More weak housing data from the UK

Last night we saw data come out from The Royal Institution of Chartered Surveyors showing the house price balance has fallen in the first 3 months of the year to -95.1 from -79.4 in March.

Monthly volumes of sales has also dropped to 18.1 from March's 22.2. This news was badly received by Sterling which fell to 1.9486 against the US Dollar and 1.2550 against the Euro.

Alliance and Leicester in a trading statement this morning announced a further writedown of £192 million.

Although a large amount to have written down their outlook remains very positive and they confirm that they have strong medium term funds secured into the second quarter of 2009.

Meanwhile, HSBC have been downgraded from Neutral to Sell by Merrill Lynch on the back of their short term earnings risk.

UK CPI this morning at 9:30 BST will give a taster of what will follow in tomorrow's Bank of England Inflation Report. Given the frailty of Sterling at present, a weaker currency on the back of the figures has to be a better bet in the short term.

News that Spain's annualised CPI has risen to 4.2% YoY has been largely ignored by the market although the repercussions for the ECB must occur sooner rather than later.

Bernanke is one of several scheduled Fed speakers today so any clues on the Board's current thinking will be looked for. As most of the speeches occur after our close, overnight moves will be the order of the day.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Central Banks Keep Rates on Hold .. Oil surges to new record high

Yesterday we saw the MPC decide to keep UK rates at 5% for a further month. Until we get the minutes of the meeting released on the 21st May, we will not know how close a decision this was.

With the current raft of weak data coming from the UK I would imagine there was quite a battle of words between the inflation focused hawks and the doves concerned with sputtering growth.

The ECB also left rates unchanged with their reference rate held at 4% for the 11th month in a row.

The statement from ECB President John Claude Trichet, that immediately followed the meeting left the market in no doubt that the Central Bank's main concern was still very much the fight to stave off inflation.

It looks very unlikely that we will see a move in Euro rates now until well into the second half of the year even though the economic signals from the majority of the member states are getting weaker by the day. German export numbers yesterday underlined this with the strong Euro damaging business outside the region whilst weak demand from within the Eurozone accentuated the problem.

The resultant FX reaction was muted although by the end of the day Sterling did weaken against both USD and Euro.

The outlook on currencies remains clouded with the Market currently making money by being long of Dollars but still unsure that both the US economy is out of the woods and that the US are supportive of a further strengthening in their currency.

Commodities, and especially oil, were the dominant movers yet again with the price of crude going above the $124 per barrel for the first time ever - suddenly, the prediction from Goldman Sachs that oil will reach $200 per barrel this year doesn't look too off the wall.

The resulting economic Global slowdown if this occurs would be severe in the extreme. On the other side, base metals fell in active trading.

Today we are light on the data front with just the US Trade Figures at 1.30 to look forward to. Given the fine weather, this might not prove a strong enough draw to keep the market bubbling into the afternoon.

Next week looks more interesting with the highlight in the UK being the release of the Bank of England's Quarterly Inflation report. The data plus the question and answer session that follows will set the stage for the MPC meeting in June and as such should provide a good clue as to which way the committee will swing.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Wise Money eyes on the BOE and the ECB today.

The Pound took a further bashing yesterday now reaching an 11 week low against the dollar.

Sterling came under severe pressure after the UK Industrial Production figures were much worse then anticipated, with a 0.5% fall month on month. The continued weak data for sterling has raised discussions that the BOE will be forced to cut rates by a further 25bp at the meeting today.

However with UK inflation data due to be released next week many economists believe the BOE will hold rates until this data is revealed. The inflation data is expected to hit 3% so it may be seen as irresponsible for the BOE to cut rates before this important data is released.

This 3% level is extremely significant because the MPC will have to write letter of explanation to the treasury explaining why inflation is so high.

A panel of 9 financial and economic experts which make up The Times Shadow MPC also recommend that the sterling base rate remains on hold at the meeting today. The votes were swayed 5 to hold and 4 to cut.

The retail sales in the euro zone were released yesterday morning, highlighting the worsening European economic performance we have seen over the last few weeks.

