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1/5/2008 − the current market sentiment

Thu, May 1 2008, 06:45 GMT
by Walid Salah El Din

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Again Plosser the fed member of Philadelphia and fisher the fed member of Dallas opposed the majority preferring no change this time. This was not out of expectation but this time, the statement indicated less worries about growth and uncertainty about inflation currently which should moderate as they mentioned indicating the cut by just .25% which was widely expected leaving the door opened for further cuts if it needed. The fed did not surprise the market again. The greenback can find support as the statement is looking less dovish this time than before and it appreciates the inflation upside risks again expecting it to moderate and in line with expectation, they have cut by just .25% which really can signal a close end of this easing cycle which started last September. It looks that there can be a pause next meeting. Cutting by just .25% can send many messages to the market but not a clear direction to the greenback yet. It is the first .25% since the beginning of the easing cycle. The fed may have a wait and see stance to watch the impact of its recent cuts in the coming period. However the housing market is still the main concern with no bottom as it looks. Also there is still a worry about the credit market, the consuming spending is still struggling and so, we have today's cut and as usual, the fed mentioned that it will closely watch the growth and inflation developments.

Yesterday, we have had Q1 US GDP data came higher than the market expectation of just .2%. The GDP increased by .6% in the first quarter of this year due to increases of the US inventories component has added .81 to the figure reflecting a slowing down in demand. The consumer spending which forms more than 2/3 of economy has grown by just 1% which is the weakest rate since September 11 events. The housing market is still dragging the US growth down as the real residential fixed investment has fallen again by 26.7% in the first quarter showing a persisting of the housing investment pessimism weighing on the economy.

The GDP advanced reading has shown an increase of the PCE core price index by 2.2% in the first quarter which is more than the market expectation of 2.1% but less than previous quarter figure which was 2.5%. The broad figure which does not exclude oil or energy came at 3.5% which is lower than the 3.9% of the last quarter and the market expectation of 3.7%. The growth data came accompanied with the release of April US ADP employment figure which came surprisingly positive by 10k and we were waiting for a negative number by 60k. The data could make optimism by the release of April US labor report next Friday making a change of the current dovish market sentiment to wards the labor market.

We wait today for the release of April ISM manufacturing index which is expected to be well below 50 in the contracting area at 48 after April Chicago PMI manufacturing has come at 48.3 the market was expecting it to be lower at 47.5. We have today the same PMI manufacturing data from UK but we are to have the EU one tomorrow by god's will as the market labor holidays currently which make the trading thin right now. The EU PMI flash indicator has shown a slow down to 50.8 last week to know how far EU is negatively impacted by the US slow down and the strong EURO.

Best wishes

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FX Consultant

Walid Salah El Din

E-Mail: mail@fx-recommends.com

Published on  Thu, May 1 2008, 06:47 GMT