednesday: the ‘advanced’ (first issue) for third quarter GDP at 3.9% was much stronger than the 3.0% forecast and on par with the second quarter result of 3.8%.

Wednesday: the Chicago Purchasing Manager Index (PMI), the regional version of the Institute for Supply Management (ISM) report came in at 49.7, the first reading below 50 since February. September had been 54.2. Weakness in auto manufacturing weighs more heavily Chicago than nationwide.

Thursday: Personal Income rose 0.4% in September a marginal improvement over the +0.3% reading in August. But personal spending was only 0.3% higher, half the 0.6% gain in August. The Core PCE price Index added 0.2% in September twice the hike in August; the yearly rate was unchanged at 1.8%.

The ISM Index for October registered 50.9, considerably less than the 52.5 predicted and lower than the September result of 52.0. New orders’ declined to 52.5 from 53.4; employment rose to 52.0 from 51.7; prices paid scored 63.0, September had been 59.0

Friday: Non Farm Payrolls more than doubled the median estimate for October at 166,000, economists had been expecting 80,000; September and August were revised for a combined loss of 10,000. The US unemployment rate was unchanged at 4.7%

Eurozone

Wednesday: Flash (1st release) for the October Harmonized Index of Consumer Prices (HICP) at 2.6% was much higher than the 2.3% increase expected and the highest since September 2005. The September reading was left unrevised at 2.1%. The unemployment rate for the EMU area dropped 0.1% to 7.3% in October.


Germany

Friday: Manufacturing PMI for October was very weak falling to 51.7, more than four points below the September result of 54.9, the lowest reading since September 2005 and the sharpest fall in the life of the series, (since 1997).


United Kingdom

Thursday: manufacturing PMI in October came in at 52.9, much lower than the expected 54.2 and a substantial drop from the September reading of 54.7. New orders fell to 53.6 from 55.2 in September the lowest since August of last year. Export orders dropped to 50.9 from 52.6, their lowest in more than a year, both statistics reflected the ascendancy of the Sterling.

Published on  Mon, Nov 5 2007, 09:07 GMT

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Market Directions Sunday, October 28, 2007

Mon, Oct 29 2007, 09:14 GMT
by Joseph Trevisani

FX Solutions





• The Euro’s cautious approach to history

There was essentially no new information produced on either side of the Atlantic this past week. The few statistics released in the US and the EMU did nothing to dampen the Euro’s rise. If traders could not quite bring themselves to vault the Euro into the unknown on their own they did nothing to disguise their desire to do so.

Forex is a conservative market. Amid nearly universal expectation for a 0.25% cut in the Fed Funds rate next Thursday, the Euro broke new ground against the Dollar just twice this week, Monday and Friday. There were no breakouts, no stop loss induced buying and, except for the more than 200 point fall on Monday at the London open, no breathtaking volatility.

It was only last Friday, the 19th, that interest rate futures traders became certain that the Fed would drop the Funds target rate to 4.5% at the FOMC meeting on October 31st. Their conviction was supplied by the large fall in the American equities that day. The day before, on Thursday, the futures had priced the chance of a 25 basis point cut at less than 50%.

Last Friday, as the US equities sank the high in the Euro was 1.4317; the top on Monday was 1.4347, and the final peak at the end of the week was 1.4392. For a market embarked on a new relationship between the Euro and the Dollar it was an oddly muted beginning. Violent moves in forex are usually the result of stop loss orders placed to close existing positions. It much less common for large stops to have gathered for initiating new positions; completely new trading levels are very rare indeed.

Despite the apparent reluctance to test for buy stops in the Euro above 1.4400, the New York Friday close at 1.4391 insures that if they exist, Sidney and Auckland will find them on Monday morning. It will be a nervous weekend for Asian bank traders.





The Week in Review October 22 – October 26


United States

Very little substantive information was released about the US economy during the week and what was available was uniformly bad; though only the weak Durable Goods numbers could have been considered at all unexpected. At -1.7% against the forecast for a gain of 1.8% and accompanied by a -0.4% revision to the August result, they added to the Dollar’s woes despite their well known month to month volatility. New Home Sales shrank marginally from August, as the price discounting by home builders may be nearing market clearing levels. But Existing Homes Sales continued their prolonged slide into September dropping another 8.0% over the month. Neither statistic provided any new insight to the state of the US housing market.

The 134.78 point addition to the Dow average on Friday, closing at 13,806.70, was more indicative of market confidence that the Fed will be forced to act on rates, than a judgment that the US economy is headed towards stronger growth and low inflation into 2008.

Eurozone

ECB governing board members remained publicly unsympathetic to the political and economic difficulties attendant on the Euro’s record gains against the Dollar. Nicholas Garganas, head of the Greek Central Bank, and not one of the most hawkish of the governors said, “ I would characterize FX movements as normal so far”. A comment which makes sense if one checks volatility but not levels. Alex Weber, one of the ECB’s long time anti-inflation stalwarts and head of the Bundesbank, commented that, “We interrupted the tightening cycle only because of the financial market turbulence”. His view was pointedly to the past; he did not offer any speculation of future ECB policy. But Mr. Weber has rarely given countenance to economic concerns, his remark did not provoke any reaction from Euro traders.

Industrial Orders improved considerably less than expected in August, rising only 0.3% and 5.1% for the year, against expectations of +0.9% and +6.2%. But as July’s results were revised higher by 1.4% to -2.6%, and both June and May were shifted down, the net trading effect was zero. Flash Manufacturing PMI at 51.5, 1.5 points below the median forecast, was offset by the services number which was almost the same amount above expectations. Both numbers will be revised twice more.

Published on  Mon, Oct 29 2007, 09:14 GMT

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Market Directions Sunday, October 21, 2007

Mon, Oct 22 2007, 09:16 GMT
by Joseph Trevisani

FX Solutions




• The equity sky suddenly grows stormy
• The G7 meets and ...
• ECB rate policy, made in Washington?
  
There is still a week and a half before the next FOMC decision on October 31st. Fed Chairman Ben Bernanke has said repeatedly that the decision will be determined by the state of the economy as reflected in the statistics. But the Fed now has a new worry, the equity market. If Thursday's poor jobless claims number had tilted the speculative see-saw toward a 0.25% cut then the Friday collapse in stocks will keep the lever pinned to the ground. Can the Fed not cut rates again?

Even though several important statistics will be released before the Fed decision, the futures market had, by late afternoon on Friday, fully priced in a 4.5% Fed Funds rate. The day before the same futures pricing had predicted only a 48% chance for a rate cut. None of the pending statistics, Durable Goods Orders, Consumer Sentiment, the Chicago Purchases Index, 3rd quarter GDP and three housing figures will allay the Fed's economic fears. When the Fed meets it will also be able to consider the pre release ISM, PCE inflation and Non Farm Payroll numbers for October. Even the best results for these numbers are now unlikely to prevent additional Fed rate cuts and none will provide support for the Usd.

No one statistic of the past several weeks has been strongly Dollar negative. Most have shown continuing moderate growth in GDP and consumer spending but the Dollar has continued to fall. The problem for traders is that the market sentiment is overwhelmingly against the USD. That sentiment cannot be altered by rationed good news or a moderately expanding economy. The governing market assumption, one might call it the 0.5% thesis, is that the strains on the US economy will keep the Fed on the defensive and the economy from trend growth for the next two quarters. Bad sentiment cannot be driven out by mediocre news; the Dollar cannot recover while the Fed is the only central bank reducing rates.

The logic for this FOMC meeting is the same as it was for the September 18th assembly last month. The danger posed to continued moderate economic growth outweighs the potential exacerbation of inflation. If the Fed had this one good reason to cut rates last month does it now have any good reasons not to cut? What could the Fed view as more important than economic growth? Moral hazard in the financial markets? The six month horizon for inflation? The falling Dollar? None of these possibilities can overcome the economic damage from a recession. In fact all of these concerns, while real, will be made measurably worse if the economy slips into recession. Inflation is tame. Growth worries can only have been made worse by Friday's equity slide and the credit market problems have not vanished. The question can be asked again. What good reason does the Fed have for not cutting rates? It is difficult to formulate an answer. In addition, it would be rare in modern Fed history for the bank to cut rates only once in a cycle. If the Fed cuts on the 31st logic predicts further cuts as well. If the Fed rate reduction horizon has just lengthened then the decline of the Dollar has also.

In the something for everyone department the G7 communiqué is one of the best. The foreign exchange paragraph of this communiqué is worth quoting in its entirety. “We reaffirm that exchange rates should reflect economic fundamentals. Excess volatility and disorderly movements in exchange rates are undesirable for economic growth. We continue to monitor exchange markets closely, and cooperate as appropriate. We welcome China's decision to increase the flexibility of its currency, but in view of its rising current account surplus and domestic inflation, we stress its need to allow an accelerated appreciation of its effective exchange rate”. Issued by the assembled finance ministers after Friday’s meeting in Washington its virtue is to please all without offending any. Anyone that is, as long as one is not from Beijing. “Excessive volatility” satisfies those Europeans who dislike a high Euro and Euro/Yen; China’s mention satisfies all manner of trade warriors; “monitor” and “cooperate” keeps the internationalists happy. Every finance minister and politician can find in the text the appropriate phrase for reference during their news conferences back home, whatever the inclinations of the national audience.


Central Bank Rate Actions


Bank of Canada left the main overnight rate unchanged at 4.5%.



The Week in Review October 15 - October 19

United States

The descent of the US housing market accelerated this week, postponing any serious hope for recovery well into 2008. All three major housing market indicators recorded worse than expected results, but the news had little direct effect on the Dollar. There has been so much bad news from this sector that almost anything short of a complete cessation of all sales is already factored into the market. The dollar took its biggest single hit on Thursday from Weekly Jobless Claims a volatile and relatively minor statistic. The reaction to this number evidenced the extreme fragility of the Dollar to anything that indicates weakness in the US economy particularly in job creation.

Projections for weak 3rd quarter corporate profits from American heavy equipment manufacturer Caterpillar and other corporates, on Friday slammed the major US equities averages and returned what had been a mildly recovering Dollar to the defensive. The equities have been one of bright spots in a wary economic picture.

The sub prime and credit crunch which began two months ago took its toll of foreign investment in August with the net long term capital flows registering their first decline since 1995. This is the second month in a row that capital funding has been less than the amount needed to offset the US trade deficit.

The Fed Beige Book prepared for the Oct 30-31 meeting of the FOMC showed continued expansion in all districts, but it cited decelerating growth since August. Consumer spending rose but reports varied from district to district. Real estate continued to weaken. All in all this book reflects the trend we have been seeing in this anecdotal survey for many months, with slowly accumulating pressure on economic growth and heightened uncertainty among responders about the economic outlook. GDP in the 4th quarter appears that it will be considerably weaker than in the third.