The retail sales fell by 0.4% in March similarly placing pressure on the ECB who are meeting today as well.

However the ECB who are also faced with similar pressures of rising inflation and slowing growth are also expected to keep rates on hold. What will be of more interest to the market will be the comments of Trichet in his press conference following the rate announcement where he is expected to emphasise the downside risks to the economy.

The dollar on the other hand has been heading towards recent highs against a basket of currencies. Fed officials have hinted that the hard-line rate cutting may be lapsing with US Treasury Secretary Henry Paulson stating in a recent Wall Street Journal interview that 'the worst seems to be behind us.'

The BOE are due to make the rate announcement at 12.00 today followed by the ECB at 12.45. Further to this data out today is the US initial jobless claims out at 13.30.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Euro Inflation takes to the stage

Euro zone inflation took centre stage yesterday as Jean-Claude Trichet spoke at a conference in Vienna. The European Central Bank President made it clear that the governing council must use interest rates to deliver price stability.

Any other considerations, such as growth and employment are secondary. These comments effectively dismiss the recent calls from French and Italian government officials for growth to be taken into account.

Inflation which reached 3.6% last month, the fastest pace in 16 years, has led to the ECB leaving rates unchanged. It appears this may be the same reason for the repo rate remaining at 4% in the near future. In the same speech, Trichet again voiced his concern about the euro's strength and the impact it has on European exports.

The euro bounced back against the dollar during yesterday's trading, after three days of declines. Yet another occasion on which Trichet talks tough on inflation, also mentions the detrimental effects of a stronger euro and the market automatically pushes the single currency higher.

There was additional evidence, provided by the Hometrack Ltd survey, that the UK housing market is correcting. The results which were released early yesterday showed the average price of a home declined a further 0.6% in April. This is the biggest month on month drop in over three years for this report.

Oil prices climbed again to reach a record $119.93 a barrel, caused by a strike at a refinery in Scotland and further violence in Nigeria.

Possibly of greater interest is that the EUR/ USD cross rates has had a correlation of 0.96 with the price of oil. Just a bit closer and it's a perfect hedge.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Wise Money growth v inflation debate continues

There was further evidence on Friday of the difficulty that the Bank of England face over near term base rate decisions.

UK Gross domestic product rose 0.4% in the first quarter, which is the slowest since the start of 2005. Year on year growth came in at 2.5%. Perhaps, support for the MPC members who voted for a reduction that is until UK consumers inflations expectations are taken into account.

A survey also released on Friday set a record high for a second consecutive month when it showed that consumers expect prices to rise by 3.8% in the next 12 months. So it could be that the sharp rise in inflation expectations makes the MPC think twice about lowering rates.

It seems that market participants are increasingly taking the view that the Bank of England may slow the pace of interest rate cuts as indicated by UK government bonds.

The yield on the 2 year gilt pushed to the highest level in four months over concerns for UK inflation and speculation that the worst of the credit crisis is over.

Possible credit market easing has led to the unwinding of safe-haven trades globally as investors move out of bonds and back to stocks. Particularly in Japan where yields on 5 year government bonds rose the most since 1999 after consumer prices soared 1.2% in March from a year earlier.

The Pound had been heading for a weekly drop against the dollar but managed a fight back on Friday as traders took profit on the possibly excessive move of the previous few days.

The UK currency has given up 4% against the dollar over the past six months and may remain under pressure on indications that the Fed may be nearing the end of its monetary easing cycle.

Market sentiment that the Federal Reserve will probably stop cutting interest rates also allowed the dollar to post its biggest weekly gain in a month against the euro.

This was despite US consumer confidence falling to a 26 year low amid fears of record gasoline prices and rising unemployment. The university of Michigan sentiment index decreased to 62.6 in April from 69.5 the previous month.

As we head into the week with the FOMC announcing its decision on the Fed Funds rate on Wednesday, futures contracts now show there to be a 24% chance the target rate will stay at 2.25% up from 2% a week ago.

The majority of the remaining probability is for a 25 basis point reduction.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

US New home sales plummet

Whilst US home builders have slashed average house prices by record amounts we still saw new home sales plunge by 8.5% in the month of March to 17 year lows, according to the Commerce Department who released their estimation yesterday. New home sales are down 36.6% compared with a year ago!

