Fed-speak focuses again on prolonged stimulus measures


MAJOR HEADLINES – PREVIOUS SESSION

  • NZ Oct. Visitor Arrivals out at -0.7% vs. 3.8% prior 

  • AU Oct. New Motor Vehicle Sales out at 3.7% m/m, 3.3% y/y vs. revised 3.1%/-1.8% prior resp. 

  • SI Oct. CPI out at -0.8% y/y vs. -0.4% expected and -0.4% prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • Swiss M3 Money Supply (0800) 

  • GE PMI Manufacturing/Services (0830) 

  • EU ECB’s Ordonez to speak (0830) 

  • EU PMI Manufacturing/Services/Composite (0900) 

  • EU ECB’s Constancio to speak (1100) 

  • EU ECB’s Trichet to speak (1245) 

  • CA Retail Sales (1330) 

  • US Chicago Fed Nat’l Activity Index (1330) 

  • US Existing Home Sales (1500)

Market Comments:

The dollar enjoyed a second session of respite from the relentless selling of late as the move in risk aversion that had been seen in Asia on Friday extended across to the US session. We saw tests of critical levels in some currency pairs and the question on everyone’s lips was whether this 2-day dollar rally marked a paradigm shift in market sentiment or whether it was merely profit-taking and those players that had enjoyed the past six months taking their cash from the table and banking it.

The answer probably came in the Asian session this morning. Granted liquidity conditions were thin as Japan celebrated its own Labour Day Thanksgiving holiday, but the dollar gave back all the gains of the past two sessions on the index as gold proved to be the start performer, blasting through the 1,150 mark to hit new all-time highs. There was no one specific news item that powered gold higher though some suggested the lack of Tokyo liquidity played a part. The AUD was a major beneficiary of gold’s surge with the resource sector especially bid and as a consequence the AUD reverted back above the medium-term trend-line that had been temporarily breached on Friday.

Another factor adding to the dollar’s woes were early-morning comments from St Louis Fed President Bullard.
Despite saying that the Fed should raise rates when the economy is improving, even though this may be difficult with unemployment rising, he noted a preference that the Fed extend the MBS buying program beyond March’s deadline. He advocated keeping the program running, albeit at a very low level, wait and see what develops and adjust it accordingly while the Fed funds rate remains close to zero.

Chicago Fed’s Evans was also interviewed in the FT and commented that he had been "a little surprised" by the latest employment rpt, which showed unemployment at 10.2%. This had caused him to slightly upgrade his forecast for the peak jobless rate (to 10.5%) before it "hopefully" falls to around 9.5% by years’ end.
Nevertheless, Evans was optimistic that the recovery would gain traction regardless and expected economic growth of 3-3.5% over the next 18months, adding that he didn’t think there was much risk of a double-dip recession. With regard to rates, Evans said he frankly would not be surprised if the Fed keeps rates near zero until at least the middle of 2010, with the first rate increase coming in late 2010 or even later into 2011. Either way, both comments from the Fed members looked to preserve the weak dollar sentiment and confirm that the recent dollar strength was a profit-taking blip.

On the other side of the Atlantic, ECB's Gonzalez-Paramo asserted that the central bank believes rates are appropriate and risks to price stability are controlled in a good measure. He added that the CB saw no short term pressures in inflation with upside and downside risks balanced. The ECB, he noted, would likely be more explicit in December over the bank’s plans to withdraw stimulus measures in 2010. It appears as if the ECB is in "exit mode", but with any changes likely to be gradual, and well telegraphed at this stage.

The holiday-interrupted week gets off to a slow start on the data front today. The European session features German and EU PMI while the North American session has Canada retail sales, Chicago Fed activity and US existing home sales. The week ahead offers revised Q3 GDP tomorrow, with consensus looking for downward trim to 2.9% from 3.5% flash with weaker inventories, bigger September trade gap likely to blame. Housing data also features on Tuesday with a number of house price indices along with November consumer confidence reports.
Weekly jobless claims will be out on Wednesday, pre-Thanksgiving, with consensus call for dip to 500K from 505K last time. Note that the 4-week average is down 145K from its peak - a faster pace so far than seen during the slow recoveries in 1991 and 2002 - but not as rapid a decline as in 1983. A stalling in claims from here would add concern that recovery prospects may disappoint the bullish V-shape viewpoint.