Eurozone

Economic growth in the EMU is slowing but for an ECB very uneasy about inflation it has not been enough to make them break inflation cover and reduce interest rates. If the economic picture continues unchanged then logic and their own statements would put them on hold until the end of the year. If however, the Fed cuts American rates at the end of the month and the Euro then reaches 1.4500 and higher, the game changes. It will be hard for the European central bank governors to deflect the outcry from politicians and the media. And, more importantly, their own economic projections will point to the same dangers currently so evident from Washington. The ECB governors may not quite admit it but their next rate decision will probably be determined on Halloween in Washington.


United Kingdom

Retails sales for September were six times the expected rate and will certainly give the Monetary Policy Committee (MPC) pause when it contemplates its next rate decision on November 8th. But recent inflation numbers may lean the MPC in the opposite direction. Headline CPI was 1.8% in September, better than expected. And, most impressively, core CPI was only +1.5% year on year, much lower than the +1.8% prediction and a large improvement from the +1.8% rate in August and the +2.0% in June. MPC had voted 8-1 for unchanged rates at beginning of the month. The majority on the committee is shy of cutting for two reasons: lower rates could ward off the economic slowdown predicted in their August report and that the MPC expects to keep a lid on inflation; secondly, they did not want to appear to be overly supportive of the financial markets in its recent troubles. Preliminary GDP for the third quarter, +0.8% and +3.3% annualized was the highest quarterly figure in three years and is perhaps another militating factor against a rate cut. If the main argument for reducing rates is the potential for economic slowdown from housing and lingering financial markets effects then the accuracy of that view is undermined by the recent retail sales that were the driving force behind 3rd quarter growth. Given the distribution of votes on the Monetary Policy Committee, the recent economic results and the relative calm in the credit markets rate cuts might not be granted for some time. Much will depend on the world reaction to the US equity fall on Friday.


China:

With the end of the 17th Communist Party Congress market expectations are for further Peoples Bank of China rate increases. Food inflation is a serious concern for the Beijing Government. The average Chinese family spends almost 40% of its budget on food and the potential for political unrest in the poorer provinces is never far from the government's mind. The end of the twice a decade Beijing political chautauqua frees policy makers from distraction and they will return their focus to the rampant growth and speculation that are their main concerns.

At the Party Congress President Hu Jintao said that the Chinese economy continues to strengthen and pledged to make economic growth more balanced instead of relying on investment and exports. For investment read Foreign Direct Investment, for exports read replace exports with domestic consumption. China's biggest development problem is the income disparity between the booming wealthy coastal cities and the rest of the country. The party's biggest problem is that poverty, corruption and economic envy in the hinterland is a potentially explosive political situation. If the government is to encourage domestic consumption and investment then it must find a way to spread growth and wealth to the interior of the country.
Economic Releases October 15- October 19


United States

Tuesday: Industrial Production gained 0.1% in September as predicted, but Augusts' number lost 0.2% on revision to flat. Auto manufacturing output fell 3.3% in the month largely due to the two day General Motors strike. Non auto manufacturing added 0.3%, a reasonable recovery after the flat result in August and the financial market upsets.

Capacity Utilization was 82.1% in September as expected, virtually unchanged from 82.2% in August.

The Treasury International Capital system (TICS) in August registered the first decline in net long term capital flow since 1995 at -$69.3 billion. About half of the deficit was due to foreigners selling US assets and half to the overseas investments of US residents. Foreign investors sold $34.9 billion of US Securities, $24.2 billion by official institutions and $10.6 billion by private investors. US residents bought $34.5 billion in foreign securities. It was the first net sale of securities by foreigners since 1998. Private investors and hedge funds sold US equities and central banks sold US Treasuries. Overseas investors had been forecast to purchase $60 billion of US debt instruments. Coming after July's far below average inflow of just $19.2 billion the exodus aroused concerns about the funding of the US trade deficit which requires about $60 billion a month of net purchases. The credit crisis in August forced many owners of US debt to sell all or part of their holdings. Net sales by private investors were predominantly in equities and corporate paper exactly what one might expect in a credit panic. But the demand of these same private investors for US Treasuries and government agency debt, the least risky class of securities, rose. The TICS number has always exhibited a great deal of month to month volatility. Two months do not make a trend and with US equities staging a strong recovery in September and October, a return to the US market for foreign capital can be expected.

The National Association of Home Builders (NAHB) Housing Market Index for October at 18, 2 down from September, was the lowest score for this series since inception in 1985.

Wednesday: consumer inflation in September rose 0.3% a 2.8% yearly rate; the core rate gained 0.2% or 2.1% yearly. Though both numbers were largely as predicted, the core rate has ceased falling in August and September. Prior months had dropped steadily from February's 2.7% rate.

Housing Starts fell 10.3% in September to 1.191 million units the smallest number since March 1993 and well off the 1.3 million expected. Building Permits shed 7.3% to 1.226 million also the lowest since 1993.

Thursday: weekly jobless claims for the week ending October 13th rose 28,000 to 337,000 against the expectation of 312,000. A labor Department official said that a 'portion' of the rise was due to 'seasonal adjustment volatility'. Weekly numbers by nature vary widely but these results did nothing to alleviate the gloom gathered about the Dollar. The Euro reached 1.4311, in the aftermath.

NAHB Housing Market Index fell to 18 in October, down two from September and a new low record for the series which began in 1985.


Eurozone

Tuesday: final September HICP was unrevised at +0.4% and +2.1%, the highest yearly reading since +2.3% in August 2006. It was the first time in 13 months that the harmonized index has been at or above the 2.0% ECB target. The rate in August was 1.7%.

Thursday: Construction Output improved +0.4% in August, a +2.8% yearly rate; for July the rates were revised down to -0.1% monthly and +1.4% yearly from 0.0% and 1.7%, June results were also dropped to +0.3% from +0.6%. A surge in German output was the largest component in the EMU statistic.


Germany

Tuesday: final HICP for September came in as expected +0.2% but the +2.7% yearly figure was the highest in six years. The last time this standardized EMU statistic was above 2.0% in Germany was July 2006. Final CPI for September rose 0.1% to 2.4%. Though this was slightly better than the forecasts of +0.2% and 2.5%, the annual rate was the highest in two years. It was last at 2.5% in September of 2005.

The ZEW Survey for October showed business attitudes largely unchanged from the prior month: 'expectations were -18.1 the same as in September and 'current condition' fell slightly to +70.2 from +74.4. Both numbers were as forecast.

Friday: PPI accelerated in September to +0.2% and +1.5%, double the monthly rate in August and half again the yearly rate. Though PPI was less than the forecasts of +0.4% and +1.8%, and was led by volatile energy prices, with oil touching $90 a barrel this week there is no comfort in these numbers for the ECB.


United Kingdom

Monday: Rightmove house prices from the online property site jumped 2.7% in October erasing the 2.6% decline in September. The yearly rate moved up to 10.4% from Septembers' +9.6%. The DCLG House Price Index dropped one percent in August to +11.4% from the July result of +12.4%. This statistic records an actual transaction price, an simply the asking prices. The apparent contradiction between the two widely used house price surveys is due to a new government reporting requirement. Known as the Home Information Pack this puts a reporting burden on sellers who may have been rushing to complete sales before the September 10th deadline.

Tuesday: CPI in September at +0.1% and +1.8% for the year was lower than the forecast of +0.2% and 1.9% and cleanly below the BOE 2.0% target measure. Core CPI was flat and up 1.5% annually, well under the 1.8% expected yearly rate. Sterling dipped 45 points on the release.

Wednesday: ILO unemployment rate stayed constant in August at 5.4% as expected. Average Earnings rose at a 3.7% three month moving average yearly rate. In July it gained 3.5%.

Thursday: Retail Sales volume surged 0.6% in September to 6.3% for the elapsed year. It was the highest annual rate in three years, and well ahead of the median forecasts, +0.1%, +5.6%.

Friday: preliminary GDP gained 0.8% in the third quarter and 3.3% yearly, slightly better than the +0.7% and +3.2% forecast .


China


Monday: The People's Bank of China raised the reserve requirement effective October 25th for the eighth time. The 50 bps point hike brought the reserve to 13.0% the highest ever and brings the increase this year to 400bps. The PBOC has already raised rate five times this year and the reserve requirements seven times.
The Week Ahead October 22 - October 26
United States

Tuesday: Richmond Federal Reserve District Manufacturing Index at for October at 10:00 ET; September 14.

Wednesday: Mortgage Bankers Association (MBA) Mortgage Application Index for the week ending October 19th at 7:00 ET; prior week +0.7% to 656.3. Existing Home Sales for September at 10:00 ET; August 5.50 million.

Thursday: Jobless Claims for the week ending October 20th at 8:30 ET; prior week +28,000 to 337,000. Durable Goods Orders for September at 8:30 ET; August -4.9%, ex defense -5.4%, ex transport -1.8%. New Home Sales for September at 10:00 ET; August 795,000.

Friday: Final University of Michigan Consumer Sentiment for October at 10:00 ET; preliminary 82.0.


Eurozone

Tuesday: Industrial New Orders for August at 9:00 GMT; July -4.0% m/m, +10.9% y/y.

Wednesday: Current Account for August at 8:00 GMT; July seasonally adjusted +E36.6 billion, not seasonally adjusted +E3.3 billion. Flash (1st issue) Manufacturing PMI for October at 9:00 GMT; September 53.2. Flash (1st issue) Services PMI for October at 9:00 GMT; September 54.2.

Friday: Money Supply (M3) for September at 8:00 GMT; August +11.6% y/y, 3 month moving average +11.4% y/y. Loans to private sector for September at 8:00 GMT; August +11.2% y/y.


Germany

Thursday: IFO Survey for October at 8:00 GMT; September 'business sentiment' 104.2, 'current assessment' 109.9, 'business expectations' 98.7.

Friday: GfK Consumer Confidence for November at 6:00 GMT; October 6.8.


United Kingdom

Monday: CBI Industrial Trends Survey for October at 11:00 GMT; September 'monthly orders balance' 6. CBI Quarterly Industrial Trends Survey for Q4 at 11:00 GMT; Q3 'business optimism balance' -2. .

Tuesday: Nationwide House Prices for October at 7:00 GMT; September +0.7% m/m, +9.0 y/y.

Thursday: Chancellor of the Exchequer Alistair Darling testimony to the Treasury Committee at 11:00 ET.

Friday: Land Registry House Prices for September at 11:00 GMT; August +0.2% m/m, +9.4% y/y.


Japan

Friday: National Core CPI for September at 23:30 GMT (October 25); August -0.1%. Central Tokyo CPI for October at 23:30 GMT (October 25); September -0.1%.


China

Monday: Q3 GDP (release time undetermined); Q2 +11.5% y/y. CPI for September (release time undetermined); August +6.5% ytd, +3.5% y/y. Fixed Asset Investment for September (release time undetermined); August +26.7% y/y.

Published on  Mon, Oct 22 2007, 09:16 GMT

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Market Directions Sunday, October 14, 2007

Mon, Oct 15 2007, 10:02 GMT
by Joseph Trevisani

FX Solutions





• Credit markets amnesia, will the Central Banks put away their knives?

• The Europeans learn to love a strong Euro?

• The G7 meets and meets and meets?