However it wasn't all doom and gloom for the US with jobless claims falling from 375,000 to 342,000; this being the lowest level for 2 months and coming in better than the predicted 375,000.

Dollar weakness was tempered somewhat by chinks developing in the Eurozone armour. The Euro fell to a one-week low against the dollar on Thursday after a survey showed German corporate sentiment deteriorated by more than expected in April.

The German IFO business climate fell from 104.80 in March to 102.40 this month, which was significantly lower than the market expectation of 104.0pts. This is the weakest level since January 2006 and could well be the turning point of the single currency's uptrend.

On the UK side retail sales came in down 0.4% for March but were revised up to 4.6% for the year. The British Retail Consortium demonstrated concern that this figure was misleading given that the retail sector are making sounds that they are struggling.

Sterling failed to lift itself out of it's current trough against the Euro as poor sentiment on Britain's economy convinced investors the Bank of England is set to cut interest rates further.

This week it remained just above a record low against the Euro as the housing market weakened and consumer spending softened, although we have seen some fight back this morning. There's hope yet for the British holiday maker in Europe!

Oil prices retreated yesterday but the strike at Grangemouth refinery is still expected to go ahead on Sunday and has triggered panic buying in the north of England. Meanwhile Gold dipped to a three week low of $898.20 a troy ounce from 905.50 on Wednesday.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Oil hits new highs as dollar sinks

Oil carried on its upward trend yesterday almost hitting $120 a barrel supported by supply concerns largely driven by rising demand from China.

In addition, sentiment may have shifted and ignited a rethink towards the backing for biofuels in the US and Europe as rising food prises may mean this solution to the oil supply issue may no longer be commercially viable.

Rice jumped to a record high as World Bank officials stated they were concerned with the mounting pressure in Thailand to restrict shipments. Thailand is the world's largest exporter of rice and these comments help add fuel to the worsening global food crisis.

The dollar sank to lifetime lows against the Euro breaking through the significant $1.60 level as hawkish comments from the ECB supported the eurozone currency.

According to traders yesterday, strong demand for the Euro came from Asian sovereign institutions. Also ECB council member Yves Mersch made comments that the central bank may well have to revise up its inflation figure on the back of the recent surge in oil and food prices which pushed inflation to a 16 year high of 3.6% in March for the eurozone.

This has caused certain economists to rethink their rate cut stance with a view there may actually be rate increases ahead.

The Euro lost ground against the pound as Tim Beasley a member of the Bank Of England's (BOE) MPC commented on the recent action to ease liquidity problems in the UK financial system would allow it to focus on controlling inflation.

This also saw the pound rise 0.8% to 1.9955 against the greenback and gained 0.6% to Y205.66 against the Yen.

Elsewhere Bank of Canada (BOC) cut interest rates by 50 basis points to 3 per cent with the Canadian dollar falling 0.5% to C$1.0070.

Although the cut was expected the BOC made changes to their statement stating the expected US slowdown was likely to affect Canadian exports and prompt further rate cuts.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

The Pound feels the heat

As expected the Bank of England announced details of the £50billion plan to help stem the credit crisis. The Governor, Mervyn King said that the scheme is aimed to improve liquidity in the Banking system. It should also increase confidence in financial markets, he added.

This will only apply to mortgage related debt and cannot be used to finance new lending. The initial period will be for one year with Bank's having the option to renew the facility for up to three years.

There were many comments following the announcement, the facts remain that the response from the Money Markets was muted, with the 3 month Libor fixing less than 1 basis point lower however this was the 5th consecutive decline.

The Gilts market saw a correction with yields in 2-3 year tenors down around 3 basis points.

The BBA (British Bankers' Association) have initiated a panel for discussions on whether a change in the calculation of LIBOR is warranted. The Director of the BBA Libor group is quoted by saying a change may be necessary, however changing the rate radically at this time would not be the best strategy

RBS announced their plans to increase capital, with a £12billion rights issue.

On FX news - following Friday's gains, the Pound weakened yesterday against the Dollar. Initial moves this morning are extending GBP losses

The Dollar suffered in addition with the further writedowns and bad news from Wall Street.

The EUR retraced slightly against the US Dollar following comments from the Director of the IMF Michael Deppler, saying that the ECB may need to cut interest rates within 6 months to bolster the economy. Although inflationary pressures remain in the Euro zone, until commodity prices start to drop I doubt that the ECB will action any change soon.

Away from the UK - UBS admitted that a lack of risk control and ambitious plans to grow revenue led it to its huge losses when the global credit crunch struck. So far total write downs are $37billion.

In Addition, further writedowns from the Bank of America, contributed to their posting of Q1 net income down 77% (Y/Y).

Oil continued to trend upwards, closing over the $117 level amid continued concerns on supply restrictions.

On the Economic front, we do not start to get stuck in until tomorrow.

Notable release of the day will be from the US with existing home sales for March.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Bank of England is the focus of Wise Money this week

The lack of Interbank lending is weighing heavily on the price of real money in the market place, as we continue to see disparity between LIBOR rates and BASE rates, with the benchmark 3 month LIBOR fixing at 5.89pct on Friday (against 5.00pct BASE).

The question is how long will this continue and what will the powers that be implement to attempt to bring levels back towards parity? In the current climate investors have the ability to lock in to favourable deposit rates, see levels above.

In home news - The Bank of England is due to announce plans to stimulate lending between banks by effectively taking the under performing assets which are linked to residential mortgages from their balance sheet and swapping them for Gilt edged securities which are effectively backed by the labour Government.

These transactions could carry a haircut of around 20%. There are many associated risks - This will take time to filter through the system and the restoration of confidence will not be immediate, lenders may chose not to pass on reductions in Base rates to home owners while the price of liquidity remains inflated.

Oil prices continue to rise, with record levels posted last week at $117 a barrel. OPEC announced that strengthening demand coupled with the weak US Dollar were pushing prices up. Many now expect oil to go through $120 by the summer.

The stock markets posted small gains last week with the FTSE 100 ending the week up over 200 points higher at 6,056.5

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Bank of England still has tough balancing act

The office for National Statistics yesterday reported that CPI, the headline inflation figure, remained unchanged at 2.5% against market expectations of a pick up to 2.6%.

Of course, when the Bank of England cut rates last week, they were privy to this data and whilst it gives them a little respite they have said they expect inflation to rise to around 3% this year.

Indeed with record input price inflation and the strongest factory gate inflation reported in almost 17 years on Monday, Mervyn King will be acutely aware of this pipeline price surge and must be ruing the balancing act he will now be performing.

The slowing economy and falling house prices demand monetary easing whilst the rising prices, caused in the main by energy and food, warrant a tightening in rates.

Food and Energy prices are of course not confined to any one country and the ZEW survey released in Germany yesterday showed expectations at -40.7 (ZEW Indicator).

Market expectations was for a figure of about -30.0. The actual figure represents multi year lows and coming in a time of unprecedented Euro Strength may bring about a change of sentiment for the Euro.

The ZEW comment released with the report said "Economic expectations were affected by the extraordinary high price pressure in Germany this month". It would appear that the ECB has just as tough a job in maintaining Eurozone growth against a backdrop of inflationary pressures.

Following the weak housing data, drop in UK sales (as reported by the British Retail consortium) and steady CPI figure, Sterling slumped to yet another record low against the Euro as the market saw the Bank of England having room for further rate cuts this year.

The Pound also fell 0.9% against the USD to 1.9610 and dropped 0.4% against the Yen to Y199.15.

The Market today has plenty of data to gets its teeth into with EMU HICP inflation, expected to come in unchanged at 3.5% and for US CPI to fall very slightly to 3.9% year-on-year from 4.0%.

This evening we see the release of the Beige book in the US which is likely to have much of the same rhetoric about slowing economic growth and business activity.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Money markets disregard suggestion of G7 intervention

G7 financial heads warned against global currency volatility at the weekend meeting in Washington, raising thoughts of some form of joint action should the dollar continue to drop.