The Week in Review October 8 - October 12

Two weeks of inconclusive movement have left traders looking outside the market for new impetus. If the Federal Reserve now appears much less likely to cut rates at its next meeting October 31, so to does the ECB when it convenes on November 8th. If the EMU economies seem to be defying the third and fourth quarter slowdown anticipated by many just four weeks ago, so the American consumer has hardly paused working and spending. The surmise that the US economy has more to fear from the sub-prime and credit markets has carried the Euro to historic levels against the Dollar, but is it still justified? Is the Euro really leading the way?

Because ECB and BOE rate cut expectations, predicated almost solely on the financial market turmoil which began in August, have diminished as well as that of the Fed, the Dollar has been left no better off. Officials of all three central banks have been at pains to remind the markets of the still extant inflation threat and their own determination to rein it in.

The G7 meeting this coming Friday in Washington will not produce an agreement to support the Dollar. As if to underline this American President George Bush said in a interview with the Wall Street Journal published Friday that a strong dollar policy is the "correct policy", and that the "best way [to value] a currency is through the market".

The basic assumption driving the Euro has been the risk evaluation that the Fed preventive rate cut was substantive, that the US economy courted recession in the coming months and the Fed would be forced to cut again. But so far the evidence has not proved the case. If anything it has pointed the other way with US job growth and consumer spending remaining strong. US GDP expansion could well be above 3.0% in the third and fourth quarters with European growth falling to 2.5% or less. Even in the 2nd quarter the differential between the US and EMU economies was 1.3% in favor of the Americans.

The decisive move of the past two weeks has been the resurgence of the Euro/Yen and the Yen crosses. These currencies thrive in a stable rate environment. If a retreating US economy promised further Fed rates decreases, market judgment would also assign a higher probability to a future ECB reduction. If the ECB was going to cut rates, even if only for precautionary reasons, where would that leave the Euro/Yen? Currency markets are predicting that the August credit market panic is history, that it will not foster a worldwide economic slowdown and that the US economy will emerge largely unscathed. Otherwise the risk averse Yen crosses would not be within a hair of their all time high. The Yen crosses are the bell weather of today's currency markets, not the Euro or even the Dollar.

Central Bank Rate Actions


Bank of Japan leaves the overnight call rate at 0.5%. Reserve Bank of Australia keeps the cash rate at 6.5%.





The Week in Review October 8 -October 12


United States

The September 18th FOMC vote to cut the Fed Funds rate was unanimous. The minutes cited two reasons for this "prudent action". First was the concern for the impaired functioning of the financial markets, and second was the potential for reduced economic growth from that impact. Perhaps a bit surprisingly the FOMC members disregarded the August Non Farm Payroll numbers of -4,000. They assumed that "employment was probably not as weak as the most recent monthly data had suggested". The committee was right on target as the upward revision of the August number revealed a week ago.

Also from the FOMC minutes was the prescription for rate policy, "future actions would depend on how economic prospects were affected by market developments and other factors". The major economic statistics from this past week do not indicate a serious slowdown in the US economy. Weekly Jobless Claims have continued to decline. Retail Sales were much better than expected and PPI, particularly core PPI without the automobile price reductions, was very active. Clearly there are building price pressures in the consumer goods pipeline.

There are less than three weeks until the next Fed policy committee. This coming week we will see Industrial Production, core CPI and the 'Beige Book'. None of these are likely to convince the Fed that another rate cut is necessary to float the US economy. The 'moderate expansion' term of the last 'Beige Book' is more indicative of an economy poised for increased growth than one slipping. The US economy has been under stress and a cloud of worry since the third quarter of last year. It is important to remember this background when one charts future prospects. All is not as dire as the economic projections tell. Projections are by their nature linear, people and the economy are not. The statistics will tell the story; it behooves traders to listen to exactly what they are saying. Or, to paraphrase John Maynard Keynes, 'If the facts haven't change, why change your mind?"

Despite the greatly reduced expectations for a Fed Funds rate cut at the October 31st Fed meeting the Dollar Index is only 0.5% above its all time September 28th low.

Eurozone

ECB officials deployed their public comments this week promoting the dangers of EMU inflation and the bank's steadfast role in countering it. The commotion among the united currency's finance ministers early in the week when they met, ostensibly to consider the 'strong Euro' came to naught. The ministers could not even agree among themselves that the current Euro level was a problem. Except for France and Italy, none of the other finance ministers appeared to think it was.

Industrial Production recovered nicely in August and the second reading of GDP for the second quarter at 2.5% is one that the ECB can live with, wary as it may be of its effect on inflation. ECB economists consider that GDP rate near the limit for non inflationary growth.

Despite the curious comment from Jean Claude Trichet on Tuesday's that 'the headline M3 number may overstate [its] actual strength', in testimony before the EU parliament, the bank left no doubt that it still considerers inflation the primary threat. "We need further gathering of data but the baseline scenario [good economic growth and potential inflation] is very much confirmed at the present moment", said Mr.Trichet.

Germany

German Finance minister Peer Steinbrueck would rather have a strong Euro than a weak one. "I love a strong Euro", is his now famous formula. And as a finance minister who wouldn't adore a strong currency. It restrains domestic inflation, reduces government financing costs, draws private investment and promotes business efficiency. Hank Paulson, the American Treasury Secretary, and his predecessors have long said the same thing.

United Kingdom

British officials, like their continental counterparts, returned the focus to inflation. There were no hints in the Pre Budget Report of the Bank of England Governor Mervyn King that a rate cut is being considered. As a prescription for financial panic he said that the Monetary Policy Committee (MPC) will not "insulate" the banking sector from the re-pricing of risk. It is not likely he would have made such a comment if he thought there was real chance of returning credit market turmoil.

Chancellor of the Exchequer Alastair Darling reduced the government estimate for 2008 GDP growth forecast to 2.0%, specifically "because of the problems...coming out of America this summer are now affecting economies across the world..." But like King, he was careful not to infer monetary policy from his observation.

The Business and Financial Services sector is the largest industry in Britain, comprising one quarter of the economy and responsible for almost all private sector job growth. Though it has not yet showed in the statistics the financial market events of the past three months must necessarily have negative effects.

Japan





Economic Releases October 8 -October 12

United States

Thursday: the International Trade Balance sank in August to -$57.5 billion almost 2.5% under the median projection of -$59.8 billion; July's deficit was trimmed slightly to -$59.0 from -$59.2 billion. The Euro rose 30 points against the dollar on the release. Imports fell 0.4%, the most in six months; exports rose the identical amount. The 2.4% decline from July to August in the overall deficit came despite a 7.0% hike in the cost of oil imports, the biggest increase in five months. The trade balance is currently benefiting both side of the equation, with a slower US economy importing less and a weak dollar prompting foreign buying from American producers.

Weekly Jobless Claims for the week ending October 6th fell 12,000 to 308,000 substantially more than the expectation of -2,000 and 315,000. The four week moving average slipped to 310,250 continuing the downward trend begun a month ago.

Import Prices jumped 1.0% in September as predicted with a 5.4% rise in petroleum accounting for the entire increase. Non petroleum prices fell 0.2.

Friday: Retail Sales in September at +0.6% doubled estimates, the markets had been looking for +0.3%; August was unrevised at +0.3% but July added 0.1% to +0.6%. Sales ex auto was also better than forecast, +0.4% as opposed to +0.3%; August was unchanged at -0.4%. The Dollar gained 25 points against the Euro on the release but stalled and then reversed at 1.4150.

Most consumption estimates for the third quarter are now north of +3.5%, which should put GDP for the quarter near 3.25%, a very respectable number in the post sub prime world. Analysis of the details of the Retail Sales report varied with the beholder. Some commentators found the overall reading, twice the market expectation, indicative of an unworried consumer and robust spending heading into the holiday season. Others focused on the fact that price inflation in the two strongest selling categories, gasoline and food, accounted for almost all their increase.

The Produce Price Index (PPI) for September jumped 1.1% more than twice the predicted +0.4%. The PPI core (ex food and energy) rose only 0.1%, half the preliminary estimate. Automobile prices are included the PPI core measure and were the reason the core increase was moderate. Car prices fell 1.8% in September and light truck charges dropped 0.5%. Without this drag the core would have risen a much more inflationary 0.3%. Other categories displaying large increases were pharmaceuticals +0.5%, home furniture +0.5% and alcohol +0.6%, this last particularly worrisome heading into the holiday season.

Consumer Sentiment in October, according to the University of Michigan preliminary reading, deflated to 82.0, below the forecast of 84.0 and the lowest result since August 2006, when it was also 82.0.

Eurozone

Thursday: second quarter GDP was unrevised on its second issue at +0.3% for the quarter and +2.5% for the elapsed year. The yearly result for the first quarter was revised up 0.1% to +3.2%; the quarterly figure was unchanged at +0.7%.

Friday: Industrial Production expanded 1.2% in August, much more vigorously than the expected +0.3%. July was adjusted higher by 0.1% to +0.7%. The yearly rate was 4.3% in August; the prediction had been +2.1%; the July rate was +3.7%. EMU planners can now look for Industrial Production to add substantially to GDP growth in the third quarter; it had slowed in the second.

Germany

Monday: Total Manufacturing Orders for August at +1.2% were well under the expectation of +2.0%, but as July was revised up by almost the same amount that August was under, to -6.1% from -7.1%, the effect was moot.

The seasonally adjusted Trade Balance for August was +E15.3 billion, less than the +E16.4 billion median projection. Imports rose 5.6%, exports gained 3.0%. In July both had fallen, 2.8% for imports and 0.3% for exports. The overall July number was adjusted to +E16.5 billion from +16.4.

Tuesday: Industrial Production rose 1.7% in August, more than three times the forecast of +0.5%. The growth was led by manufacture of consumer durable goods. July's result gained slightly on revision, to +0.2% from +0.1%.

Wednesday: the German Chamber of Industry and Trade (DIHK) Balance of Business Expectations fell in September to 15 from 24 in August. This trade group polls 25,000 companies each month and calculates this indicator by subtracting the number of those firms whose business expectations to be poor from those firms who judge expectations to be good. "The economic euphoria is over", said DIHK. The trade group also cut its GDP forecast for 2007 to +2.5%, it had been +2.8%.

Thursday: Wholesales prices as recorded by the Federal Statistical Office (FSO) rose 0.9% in September, the highest monthly increase since April of last year. The annual rate was 4.0%; in August the yearly rate was 2.5%.

United Kingdom

Monday: Manufacturing Output in August reached its highest level in six years gaining 0.4% for the month and +0.6% year to year. July's results were -0.3% and +0.8% respectively.

Industrial Production rose 0.1% in August, +0.7% on the year; the July statistics were -0.1% monthly and +0.9% yearly. Output Producer Prices jumped 0.1% in September, a +2.7% yearly rate. In August these prices rose 0.1% and 2.5%. Core Output Prices gained 0.2% m/m and 2.2% y/y in September. Input prices rose a dramatic 3.2% in September more than twice the forecast of +1.5%. The yearly rate was +6.4%, also well in advance of the prediction for +4.5%. In August the same 'input' statistics were -0.5% m/m and +0.6% y/y. Soaring crude oil prices were the greatest contributing factor in the input price rise.