However, in Asian market trade early this morning, the idea of such intervention was largely dismissed. The big Dollar made initial gains following the rhetoric from the Group of Seven discussions, causing a drop in oil prices back below the $110 a barrel level.

Locally, today's UK primary producer's (PPI) data due out at 9.30 this morning is expected show further pressure on producer costs in the UK's manufacturing sector.

Input producer prices rose 19.4 percent year-on-year in February, and are predicted to ease only somewhat to 19.0 percent in March. Although demand is weakening slightly, companies are feeling the strain to pass on these higher costs in their pricing for goods leaving the factory.

Also out later today, we have the US Retail sales figure for last month ; this is always a significant measure of consumer prosperity and confidence across the pond. Tomorrow's UK CPI data for March is vitally important this week; again under the watchful eyes of global investors, we could see further pressure on a beleaguered Sterling in currency trade.

For the remainder of the week, we have plethora of economic data.CPI is the flavour of the week with the US and the Eurozone March CPI numbers following the UK with releases on Wednesday.

Also on hump day we have March's UK employment figures, along with US housing starts for last month. With investors still searching for some certainty from market fundamentals from the States, this week may not be the one that starts showing them such love

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

New Sterling lows on credit crunch fears

Sterling was hit hard yesterday after data revealed house prices fell sharply in March. Prices slumped 2.5% which is the biggest decline since the 1992 house price crash.

Talk of an interest rate cut tomorrow is also weighing on the pound. GBP/USD slipped from above 1.9900 to around 1.9650 while GBP/EUR hit fresh all time lows at 1.2500 this morning and with EUR/USD still robust there could be more to come.

On a trade weighted basis Sterling is at its lowest level in 11 years.

The market has priced in a 25bp rate cut but inflationary pressures still remain and anything more aggressive to curb the falling houses price would add further inflationary pressure.

Meanwhile the USD eased against the EUR after the minutes from the previous Fed meeting revealed a prolonged and severe economic downturn can not be ruled out.

The Fed appears it will take any necessary steps to minimise the impact of the financial and housing turmoil even if inflation continued to push higher.

The move in EUR/USD was restricted however as there is rising concerns the US economic slump will have global impact. This already appears to be happening in the UK given the housing data but any impact on the Euro zone has not yet surfaced.

Meanwhile in Japan the central bank downgraded its growth outlook with exports expected to be hit severely by the slumping US economy. The Bank of Japan also swore in a new governor, Masaaki Shirakawa, ending a political deadlock which began when Fukui retired last month.

Today sees the release of UK industrial production which is expected to be 0.2% for the month. Euro GDP is expected to be 0.4% mom / 2.2% but the main focus will still be tomorrow's ECB and BOE rate announcements along with US Initial jobless claims.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

When is a recession a recession?

On Friday US employers cut payrolls for the third time in a row resulting in a decline of 80,000 jobs.

Industries which showed the highest losses were construction and manufacturing sectors. The report was showing a great weakness in the labour market confirming fears that the US economy is in recession.

The slashing of 80,000 jobs did not come as a surprise however was worse than expected (60,000) and has accelerated expectations of more aggressive rate cuts by the Federal Reserve. The Fed releases its minutes on Tuesday night which should give an indication of future monetary policy decisions.

On Thursday the ECB will come together for their monthly meeting and the resulting rate announcement is likely to be no change. The market does not expect the ECB to show any signs of a rate move and is very likely to remain hawkish.

Whilst the expectation of rates is to remain on hold the accompanying press conference following the meeting may shed some light on the future direction of the ECB.

On the same day BoE will announce the new benchmark rate, the market seems somewhat divided on whether they will cut rates by 25 points or leave rates unchanged until the May meeting. Last week's PMI surveys suggested that MPC members are to vote for a 25bp cut however a May rate cut looks more likely.

Reasons being the UK economy remains fairly solid however inflation is expected to move higher and is of some concern.

The Bank of Japan is expected to keep rates unchanged at 0.50% this Tuesday.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Rally for Sterling

Yesterday saw the US Dollar and British Pound rally back against the Euro.

Figures showed a surprise drop in German retail sales, falling by 1.6% in February, market expectation was for a 0.5% rise, making this the lowest drop in a year.

This led many traders to cash in on their positions which have seen the Euro hit historic highs against both the USD and GBP. Whether this represents a long term pattern is debatable, particularly with this month likely to see both the Fed Funds rate and the UK base rate cut.

The USD gains were supported by better that expected US manufacturing numbers from the Institute for Supply Management. This data should be taken with a pinch of salt as new reporting methods gloss over a sharp drop in the new orders component, which had the lowest drop since Oct 2001.

The markets main focus will be on Bernanke's testimony today at 14.30 BST. They will be looking for indications as to the likely size of the Fed Funds cut on the 30th April. Sentiment seems to point to 50bpts cut, however a bullish testimony from Bernanke may change this.

Across the globe we saw the Reserve Bank of Australia signal the end of their rate raising cycle by keeping interest rates on hold at a 12 year high of 7.25%. The AUD dropped 0.8% against the USD.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Will Bernanke Provide the Answers?

The Euro continued its rally at the end of last week, hitting all time highs against GB Pound and the US Dollar.

Data released last week, particularly German and French business confidence, proved to be better that expected. This view added support to the ECB's decision not to follow the US and the UK by cutting rates.

The inflationary pressures in the Eurozone remain the focus of the ECB. Expect the Euro to keep hold of those gains this week with today's inflation data expected to add credence to their policy.

As last week drew to a close the outlook for GBP became increasingly dovish, with the likelihood of an April rate cut gaining momentum. The BoE has further signalled its intention to ease liquidity pressures in the market, particularly with 3 Month LIBOR still over 6%.

Bernanke's Testimony to congress will be the crucial indicator for the week. The market expects some difficult questions for Bernanke to answer, namely is the US in a recession and what is being done about it?

The obvious tool at the Fed's disposal is cutting the Fed Funds rate. Sentiment favours a 50bpts cut on the 30th April at the next FOMC meeting. It has been mooted that measures to nationalise bad mortgage debt will be announced.

Although a radical step, it is aimed at shoring up already weak confidence in the economy and on Wall Street. Friday's Non-farm pay rolls is expected to provide further evidence of a US recession.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

FED cuts home rates to 4.25pc but recession feared

The Federal Reserve duly reduced its Funds Target Rate by 25bp to 4.25% but disappointed both the stock and bond markets by reducing its Discount rate by only the same margin (the discount rate is the rate at which the large American Banks can borrow from the Fed directly as ‘emergency funding’).

Wall St crashed off and the European bourses arrive this morning braced for a similar reaction. The USD on the foreign exchange benefited marginally from the less than hoped for cuts.

The Fed warned that recent economic data indicated a slowdown in the US economy as a result of "the intensification of the housing correction and some softening in business and consumer spending".

It added: "Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation." These comments differ markedly from those made by Fed Chairman Bernanke after last month's interest rate cut when he sounded a relatively upbeat note on the health of the US economy.

Then it was suggested that the greater risks came from inflationary pressures due to higher energy and food prices. But with no sign of recovery in the housing market since then and the banking system still not functioning under normal conditions, analysts believe the Fed has been preparing for a sharp downturn with more interest rate cuts expected and as such were dismayed that the Fed did not move more aggressively at yesterday's meeting.

One member of the Reserve Board argued for a full 50bp cut but was out-voted by the other 9 members held firm and the lesser cut was voted through.

One interesting development that has been reported this morning is the proposal being muted at the Fed to move away from operating a discount window to provide liquidity to the market and move towards an auction based system.

A discount window is where the Fed says, here is the price that we want to lend at, who wants it? An auction, would be where the Fed says, we want to lend this much, how much do you want to pay for it.

Basically it is a way of guaranteeing a quantity amount of liquidity injection. At the moment the discount window is being very underutilised. So yes, this is a fairly important innovation IF it is implemented……..

Away from the US, we saw better than expected UK trades (still a huge deficit and largely irrelevant to the market) and a weaker than expected German ZEW report which is much more worrying for the European outlook.