Wednesday: British Retail Consortium (BRC) Retail Sales in September were twice as strong as forecast, +3.0% versus +1.5%.; August had registered +1.8%. British consumers seem to be unaffected by the Northern Rock bank rescue by the BOE early in the month.

Thursday: Royal Institute of Chartered Surveyors (RICS) House Price Survey which measures the difference between gainers and losers in house prices exhibited -14.6 in September, nearly three times the -5.0 forecast. The August reading was revised down to -3.3 from -1.8. House buyer inquiries were at the lowest level since 2003.

China

Friday: the Trade balance in September fell 4.3% to +$23.9 from Augusts' +$24.9 billion. Nevertheless, the balance for the first nine months of 2007 was +$185.66 billion an astonishing 69% higher than the same period in 2006.




The Week Ahead October 15 -October 19

United States

Tuesday: Treasury International Capital System (TICS) net long term securities transactions for August at 9:00 ET; July +$19.2 billion. Industrial production for September at 9:15 ET; August +0.2%. Capacity Utilization for September at 9:15 ET; expected 82.2%, August 82.2%. NAHB Housing Market Index for October at 13:00 ET; September 20.

Wednesday: CPI for September at 8:30 ET; August -0.1%, core +0.2%. Housing Starts for September at 8:30 ET; August 1.331 million units. Building Permits for September at 8:30 ET; August 1.322 million units. Federal Reserve Beige Book, September "moderate expansion' in 10 of 12 Federal Reserve districts.

Thursday: Jobless Claims for week ending October 13; prior week -12,000 to 308,000.

Eurozone

Tuesday: ZEW Survey for October at 9:00 GMT; 'Expectations' -20.3 in August, 'Current Conditions' 65.6.

Thursday: Preliminary Trade Balance for August at 9:00 GMT; seasonally adjusted -E0.6 billion, non seasonally adjusted +E4.6 billion in July. Final HICP for September at 9:00 GMT; preliminary +0.1% m/m, +1.7% y/y. Construction Production for August at 9:00 GMT; August 0.0% m/m, +1.7% y/y.

Germany

Tuesday: Final CPI for September at 6:00 GMT; preliminary -0.1% m/m, +1.9% y/y. Final HICP for September at 6:00 GMT; preliminary -0.1% m/m, +2.0% y/y. ZEW Survey for October at 9:00 GMT; September 'Economic Expectations' -18.1, 'Current Conditions' 74.4.

Friday: PPI for September at 6:00 GMT; September 0.1% m/m, +1.0% y/y.

United Kingdom

Sunday: Rightmove House Prices for October at 23:01 GMT; September -2.6% m/m, +9.6% y/y.

Monday: DCLG House Price Index for August at 8:30 GMT; July +12.4% y/y.

Tuesday: Core CPI for September at 8:30 GMT; August +1.8% y/y. HICP for September at 8:30 GMT; August +0.4% m/m, +1.8% y/y.

Wednesday: ILO Unemployment Rate for August at 8:30 GMT; July 5.4%. Average Earning including bonus for August at 8:30 GMT; July +3.5% y/y. BOE minutes for the October 3&4 Monetary Policy Committee meeting.

Thursday: Retail Sales for September at 8:30 GMT; August +0.6% m/m, +4.9% y/y.

Friday: Third quarter GDP, first estimate, at 8:30 GMT; second quarter +0.8% q/q, +3.1% y/y.

Japan

Monday: Consumer Confidence for September at 5:00 GMT; August 44.0. Industrial Output for August at 4:30 GMT; July -0.4%.

Wednesday: Tertiary Index for August at 8:50 GMT; July -0.5%. Revised Leading Index for August at 5:00 GMT; July 72.7, 'Coincident Index' 70.0.


China


No important releases

Published on  Mon, Oct 15 2007, 10:02 GMT

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Market Directions Sunday, October 7, 2007

Sat, Oct 6 2007, 08:20 GMT
by Joseph Trevisani

FX Solutions





• The stoics-the Bank of England and the European Central Bank

• Job growth returns to the US, but not optimism to the Dollar

• The ECB wants a strong dollar but not a strong Euro?

The Week in Review October 1 - October 5

It was status quo in the central bank market this week.  T he Bank of England, the European Central Bank and the Reserve Bank of Australia  a ll  left their base rates unchanged. Only the American Federal Reserve has felt the need to chop rates in this post sub-prime world.

In the immediate aftermath of the recent credit problems the currency markets have placed the onus squarely on the Usd. The States were the source of the original problem and the most likely sufferer from its aftereffects. The Fed September rate cut and the admission it represented for the immediate health of the American economy drove the Usd down and down. The skein did not completely  unwind until this past Monday when the Euro reached its lifetime high at 1.4280.

The fears that financial markets would freeze up in credit scarcity brought on by defaults in the sub prime housing and asset backed sectors have subsided. And while another large bank or mortgage company failure would make headlines it is unlikely it would incite the worldwide panic of early August. One of the chief fears in August was the unknown extent of the problem. How much questionable debt was held and how much would come due for refinancing in the following weeks. The period until the end of October was seen as crucial. We are now more than two thirds through that period and the credit markets have returned to normal functioning, if not to entirely normal spreads. The Europeans and the British central bankers, while acknowledging the severity of the credit liquidity situation, have demonstrated their resolve. They judge that their economies do not require preventative medicine. The remaining question is the health of the US economy; it weighs heavily on the dollar.

The situation is similar to that of last December. From October to December the then relatively new housing market collapse was expected to crack the wider US economy and produce a severe slowdown if not recession. The dollar sank against the Euro through the last quarter of the year in anticipation of the economic result. However, the US economy did not falter and the statistics improved throughout December. In January the Dollar gained almost 3.4% against the Euro. The case here is not to predict a Dollar recovery but to underline the fact that the market assumption is not yet proven. The speculative urge that is driving down the Usd is produced by anticipation of events not the events themselves. It may prove to be correct and the American economy may slip to neutral or recession. But the two figure fall in the Euro on Thursday reminds traders of the potential fragility of that assumption.

The difference between the economic views of the ECB and the Fed as expressed in their actions and policy are driving the dollar lower. Both are based on projections of current economic trends that are not yet fully substantiated.



United States

The US economy has not rolled over; it is still growing and creating jobs, the basic value for a consumer economy. But most economic numbers are sliding. Both ISM numbers, manufacturing and services, and factory orders were below forecast. The slowing trends that are evident in most US statistics originated before the credit crisis surfaced. However, there does not seem to be a generalized depiction of weakness, moderating growth is still the order of the day. With the Christmas and Holiday season approaching and the credit crisis behind a return to more buoyant spending is always possible. The main forward looking statistics, the purchasing managers indices and the consumer sentiment numbers were no doubt swayed by the emotional effects of the credit market crisis.

The Fed and Chairman Bernanke should be pleased with the NFP report. Job growth was not unduly affected by the credit liquidity crisis and recession fears are reduced as a consequence. Moderate but not dramatic job growth can support consumer spending without aggravating inflation. And while the three month moving average has been falling steadily all year, from +190,000 in January to +97,300 in the latest month this may help spur productivity and forestall rising labor cost pressures. Average Hourly Earning gained in September and with PCE Core Inflation at only +1.4% there is room for an increase in retail spending.



Eurozone

The ECB program for rate policy is clear and well expressed in the statement accompanying the rate decision. The reference to an "accommodative' rate policy was eliminated and replaced by "upside risks...to price stability". The wording may be different but it is hard to see how the rate stance has changed. Economic "fundamentals...support a favorable outlook for economic activity...on balance risks to the outlook for growth are judged to lie on the downside...[but] these downside risks relate mainly to the potential for a broader impact from the ongoing reappraisal of risk in financial markets..". In brief, except for the financial and credit market problems, the EMU economies are expanding at or above trend, producing a serious future potential for inflation that remains the bank's central concern. By implication, if the credit problems disappear then the bank will have no reason to be other than vigilant against inflation and the governing council will raise rates when and if it deems necessary.

Earlier in the week Jean Claude Trichet, ECB President speaking in Valetta Malta, reminded his audience that the US Treasury and Federal Reserve Bank have historically supported a strong dollar. His point was not to lecture the dignitaries that a strong Euro is good for the EMU economies and that the Europeans should stop complaining, but to remind the US officials of their traditional stance.

On Tuesday French Finance Minister Christine Lagarde had suggested that US Treasury Secretary Henry Paulson should say "loud and clear that a strong dollar is good for the US economy". If a strong Dollar is good for the US economy why wouldn't a strong Euro be good for the EMU economies? Would not all the advantages that a strong currency confers on the US also accrue to the EMU? Are the laws of economics different in the Old world than the New?

Or as one commentator, Barbara Rockefeller of Rockfeller Treasury  S ervices put it, as quoted by Market News International, "the chance of ECB or G7 intervention is nearly zero, especially if it depends on the US participation". The Fed does not appear to be worried about the Dollar and the Treasury is unlikely to be either with exports up over 12%. While the US say "a strong dollar [is in its] best interest", it does nothing to support such a policy. "The real policy is let the markets decide". As for the Euro, the European have long said that they wanted a currency that could compete with the dollar's reserve status, "now let them live with it". No major industrial country predicates its economic, fiscal or monetary policy on exchange rates. The overriding operational factor is the health of the domestic economy; the Europeans are no different.




Japan

The Tankan Survey for the third quarter from the Bank of Japan held ground with large manufacturing firms reporting sentiment the same as in the second quarter, 23. Since GDP contracted 1.2% in that quarter according to the latest government figures the status quo reading was a small victory, reflecting strong demand from non US customers.




Economic Releases October 1 - October 5

United States

Monday: the Institute for Supply Management Survey of Manufacturing for September recorded a decline for the third month in a row at 52.0. This is consistent with a 2.5% growth in manufacturing. The median prediction had been 52.9, the same as the August reading. "Prices Paid' fell to 59.0 from 63.0, "New Orders' to 53.4 from 55.3. Only the result for 'Employment' increased to 51.7 from 51.3.

Tuesday: the Pending Home Sales Index from the National Association of Realtors (NAR) plunged 6.5% in August to 85.5. It is down 21.5% from the same period last year. Pending sales are those where a price between the seller and buyer has been agreed but the sale has not closed. The decline reflects the increased difficulty in mortgage financing for retail home buyers. The Pending Index acts as a leading indicator for 'existing home sales' and promises further weakness in the largest category of home purchase in the US. It also underlines the still lively potential for wider economic impact from the year long decline in the residential housing market.

Wednesday: the Institute for Supply Management Non-Manufacturing Index (ISM) at 54.8 was slightly better than the 54.5 forecast but below the August reading of 55.8. Though this was a bit less than the 56.6 average for the past it is nevertheless indicative of continued moderated growth into the fourth quarter. The 'Employment' Index staged a recovery to 52.7 from 47.9 in August; 'New Orders' fell to 53.4 from 57.0.

Thursday: Factory Orders for August underperformed expectations at -3.3% against the median forecast of -2.8%. It was the largest monthly drop since January when they fell 5.7%. The Euro climbed 50 points immediately after the release.

Friday: Non Farm Payrolls returned to positive territory in September as excepted adding 110,000 jobs. More interestingly the August deficit of -4,000 was erased with the adjustment to +89,000 for the month, most of the addition being in government payrolls. July's number was adjusted higher to +93,000 from +68,000 for a total revision of 118,000 over the two months. The unemployment rate moved 0.1% higher to 4.7%. The three months moving average has almost halved since the beginning of the year: January 180.7, February 159.3, March 142.3, April 129.0, May 162.3, June 127.0, July 117.3, August 83.7, September 97.3. Average Hourly Earning moved up 0.4% for the month, now 4.1% annually, a gain of 0.2% over July and August and slightly better than the average for the past year.




Eurozone

Monday: The final issue for the September PMI manufacturing number was 52.3 as expected and unchanged from the preliminary issue. It is the third monthly decline since June registered 55.6 and the lowest reading since February of last year.

Tuesday: the Produce Price Index gained 0.1% in August as expected, flattening the yearly rate to 1.7% from 1.8% in July. Energy prices ebbed 2.2% in August helping to lower the overall result but prices have since surged higher in September and were the chief cause for the spike to 2.1% in the preliminary HICP rate as reported last week. The ECB is unlikely to take much ease with this number. Unemployment in the EMU was steady at 6.9% in August, the third month in a row that it has sustained the historic low for this series which began in 1993. German unemployment fell to 6.2% from 6.4%; French to 8.6% from 8.7%. The jobless rate in the US is 4.6% and in Japan it is 3.8%.

Wednesday: Retail Sales rose only 0.1% in August, a quarter of the +0.4% forecast. The annual rate was +0.5% as predicted. The July result was revised to +0.4 from +0.1% monthly, and to +1.3% from +0.5%. The Euro was unmoved by the disappointing monthly number, the July adjustment negating the August result.




Germany

Monday: the NTC/BME Manufacturing Purchasing Managers Index (PMI) dropped to 54.9 in September 1.1 points lower than August.

Wednesday: the NTC PMI Report on Services registered a sharp drop to 53.1 in September from the August reading at 59.8. It was the lowest result in more than a year. NTC Economics is a private British economics date and research firm that produces a wide array of data on the economies of 20 of the worlds largest industrial countries.




United Kingdom

Monday: the CIPS/NTC Manufacturing Purchasing Managers Index (PMI) for September fell slightly to 55.1 from 56.1.

Wednesday: Reuters Services PMI for September eased to 56.7 from 57.6, a tad below the 56.8 median forecast and the weakest result in 13 months. "Employment' fell to 51.8 from 43.7 and "Prices Charged" jumped to 53.7 from 53.1. The British Retail Consortium (BRC) Shop Price Index in September gained 0.2% and was 0.4% ahead of last year's prices. Food prices were the main culprit, up 0.6% in September, and 2.7% annually. It was the largest increase since last December. In August the yearly inflation rate for food prices was only 2.1%. Non-food prices sank 0.1% in September, a +0.7% annual rate. The 'final' RBS/NTC Report on Services PMI added 0.2 to 54.2, a substantial drop from the 58.0 reading in August. Nationwide Consumer Confidence rose to 99 in September a major improvement over the 94 reading in August. However, the current relevance of the September score is questionable because 90% of the data was collected before the BOE rescue of Northern Rock.




Japan

Monday: The BOJ Quarterly Tankan Report  for the third quarter presented a mixed picture for the Japanese economy. Business confidence at large manufacturing companies remained at 23, as it was in the second quarter but better than the forecast of 21. All other major categories of business confidence recorded losses: 'small manufacturing firms' were 20 against 22 in quarter two; 'large service firms' were 20 versus 22 in the second quarter and 'small service sector firms' categories were -10 as opposed to -7 in the second quarter. Firms were polled for their opinion between August 28th and September 28th.




The Week Ahead October 8 - October 12

United States

Monday: Columbus Day Holiday US markets closed

Tuesday: FOMC minutes at 2:00 ET for the September 18th meeting when the Fed unexpectedly cut rate 0.5%.

Thursday: International Trade Balance for August at 8:30 ET; July -$59.2 billion

Friday: Retail Sales for September at 8:30 ET; August +0.3%. Retail Sales ex Food and Auto for September at 8:30 ET; August -0.4%. Producer Price Index (PPI) September at 8:30 ET; August -1.4%. PPI for September at 8:30 ET; August +0.2%. University of Michigan Consumer Sentiment for October at 10:00 ET; September 83.4.




Eurozone

Thursday: GDP for the second quarter (second issue) at 9:00 GMT; first quarter +0.7% q/q, +3.1% y/y. EU Commission GDP forecast at 9:00 GMT; Q3 2007 +0.3%-0.8%, Q4 2007 +0.2%-0.8%, Q1 2008 +0.2%-0.8%.

Friday: Industrial Production for August at 9:00 GMT; Jul +0.6% m/m, +3.7% y/y.




Germany

Monday: Total manufacturing Orders for August at 10:00 GMT; expected +2.0% m/m, +4.3% y/y. July -7.1% m/m, +6.1% y/y.

Tuesday: Industrial Output for August at 10:00 GMT; expected +0.5% m/m, +3.9% y/y. July +0.1% m/m, +4.4% y/y. Manufacturing Sector Output for August at 10:00 GMT. July +0.2% m/m, +5.7% y/y.

Thursday: Wholesale Prices for September a 6:00 GMT. August +0.5% m/m, +2.5% y/y.




United Kingdom

Monday: Manufacturing Output for August at 8:30 GMT; July -0.3% m/m, +0.6% y/y. Industrial Production for August at 8:30 GMT; July -0.1% m/m, +0.9% y/y.

Wednesday: RICS House Price Survey for September at 23:01 GMT.

Published on  Sat, Oct 6 2007, 08:20 GMT

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Market Directions Sunday, September 30, 2007

Mon, Oct 1 2007, 08:45 GMT
by Joseph Trevisani

FX Solutions





The Week in Review September 24 - September 28

• * The US Dollar sinks, is there a lifeline?
• * Oil prices remain at historic highs, the world is unimpressed
• * The BOJ looks for inflation and finds deflation

The Dollar fell to a series of record lows against the Euro this week as markets remained focused on the Federal Reserve rate cut and worries that the US economy will slip into recession. Unmarked but on the horizon are the next rate decisions of the European Central Bank (ECB) and the Bank of England (BOE). Neither bank will raise rates this coming Thursday, with the BOE reporting its decision first. But the possibility that one or both central banks might cut rates has been ignored by all. The economic and interest rate situation in the Eurozone and the United Kingdom is similar to that of the United States, though perhaps less advanced. Ben Bernanke did not drop the Fed Funds rate 0.5% because the American economy was in a tailspin but because the Federal Reserve Governors feared what the recent financial and housing market turbulence might exact from the economy in the future. The economic situation is the same on the continent and in England with the added drag that very expensive currencies inflict on a nation's export trade. A reduction in European rates or moderation in the ECB economic risk outlook is almost wholly unpriced for the currency markets.

Oil prices have also cast a pall over economic growth prospects in the industrial world but the effect is different on either side of the Atlantic. The European Monetary Union (EMU) exports more goods and services to the Middle Eastern oil producers that does the United States. Higher oil revenues in the Gulf States and Iran translate into more purchases by Middle Eastern consumers and governments and higher export earning by the EMU economies. Such exports help to offset the already evident declines in EMU domestic consumption. The US economy, because it exports less to the Middle East, has less income returned as payment for US products and less support for domestic production.

Another factor in the oil price effect in Europe is the ECB definition of inflation. The EMU wide HICP statistic, which the ECB has targeted at 2.0%, includes energy prices. A rise in oil and gasoline prices is a direct contribution to inflation accounting. This effect is somewhat mitigated by the overall value of the currency which lowers the prices of imports and reduces the pricing power of domestic firms. In the US the Fed watches core inflation, without the monthly changes in food and energy prices. A sustained rise in oil prices will still contribute to inflation but in a more diffuse fashion as a basic industrial product rather than a first line consumer price increase.

For both reasons rising oil prices tend to keep greater upward pressure on European interest rates than they do in the United States and to support the Euro more than the Dollar.

United States

A raft of secondary statistics pointed to an American economy more resilient than otherwise depicted, despite the ongoing housing collapse. Personal Income, Personal Expenditures, Construction Spending and the Chicago Purchasers Index all met or surpassed forecasts. Only the two consumer confidence numbers, easily the most emotionally laden of the forward looking statistics, were weaker than forecasts. Personal Income and Expenditures seemed to belay worries of a pending consumer spending collapse. Despite concerns of falling consumer spending, constrained by the decline in the housing market and worries about pending job losses due to credit market contractions, the American consumer appears to have, at least temporarily, resumed normal spending habits in August. Expenditures rose half again as much as predicted and doubled the rise in personal income. Core PCE Prices further moderated in August and have now been at or within the Fed range of 1-2% for four months. Core PCE Prices peaked at 2.5% in February.

Weekly Jobless claims unexpectedly fell for the second week in a row chopping the four week moving average to 311,500 from 321,000 and easing concerns about job creation. Estimates for this Friday's September Non Farm Payrolls number remain at +115,000. The unemployment rate is predicted to rise to 4.7%.

Eurozone

Last week Jean Claude Trichet, the ECB President, said that the central bank has been successful in "very solidly" anchoring price stability in the EMU. This week, in an interview on Dutch television, he said that the ECB will do what is needed to anchor inflation around 2.0%. Last week inflation was anchored, this week the anchor has slipped. At the risk of a parse too far the significant difference is the phrase 'around 2.0%', instead of 'at or below 2.0%' . The ECB has long forecast that inflation would rise above 2.0% despite its year long sojourn below that level. This projection has been the prime rationale for increasing interest rates and in August the flash HICP rate finally climbed to 2.1%. A target of 'around 2.0%' is considerably more expansive than one 'at 2.0%'. Is the ECB introducing the notion of a rate cut despite an inflation rate higher than 2.0%?

Admittedly this is a heavy burden for one small phrase. But central bankers do not free associate during interviews and the interpretative leeway between the two phrases gives the ECB much more room to maneuver than it currently has.

Another question for the ECB is does the 8% money supply target matter anymore? Would the M3 number, by itself, prevent the ECB from cutting rates? The answer is already evident. M3 did not prevent the bankers from halting their series of rate hikes last month; it will make no difference should the governors decide to cut rates.

The EMU economies are showing fatigue. Not dramatic but noticeable. As we noted last week, GDP peaked in the fourth quarter of 2006. Business sentiment and consumer confidence are falling in the EMU as a whole and specifically in its largest economy, Germany. What is to prevent the ECB governors from taking the same much applauded precautionary view as the FOMC? The ECB may now be learning one of the drawbacks of a public target for inflation.

Germany

All German statistics this week indicated a slowing economy, falling consumer spending and decreasing business confidence in the immediate future.