Little reaction in the forex markets on these pieces of data and as such the December doldrums do seem to be taking a firm grip on exchange rates. UK unemployment and wage data today at 9.30am is the first chance for some short term action and the perennially appalling US Trade data at 1.30pm is always good for currency gyrations – the market is expecting a shortfall on about $ 57.3 billion with import prices unchanged at +1.8%.

Of the other economies, the Norges Bank are today expected to RAISE Nowegian interest rates by 25bp to 5.25% which is the level that the Central Bank predicted would be the peak for the next 12 months. Recent inflation data however suggests that the tightening cycle is not yet over and that further increases could be necessary should inflationary pressures persist.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Morgan Stanley issues full US recession alert

Morgan Stanley has issued a full recession alert for the US economy, warning of a sharp slowdown in business investment and a "perfect storm" for consumers as the housing slump spreads.

In a report "Recession Coming" released today, the bank's US team said the credit crunch had started to inflict serious damage on US companies.

"Slipping sales and tightening credit are pushing companies into liquidation mode, especially in motor vehicles," it said.

"Three-month dollar Libor spreads have jumped by 60 to 80 basis points over the last month. High yield spreads have widened even more significantly. The absolute cost of borrowing is higher than in June."

"As delinquencies and defaults soar, lenders are tightening credit for commercial, credit card and auto lending, as well as for all mortgage borrowers," said the report, written by the bank's chief US economist Dick Berner.

He said the foreclosure rate on residential mortgages had reached a 19-year high of 5.59pc in the third quarter while the glut of unsold properties would lead to a 40pc crash in housing construction.

"We think overall housing starts will run below one million units in each of the next two years -- a level not seen in the history of the modern data since 1959," he said.

Although the US job market has apparently held up well, an average monthly fall of 138,000 in the number of self-employed workers over the last quarter suggests it may now be buckling. "Consumers face what could be a perfect storm," said Mr Berner.

The partial freeze on subprime mortgage rates announced last week by US treasury secretary Hank Paulson may help cushion the blow for some banks, but it could equally backfire by adding a "risk premium" that drives even more lenders out of the mortgage market.

Like Goldman Sachs, and Lehman Brothers, the bank no longer believes Asia and Europe will come to the rescue as America slows.

It has slashed its 2008 growth forecast for Japan from 1.9pc to 0.9pc, and warned that credit stress will weigh heavily on the eurozone.

Mr Berner said US demand is likely to contract by 1pc each quarter for the first nine months of 2008, but the picture could be far worse if the Federal Reserve fails to slash rates fast enough.

It is betting on a quarter point cut this week, with three more cuts by the middle of next year. "We expect the Fed to insure against the worst outcome," he said.

Morgan Stanley is the first major Wall Street bank to warn that it is may now be too late to stop a recession, though most have shifted to an ultra-cautious stance in recent weeks.

The bank at first treated the August crunch as a "mid-cycle correction", much like the financial storm after Russia's default in 1998. But the collapse of the US commercial paper market has now continued for seventeen weeks, suggesting a "fundamental deleveraging of the banking system."

Mr Berner -- known at Morgan Stanley as the "resident bull" -- is one of the most closely watched analysts on Wall Street. While he began to turn bearish last April as the credit markets turned nasty, the latest report is written in tones that may is rattle the fast-diminishing band of optimists.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Currency converter sees strong US data

Earlier last week, the chance of a 25 vs. 50bp rate cut was close to fifty-fifty. Now, the odds for a half point cut are less than 25 percent because the payrolls figure was not bad enough to warrant a larger rate cut.

Managing expectations has become a big component of the Fed’s job these days whether they are willing to recognise it or not. If the market is pricing in a quarter point cut and the Fed under delivers by leaving rates unchanged, they risk triggering a sharp re-pricing of the yield curve.

If they over deliver by cutting interest rates 50bp, it could cause many people to wonder whether some bad news has yet to be discovered.

The Federal Reserve’s interest rate decision has the power to shift the trend in the market, but they will probably contain volatility by releasing a more cautious FOMC statement that points out the risks of both growth and inflation.