The IFO Survey came in with its lowest reading in more than 18 months, undercutting hopes for a sustained expansion in the EMU's largest economy. Chief Economist of the IFO Survey Gernot Nerb said that domestic demand in Germany was sluggish. At the beginning of almost every European economic expansion government and private officials express hope and sometimes confidence that 'this expansion' will be borne to a greater degree by domestic consumption and so be less susceptible to external factors. The results almost always disappoint.

GfK Consumer confidence fell for the second month in a row. "As was already evident in August the positive consumer mood has been affected…of late…[by]... the entire credit crisis in the USA and rising food prices are responsible for the somewhat less than euphoric consumer attitudes", said GfK in a written statement.

Retail Sales in August, as collected by the Federal Statistical Office, fell 1.4%, the worst result since May's 3.2% collapse. As business investment turns uncertain, shown in the IFO report above and by last week's ZEW Survey, the German consumer has, once again, been sought as a source of spending and continued growth. Once again it does not seem that the German consumer is willing to oblige.

Japan

Yasuo Fukuda was elected president of the Liberal Democratic Party (LDP) by a vote of 330 to 197 over Taro Aso and thereby becomes the next Prime Minister of Japan. Mr. Fukuda is 71 years old, was first elected the Diet in 1990 and has served in various leadership roles in the LDP since 1997. He is considered a moderate on foreign policy. His first task will be to extend a law that permits the Japanese military to assist American naval operations in the Indian Ocean as part of the war in Afghanistan. This was the issue that forced Shinzo Abe to resign. The opposition Democratic Party of Japan (DJP) controls the upper house of the Diet and blocked passage of the extension legislation. The head of the Democratic Party of Japan, Ichiro Ozawa, has promised to end LDP control of Japanese politics. Except for one brief period in the mid 1990s the LDP has ruled Japan since its formation in 1955.

It is in domestic and economic policy the Mr. Fukuda will face his greatest challenges. Under the stewardship of Shinzo Abe the LDP lost much of the public approval and popularity it had enjoyed with the previous Prime Minister Junichiro Koizumi. If Mr. Fukuda does not improve his and the LDP's standing with the electorate his party could very well lose the next election for the lower house of the Diet. The majority party in the lower house of the Diet elects the Prime Minister. The DJP would like to hold an election for the lower house as soon as possible before Mr. Fukuda can effect any positive change in the LDP's popularity. Mr. Fukuda has said he will not call an election until the spring at the earliest. The LDP simply cannot afford to add a faltering economy to its roster of problems.

National CPI in August fell for the seventh month in a row keeping deflation fears current. GDP in the second quarter declined 1.2%, surprising everyone. Though Retail Sales rose in August one half of one percent, it was the first gain in three months. Japanese industry and finance faces serious constraints in the years ahead. Its population is aging and falling, shivering the economic backbone of domestic consumption. Its main competitor across the Sea of Japan will soon be following the Japanese economic model, building high value-added industries and exporting cars and electronics that have long been a Japanese specialty. The Korean auto and steel industries have already accomplished this transformation.

China is not only an economic giant; the Beijing government has been busily creating a military that can project power into the seas surrounding the mainland. The Japanese central government will soon have the twin financial burdens of a growing military and a growing pensioner roll. It cannot meet these obligations with a static or falling GDP.

The Bank of Japan is more deferential to the desires of the Tokyo politicians than any other major central bank is to its own political establishment. The BOJ has tried hard over the past year to keep inflation and future rate hikes in the political mix. Miyako Suda, BOJ board Member said, the "Japanese economy is growing in line with our forecast…risk[ing]…an inflationary rate rise faster than our forecast". The BOJ wants to keep its field of action as wide as possible. But with falling consumer prices, a 2nd quarter GDP decline, the Fed cutting rates and the Europeans perhaps soon to follow, and an unpopular and tired LDP in charge in Tokyo there will be no rate increase this year. In reality, Japan may be in for a prolonged stay at the 50 basis point mark.

United Kingdom

The Bank of England September policy statement and the minutes of that meeting suggest that the members of the Monetary Policy Committee (MPC) felt that more time was needed before they reached a conclusion about the impact of the credit market problems on the real economy and inflation. The subsequent Northern Rock rescue by the BOE, which has ballooned to over eight billion Pounds, may have concentrated minds on the MPC as to the real economic risks ahead. Andrew Sentence, an external member of the MPC and normally considered a rate hawk, hinted at such a recognition. "Global forces can…inject volatility into the real economy…recent changes in global financial market conditions could weaken demand conditions". This is logic that would play very well on Capitol Hill in Washington. As with the Euro, any change in rate policy by the BOE is not priced into the value of Sterling.

Economic Releases September 24 – September 28

United States

Tuesday: the Case Shiller Home Price Index for July fell to 215.94, 0.6% lower than June and the steepest decline in 16 years. The index is now 4.5% lower than last year. The Conference Board Consumer Confidence Index sank to 99.8 in September, well below the median forecast of 104.0 and below the August reading of 105.00. Existing Home Sales in August slid to their lowest level in five years at 5.5 million units, a 4.5% monthly drop. It was the second largest fall in over a year; the biggest fall was the 7.93% drop from February to March this year. The market supply of unsold homes at current prices rose to 10.0 months from 9.5 months in July.

Wednesday: Durable Goods Orders declined 4.9% in August; a drop of 3.1% had been anticipated. The July statistic was revised up to +6.1% from +5.9%.

Thursday: In August New Home Sales sank to 795,000 units, an 8.3% fall in one month and well under the 835,000 units that had been expected. The July return was adjusted down to 867,000 from 870,000. The unsold market supply climbed to 8.2 months from 7.5 in July. The median sale price fell 8.3% to $225,700, off 7.5% on the elapsed year. In its third and final release second quarter GDP lost 0.2% to 3.8%; the initial or 'advanced' release was 3.4%; the second or 'preliminary' was 4.0%. Weekly Jobless Claims for the week ending September 22nd fell by 15,000 to 298,000; a rise of 9,000 to 320,000 had been forecast. It was the second week in a row that claims dropped rather than rising as anticipated.

Friday: Personal Income rose 0.3% in August as expected but Personal Consumption Expenditures (PCE) outstripped predictions climbing 0.6%, +0.4 had been forecast. It was the best performance for this gauge of consumer spending since July 2005. Core PCE Prices moved ahead 0.1% in August as expected, dropping the year on year increase to 1.8%. It was the lowest yearly rate since February of 2004 and below the preferred Fed target of 2.0%. The September Chicago Purchasers Index surprised at 54.2, bettering both the median prediction of 52.9 and the August result of 53.9. 'New Orders' fell to 56.2 from 58.4 in August and 'Prices Paid' diminished to 59.0 from 71.8. Construction Spending in August was substantially better than expected at +0.2% on a predicted decline of 0.5%. Non-residential construction moved up 2.3% but was partially negated by the 1.5% drop in residential building. The August result was revised higher to -0.4% from -0.5%. The final return of the University of Michigan Consumer Confidence for September dropped four tenths to 83.4; the preliminary issue had been 83.8.

Eurozone

Monday: Industrial New Orders for July dropped 4.0% from June, greater than the predicted 3.0% decrease. The June result was revised up 0.1% to +4.5%. Orders for July 2007 were 10.9% ahead of the prior year, this was a better result than the +10.2% predicted. The June year on year figure was adjusted 0.2% higher to 14.0%.

Thursday: the European Monetary Union Money Supply (M3) rose 11.6% in August as expected, a slight but welcome decrease from July's 11.7% reading. The three months moving average was +11.4% as predicted; in July it had been +11.1%. The August 11.6% increase in M3 was the first decline in the rate of increase in four months.

Friday: the European Commission Economic Sentiment Indicator for September came in at 107.1 well below the expectation of 109.0. The August result was revised lower to 109.9 from 110.0. It was the sharpest one month fall since October 2001 and the lowest reading of the past year. Even so it remains well above the long term average of 100.0 The Business Climate Indicator for September was 1.09 a precipitous drop from the August reading of 1.37, which was itself a revision from 1.41. It is the lowest reading since May of 2006. Consumer Confidence dropped to -5 in September from -4 in August but it is still well above the long term mean of -11.0. The 'flash' Harmonized Index of Consumer Prices (HICP) result for September arrived at +2.1% as expected, much higher than the 1.7% rate in August. It is the first time in a year that the headline HICP number has topped the 2.0% ECB target.

Germany

Tuesday: the IFO Survey of Financial Experts one of the most followed German business indicators fell across all categories in September: 'Business Sentiment was 104.2 on expectation of 105 and July's reading of 105.8; 'Current Assessment' was 109.9 on expectations of 111.0 and the August issue of 111.5; 'Business Expectations' were 98.7, on a prediction of 99.6 and an August result of 100.4. GfK Consumer Confidence fell in October to 6.8, well under the median prediction of 7.1. The September statistic was revised lower to 7.4 from 7.6. It was the 2nd monthly drop in a row.

Thursday: the 'flash' or first issue of the September (HICP) showed a 0.2% gain for the month and a 2.7% year over year rate. Both results were higher than the median forecasts, for a flat month and a 2.5% increase for the year. The Consumer Price Index also beat expectations in September coming in at +0.2% for the month and +2.5% yearly; 0.0% and +2.3% had been anticipated. This was the first national CPI number over 2.0% since July 2006 when it registered +2.1% and the highest since September 2005 when it was also 2.5%.

Friday: Retail Sales in August fell 1.4%, an unusually large distance from the predicted rise of 0.3%. The drop was greater than all polled forecasts. It was the largest fall in consumer purchases since the 3.2% drop this past May. The July result was also adjusted lower to +0.6% from +0.7%. The year on year rate for Retail Sales was 2.2% less than the previous August, shrinkage of 1.6% had been expected; the decrease from last July to this July was 1.9%.

United Kingdom

Tuesday: Total Business Investment in the second quarter was revised down to +0.4% from +0.8%, and the yearly figure was adjusted up to +7.8% from +7.4%. Manufacturing investment fell 6.0% in the quarter, leaving it 1.3% higher for the elapsed year. Investment in the services sector climbed 0.8% in the quarter and 7.9% yearly.

Thursday: the Nationwide House Price Survey rose 0.7% in September over August, a 9.0% yearly rate. In August the increases were +0.7% monthly and +9.6% yearly.

Japan

Friday: Retail Sales gained 0.5% in August, it was the first rise in three months; in July they had fallen 2.3%. Industrial Production gained 3.4% in August a major improvement on July's 0.4% contraction. The unemployment rate rose 0.2% to 3.8% as expected and left behind the 3.6% rate which had been the lowest since 1998. Core National CPI fell for the seventh month in a row, dropping 0.1%, deflation fears are uncomfortably alive. Household spending rose 1.6% year on year; in July it sank 0.1%.

The Week Ahead October 1 – October 5

United States

Monday: ISM Manufacturing Index for September at 10:00 ET; expected 52.9, August 52.9.

Tuesday: NAR Pending Home Sales for August at 10:00 ET; July 89.9.

Wednesday: ADP National Employment Report for September at 8:15 ET; August +38,000. ISM Non Manufacturing Index for September at 10:00 ET; expected 54.5, August 55.8.

Thursday: Jobless Claims for the week ending September 29 at 8:30 am ET; expected +12,000 to 310,000, prior week -15,000 to 298,000. Factory Orders for August at 10:00 ET; July +3.7%.

Friday: Non Farm Payrolls for September at 8:30 ET; expected +115,000, August -4,000. Unemployment Rate for September at 8:30 ET; expected 4.7%, August 4.6%.

Eurozone

Monday: Manufacturing Purchasing Managers Index (PMI) for September at 8:00 GMT: August 54.3.

Tuesday: EMU Unemployment for August at 9:00 GMT; expected 6.9%, July 6.9%. Industrial PPI for August at 9:00 GMT; expected +0.1% m/m, +1.8% y/y, July +0.3% m/m, +1.8% y/y.

Wednesday: Services PMI for September at 9:00 GMT; August 58.0. Retail Trade for August at 9:00 GMT; expected +0.4% m/m, +0.5% y/y, July +0.1% m/m, +0.5% y/y.

Thursday: ECB rate announcement and press conference.

Germany

No important statistical releases

United Kingdom

Monday: CIPS Manufacturing PMI for September at 9:30 GMT; expected 55.7, August 56.3.

Wednesday: Nationwide Consumer Confidence for September at 23:01 GMT; August 94. CIPS Services PMI for September at 9:30 GMT; expected 56.8, August 57.6.

Thursday: BOE rate announcement at 12:00 GMT.

China

No statistical releases

Japan

No statistical releases

Published on  Mon, Oct 1 2007, 08:45 GMT

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Market Directions Sunday, September 23, 2007

Sat, Sep 22 2007, 08:28 GMT
by Joseph Trevisani

FX Solutions





• The Fed, the Fed, the Fed and the 0.5% cut

• The ECB pulls its rate punches

• The worldwide rate reduction cycle begins?




United States

It would be hard to overstate the effect that the Federal Reserve decision to cut the base American interest rate, the Fed Funds, had on market perceptions this week. The Fed move instantly shifted the economic focus from inflation to growth and from confidence to concern. No central bank in the industrial world can afford to discount Fed policy and by the end of the week recognition of that fact was heard in statements from the European Central Bank (ECB) and the Bank of England (BOE). In the aftermath of the Fed the Dollar reached a new low against the Euro, surpassing even the nadir of its trading against the old German Deutsche Mark , and the Yen crosses returned to popularity. The speculative Dollar Index also sank to a record level.

In his appearance before Congress on Thursday, Ben Bernanke offered no elaboration on the terse policy statement issued by the Fed on Tuesday accompanying the rate announcement. He did, however, warn Congress against the 'moral hazard' of legislating a bail out for parties in the sub-prime debacle. That warning must hold as well for Fed policy. Inflation readings have helped give the Fed the leeway to cut rates, though it is likely Mr. Bernanke would have cut at least 0.25% even if inflation was considerably higher. But commodity prices are rising and gold traded at a 27 year high during the week.

By surprising the markets with a large reduction Mr. Bernanke has purchased time for the financial system to return to normal. The next Fed policy meeting is not until October 31st and by then many of the unknowns in the asset backed market should have been vetted and refunded. Inflation has not vanished from the American or the world economy. The US economy is growing as is the EMU, and the financial picture may well look very different in six weeks. The Fed has not changed its opinion that the financial turmoil of the last weeks is not an economic collapse, it has simply given the market time to discover that fact for itself.




Eurozone

The European Central Bank began the post Fed week on Wednesday with brave words about inflation and price stability. Klaus Liebscher, head of the Austrian National Bank and governing council member, said that the ECB "must do what is necessary "   to preserve price stability.    He implied that the Federal Reserve rate cut did not prevent the ECB from hiking again.

The next ECB policy meeting is October 4th in Vienna. By then the board members will have the August money supply and credit supply figures. Noting that worldwide energy and commodity prices have risen sharply, Mr. Liebscher said "I would not be surprised if in the next few months we see higher inflation rates than we have seen in the past". He was repeating the standard ECB analysis on inflation. It is not necessarily wrong, even though the HICP inflation rate in the EMU zone has now been at or below the 2.0% target for 12 straight months. During the same period the money supply figures have been between 9% and 11%, well beyond the ostensible ECB target of 8.0%. His view on the market turbulence of the past six weeks echoes the original reaction of Ben Bernanke, the Federal Reserve Chairman. The financial market problems are for the banks themselves to settle. "I don't see now that you can solve the problem if the banks and the financial intermediaries do not react immediately…we can only give advice to the industry". Mr. Liebscher also predicted that the market turmoil  "will continue for a certain period of time", and that "surprises should not be excluded". That was on Wednesday, one day after the Fed surprise.

On Thursday French President Nicholas Sarkozy called for the ECB to lower rates. "When the US central bank lowers its rates, everything picks up; when we don't lower rates we go down. I'm telling Mr. Trichet look what others are doing". This is not a new position for the French President. He made the same criticism during the election campaign and his ministers have voiced similar sentiments since they came to power.

On Friday, Lorenzo Smaghi, ECB Executive Board member, spoke in approving tones of the long time United States "strong Dollar policy ".    He characterized the oft repeated US Treasury official mantra not as an attempt to manipulate the exchange rate but as a recognition of a basic economic fact, that a strong American currency is good for the United States and the US economy. Among other uses of a strong currency is the check it provides on domestic inflation.

And lastly, also on Friday, Jean Claude Trichet the ECB President said that the bank has been successful in "very solidly" anchoring price stability in the EMU. If inflationary expectations are 'anchored', then why does the bank need to continue to raise rates? This question will be asked across Europe and in all public forums as the next ECB meeting approaches. If the Euro is "a currency that inspires confidence" surely it no longer requires the support of an aggressive monetary policy.

European economic growth appears to have peaked in the 4th quarter of last year. The EMU Purchasing Managers Index (PMI) for September fell in all categories. The manufacturing index slid to 53.2, much less than the median forecast of 53.9 and more than a full point below the August figure of 54.3. The services sector scored only 54.0, well behind the 57.5 prediction and the August return of 58.0. It was the lowest result for the services measure in two years and the largest monthly drop in the history of the series which began in 1998.

If the Fed and then the Bank of England are cutting rates, if EMU economic growth is slowing and inflation is under control and if EMU exports are suffering from the pains of an expensive currency, can the ECB remain stationary for long? The real question is when will the currency markets begin pricing the almost inevitable ECB rate cut?




Japan

The Bank of Japan (BOJ) declined to raise the overnight call rate beyond its current 0.5%. The vote was 8 to 1. Board member Atsushi Mizuno voted against leaving rates unchanged as he had at the previous two policy meetings. The BOJ last increased its base rate in February when it hiked 0.25%. The bank launched its "flexible and gradual" series of rate hikes in July 2006, when it boosted rates for the first time in six years. BOJ Governor Toshihiko Fukui has made public his desire to 'normalize' the Japanese rate structure but he has been thwarted by political opposition from the ruling Liberal Democratic Party (LDP). The BOJ is worried that low interest rates could encourage artificial additions to Japan's manufacturing capacity which would add to the potential for price deflation. Governor Fukui has also stated that inflation expectations are "the biggest enemy" for a central bank. However, inflation in Japan is very tame. The July national core CPI was actually 0.1% lower than a year earlier and down for the sixth month in a row. Second quarter GDP was revised lower to -1.2% from the initial +0.5% reading. Industrial Output and Household  Spending were both negative in July as well, though the Japanese government has said that they expect a substantial rise in output in August. Despite BOJ intentions and inflation concerns the chance for further rate increases this cycle is vanishing.

The LDP will choose it new leader on Sunday to replace Shinzo Abe, the former prime minister who resigned earlier this month. In Japans' parliamentary system the leader of the party with control of the lower house of the Diet, the legislature, automatically becomes Prime Minister. The two leading candidates are former chief cabinet secretary Yasuo Fukuda and the LDP's current secretary-general, Taro Aso. Fukuda is ahead in opinion polls and among LDP members. Both are long time LDP politicians and will offer few new ideas or initiatives. The Japanese public is already tired of the economic reforms of Junichiro Koizumi and concerned about the widening rift between the wealthy and the rest of the populace.





Economic Releases September 17 – September 21




United States

Tuesday: the Producer Price Index (PPI) for August was much lower than forecasts at -1.4%, with the core reading as predicted at +0.2%. The year on year rate for both measures is now 2.2%. Falling energy prices in the month lowered the overall number without affecting the core result. The National Association of Home Builders Housing Market Index fell to 20 in September down two from August, its seventh monthly fall in a row since it scored 39 in February of this year. The September reading equaled the record low from January 1991; the series has been kept since 1985. Net Long Term Securities transactions as reported by the Treasury International Capital system of the Treasury Department listed a very modest inflow of $19.2 billion in July. A total of $24.7 billion were purchased by overseas buyers, $20.3 billion from private sources and $4.4 billon by official sources. American bought $5.5 billion of foreign securities.

Tuesday: the Producer Price Index (PPI) for August was much lower than forecasts at -1.4%, with the core reading as predicted at +0.2%. The year on year rate for both measures is now 2.2%. Falling energy prices in the month lowered the overall number without affecting the core result. The National Association of Home Builders Housing Market Index fell to 20 in September down two from August, its seventh monthly fall in a row since it scored 39 in February of this year. The September reading equaled the record low from January 1991; the series has been kept since 1985. Net Long Term Securities transactions as reported by the Treasury International Capital system of the Treasury Department listed a very modest inflow of $19.2 billion in July. A total of $24.7 billion were purchased by overseas buyers, $20.3 billion from private sources and $4.4 billon by official sources. American bought $5.5 billion of foreign securities.

Wednesday: the Consumer Price Index (CPI) fell slightly in August 0.1%, bringing the year on year rate to 2.0%.; a flat number had been predicted. The core rate rose 0.2%, a year early rate of 2.1%. The core annualized rate for July and August based on the unrounded monthly results is now 2.32%, the three month rate is 2.48%. Energy prices fell 3.2% in the month, mostly on gasoline and natural gas price declines which made the overall rate less than the core. But with crude oil at more than $80 a barrel and commodity prices rising, the string of lower core results going back to January are probably at an end. Housing Starts in August shrank 2.6% from July to 1.331 million units, a twelve year low. The July figure was adjusted down to 1.367 million from 1.381 million. Single family house starts skidded 7.1%, but multi-family starts jumped 12.8%. Building Permits plunged 5.9% to 1.307 million with single family permits falling 8.1% to their lowest level since June 1995.




Eurozone

Thursday: European Monetary Union (EMU) construction Output in July was flat, the elapsed yearly rate was at +1.7%. The June number was revised down to +0.5% from +0.6%, the yearly to +2.6% from +2.7%.