If the Fed fails to give the markets the clarity that it needs, producer prices, consumer prices and retail sales will. If inflation and spending remains strong, then the recession story gets shelved for the time being and the dollar could see a short term recovery.

The other releases that we are also expecting are pending home sales, the US trade balance, import prices and industrial production.

Is the European Central Bank just talk or will they actually follow through with an interest rate cut?

Unfortunately, this question will not be answered until the next ECB meeting on January 10th at the earliest. With each passing day however we have more reason to believe that the ECB could actually make good on their threats.

On Friday, German industrial production was stronger than expected while the OECD leading indicator for the Eurozone remained unchanged at 98.4. Even the Eurogroup which has previously called for the ECB to step in and stop the Euro from rising now says that the economy is proving resilient in the face of shocks.

In the week ahead, we do not have many important pieces of data other than the German ZEW survey, which has been losing its market moving potential because it has repeatedly called for a slowdown that has yet to unfold. This means that US data will probably dictate the movements in the EURUSD.

Meanwhile aside from the Federal Reserve, the Swiss National Bank also has an interest rate decision. They are widely expected to leave rates unchanged, but there is a risk for a surprise rate hike or at least hawkish commentary from the SNB.

GBP

The British Pound recovered for the second day in a row which says a lot because it comes on the heels of the first interest rate cut in two years.

The futures market is still pricing in 50 to 75bp of easing next year and if expectations are correct, then the pound should continue lower. However there are often retracements within a broad downtrend and we expect to see one at the beginning of this week.

Before Tuesday’s FOMC meeting, we are expecting producer prices and the trade balance. The UK trade deficit should improve because the export component of manufacturing PMI accelerated last month.

We already know that inflation is a problem because the latest monetary policy statement talked up the risks to short term inflation. However anything goes after the FOMC meeting because the US rate decision could shift the near term outlook for many currency pairs. On Wednesday we also have UK employment data which we expect to be pound bearish.

Prices at the London open
GBPUSD – 2.0321
GBPEUR – 1.38.73
EURUSD – 1.4649
GBPJPY – 226.64
GBPCHF – 2.2936
GBPAUD – 2.3133
GBPCAD – 2.0390
GBPZAR – 13.6596

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

UK interest rates down to 5.5 pc, ECB stays on hold at 4pc

The euro made strong gains across the board after hawkish comments from European Central Bank chief Jean-Claude Trichet reinforced the idea that euro zone interest rates are likely to head higher still.

Following the ECB's decision to hold its key rate at 4.00 %, Trichet said in a press conference the central bank is ready to counter growing inflation risks. He also revealed that the governing council discussed the possibility of a rate hike at its meeting yesterday.

In parallel, the ECB raised its inflation forecasts and downgraded its growth predictions. Despite the prospect of lower growth, price pressure appear to remain the ECB's primary concern.

Elsewhere, the Pound recovered from losses incurred after the Bank of England cut interest rates.

The UK currency dropped to a 10-week low against the dollar and sank against the euro after the BoE lowered the cost of borrowing to 5.50 % from 5.75 %. It said the UK economy has begun to slow and inflation should be tempered by flagging demand.

Analysts said rates may have to fall as low as 4.00 % to avoid a brutal economic slowdown.

The Pound weakened steadily against the euro but gradually recovered from its steep fall against the dollar, helped somewhat by poor US jobs data. First-time claims for unemployment insurance rose to their highest in more than two years in the four weeks to Dec 1, with 338,000 new claims filed.

The data add to an increasing bulk of evidence that the US economy is heading for a sharp slowdown, and will fuel expectations for more rate cuts from the Federal Reserve in the months to come.

The Fed announces its next decision on borrowing costs on Tuesday and todays non-farm payrolls report for November will again be crucial for the market's expectations ahead of the meeting.

Wednesdays estimate from the ADP payrolls firm was for a rise of 189,000 in the November payrolls. This is more than twice the 65,000 increase analysts had forecast for the official non-farm payrolls figure today, although analysts point out the data is notoriously volatile.
Prices at the London open