Germany

Tuesday: the ZEW Survey of financial experts for September's 'economic expectations' dropped for the fourth month in a row coming in at -18.1 below the expected16.0. The August reading was -6.9. The 'current conditions' number was short of the median prediction of 75.0, reaching only 74.0. August had registered 80.2. It is the third monthly drop in succession. "The second considerable decline of business expectations since the beginning of the sub-prime crisis makes clear that the financial experts do not rule out the possibility that the crisis could spill over to the German economy", the ZEW statement said.




United Kingdom

Tuesday: the Consumer Price Index (CPI) for August was up 0.4% and elevated by 1.8% for the year, the same as the monthly estimate and very close to the prediction for the yearly number of +1.6%. July's results were was -0.6% and +1.9%.

Thursday: Retail Sales in August performed better than expected rising 0.6% for the month, 4.9% better than a year ago. A flat monthly had been the median prediction with +4.0% for the year. In July sales rose 0.7% and 4.4% on the year. Confederation of British Industry (CBI) monthly Industrial Trends Survey reported a 0.6% gain in 'total orders' for September; in August it rose 0.9%.





The Week Ahead September 24– September 28




United States

Tuesday: Case-Shiller Home Price Index for July at 9:00 ET; June 217.07. Conference board Consumer Confidence for September at 10:00 ET; August 105.0. National Association of Realtors (NAR) Existing Home Sales for August at 10:00 ET; July 5.75 million.

Wednesday: Durable Goods Orders for August at 8:30 ET; July +5.9%, 'excluding defense' +4.9%, 'excluding transport' +3.7%.

Thursday: final GDP for the second quarter at 8:30 ET; preliminary +4.0%. New Home Sales for August at 10:00 ET; July 870,000.

Friday: Personal Income for August at 8:30 ET; July +0.5%. Personal Expenditures for August at 8:30 ET; +0.4%. Chicago Purchasers Index for September at 9:45 ET; August 53.8. Final University of Michigan Consumer Sentiment for September at 10:00 ET; preliminary 83.8. Construction Spending for August at 10:00 ET; July -0.4%.




Eurozone

Monday: Industrial New Orders for July at 9:00 GMT; June +4.4% m/m, +13.8% y/y.

Thursday: Money Supply (M3) for August at 8:00 GMT; July +11.7% y/y, +11.1% three month moving average y/y.

Friday: Initial 'Flash' Harmonized Index of Consumer Prices (HICP) for September at 9:00 GMT; August +1.8% y/y. EMU Economic Sentiment Index for September at 9:00 GMT; August 'Economic Sentiment' +110.0, 'Industry Confidence' +5, 'Consumer Confidence' -3, 'Business Climate Indicator' 1.41.




Germany

Tuesday: IFO Survey for September at 8:00 GMT; August 'Business Sentiment' 105.8, 'Current Assessment' 111.5, 'Business Expectations' 100.4.
Wednesday: GfK consumer Confidence for October at 6:00 GMT; September 7.6.

Thursday: Unemployment Rate for September at 7:55 GMT; August 9.0%. Preliminary CPI for September-release time unannounced; August -0.1% m/m, +1.9% y/y. Preliminary HICP for September-release time unannounced; August -0.1% m/m, +2.0% y/y.

Friday: Import Prices for July at 6:00 GMT; June +0.3% m/m, +0.4% y/y. Export Prices for July at 6:00 GMT; June 0.0% m/m, +1.6% y/y.




United Kingdom

Monday-Friday (date unannounced) Nationwide House Prices for September at 6:00 GMT; august +0.6% m/m, +9.6% y/y.

Wednesday: second quarter GDP 3rd release at 8:30 GMT; prior +0.8% q/q, +3.0% y/y.

Thursday: CBI distributive Trades survey for September at 10:00 GMT; August 17.

Friday: GfK Consumer Confidence for September at 9:30 GMT; August -4. Land Registry House Prices for August at 10:00 GMT; July +0.1% m/m, +8.8% y/y.




China

No significant releases




Japan

Monday: markets closed for Autumnal Equinox holiday.

Friday: National core CPI for August at 23:30 GMT (August 27); July -0.1% y/y. Central Tokyo CPI for September at 23:30 GMT (August 27); July 0.0% y/y. Unemployment Rate for August at 23:30 GMT (August 27); July 3.6%. Household Spending for August at 23:30 GMT (August 27); July -0.1%. Industrial Output for August at 23:30 GMT (August 27); July -0.4% m/m. Retail Sales for August at 23:30 GMT (August 27); July -2.2% y/y.









Published on  Sat, Sep 22 2007, 08:28 GMT

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Market Directions Sunday, September 16, 2007

Wed, Sep 19 2007, 11:23 GMT
by Joseph Trevisani

FX Solutions





• The Fed seeks to diminish rate hike glee but the markets celebrate

• The Yuan sets a new record against the Dollar and the PBOC raises rates yet again

• The Bank of England rescues Northern Rock and the yen crosses swoon




The Week in Review September 10 - September 14


United States

Federal Reserve officials sought to dampen the fervor for a cut in the Fed Funds Rate at the Tuesday FOMC meeting. Market speculation has centered on the size of the cut, 0.25% or 0.5%, but not on the possibility that the Fed might decline to cut at all. In truth the markets are right. It is very unlikely that the Fed would risk sparking the credit market volatility that would ensue if it failed to reduce rates. The herd of disappointed traders would sweep all before them. In the current tense and febrile credit markets the result could be disastrous and it would quickly affect the equities and currencies.

The Fed has little to gain and much to lose if it denies traders their surcease. If the Fed's analysis is correct and the credit market problems are largely liquidity based and will subside once the overhang of refundings pass and banks can resume normal money market operations, then the potential for economic damage is neatly insured by a rate cut. Market expectation for another cut can then be postponed and if the economy shows continued growth, permanently denied. A 0.25% cut will provides the market with emotional support, grant time for the credit problems to work themselves out in the financial arena and leave the Fed a free hand in future rate choices. A rate cut is prudent, careful and wholly in keeping with Mr. Bernanke's method, especially if coupled with an inflationary admonition.

Market opinion is still weighing against the dollar with the greatest pressure from the perception that the potential damage to the US economy from the sub-prime collapse is high. But market opinion, as with trading, often overreacts. It is quite possible that the eventual economic impact will be, as it was in the Long Term Credit Russian debacle of 1998, far less that originally feared. Some economic indicators have slowed, last week's Non Farm Payroll and Friday's moderate Retail Sales number, being primary, but Consumer Sentiment appears to be sustained and Capacity Utilization was actually a bit higher than forecast. To cite another parallel, late last year the fall in the housing market was continually cited as presaging a general retraction in the economy, perhaps even a recession. Consumers were supposed to have mortgaged their once increasing and then falling home values to the hilt, converting every iota of value into spending. It turned out that those consumers, who are after all people we know and whose judgment we can understand, were not nearly as reckless as imagined. To be sure, growth did drop in the first quarter to +0.7%, but it quickly recovered it the second and looks to continue close to trend in the third. If the economy does not falter, admittedly a substantial unknown at this point, the dollar stands a good chance of recovery in time for a Christmas celebration.

An interesting comment from Goldman-Sachs research, "an increase in foreclosure rates of one percentage point over a year, about a quarter percentage point of increase in the annualized rate each quarter causes a swing in real house price inflation of ten percentage points. So the 0.9% increase in foreclosures over the past year implies real house price appreciation about nine percentage points lower than the 3% increase that occurred over the prior year - in other words a price decline of 6%."

Eurozone

Jean Claude Trichet, the ECB President, struck a similar tone to the Federal Reserve in his public comments this week. He characterized central bank policy as 'accommodative', with 'upside inflation risks' and was secure in his conviction that 'anchoring inflation helps the EMU economy'. Nevertheless, in a rather studied understatement he acknowledged that 'uncertainties have increased', that 'money markets must function properly' and that given the high level of uncertainty it is 'appropriate to gather more information'.

The ECB monthly bulletin outlined the ideas in more detail. "The medium term outlook for price stability remains subject to upside risk as identified by both its economic and monetary analysis". The Euro area retains 'strong fundamentals".

The congruence of views between the Fed and the ECB, expressed in their different styles, is remarkable. The response of both banks has been to start with the liquidity issues and ratchet their response from there. For both central banks the key and still undetermined question is what will be the economic impact of the financial and credit market restrictions. For the majority of market participants the answer to the problem is drastic rate reductions. There is, of course an element of talking one's book in all this hyperventilation for rate relief. Economists prefer to call it the moral hazard problem, but the meaning is the same. The people who advocate rate cuts are the same people who will benefit from those cuts. This is a problem that Mr. Bernanke, with his opinion of the relative separation of the financial markets from the productive economy, takes seriously.

United Kingdom

The Bank of England was forced to provide $12 billion in liquidity to Northern Rock, a Newcastle based bank in the biggest rescue of a British financial institution in 30 years. According to the BOE the issue was "liquidity and not solvency", but to the risk resumption traders of the Yen crosses the difference was moot. Prior to the Friday rescue of the mortgage lender the Yen crosses had risen steadily, the Euro/Yen reached 160.50 on Thursday, its highest level since August 14th , when it was on the way down in the midst of the credit market squeeze. In the immediate reaction to the news, the Euro/Yen was sold almost two figures to 158.75; it later recovered to 159.70.

Japan

The Japanese Prime minister Shinzo Abe abruptly resigned on Wednesday throwing the political scene in Tokyo into chaos but provoking little consternation in the currency markets. The Nikkei fell 0.5%, bringing its losses to the year to more than seven percent. The evident haste of Abe's decision after he failed to secure passage of a law renewing permission for the Japanese military to continue supplying fuel and supplies to the US and Nato forces fighting in Afghanistan was a surprise but the fact was not. Since the Liberal Democratic Party (LDP) lost heavily in the elections for the upper house of the Japanese Diet six weeks ago, his government has widely been viewed as living on borrowed time. A series of scandals and political miscues had sapped his popularity and the comparison to his very popular predecessor, Junichiro Koizumi, was damning. A cabinet shuffle on August 27th, replacing secretaries criticized as incompetent and corrupt with well known LDP members, did little to revive his popularity.

Because the LDP retains a large majority in the lower house of the Diet new elections are not required. It is only for the LDP to choose a new leader for that person to become Prime Minister. The LDP will meet concurrently with the Bank of Japan on September 19th to elect a new leader. Taro Aso, 66 years old, former Justice Minister and Foreign Minister under both Koizumi and Abe is the favorite. The economic reform agenda that had been championed by Koizumi and weakly pursued by Abe will likely fall to the wayside as the new LDP Prime Minister seeks to regain sway with the electorate. Economic reform, though seen as necessary by most economists and commentators, and encouraged by Japan's trading partners, is not popular with the Japanese voter. The new government will be in no position to pursue painful reforms. The Bank of Japan holds its next rate policy meeting on September 18 and 19th. A rate hike was not probable before Mr. Abe's resignation, it is highly improbable now.

China

The People's Bank of China (PBOC) raised one year rates by 27 basis points effective September 15th. Deposit rate will be 3.87% and lending rates 7.27%. The statement accompanying the announcement said the move was taken "to stem money credit expansion and slow investment".




Economic Releases September 10 -