Bernanke comments give the markets hope

Yesterday's fairly restrained market was kick-started into life in the afternoon by comments from the Federal Reserve Chief, seemingly directed at Congress, in which he intimated that the US economy required a new fiscal stimulus to get it back on track.

Both the Dollar and the Stock Market rallied with the Euro hitting a new 18-month low this morning. Cable also briefly fell below 1.7100 but early morning jitters have halted the Dollar's early progress.

Technically, there is strong potential for a further immediate strengthening of the US currency, especially if doubts persist as to the likelihood of a turn around in the UK and Eurozone economies.

LIBOR interest rates continued to correct rapidly in the Dollar's case, but in a more sedate manner in Euro and Sterling.

The freeing up of the Money Markets is vital to an economic pick up so expect further Central Bank measures to keep the momentum going. Expectations for huge liquidity adds plus continued official rate cuts should keep the momentum going but it is a return to confidence between Money Market operators that will determine whether period lending resumes.

Talking of economic stimulus, the UK, as expected, reported Government borrowing at a record level last month with September's figure surging to £8.1 billion, almost double the number from 12-months ago. Estimates for the total for the year are for an excess of a massive £60 billion, with rises in the deficit for the following 2-years.

With the assertion from Brown yesterday that the UK was looking to stave off a continued slide into recession by spending, plus the additional funding required to fund the Financial Market's bail-out plan, these borrowing figures look destined to deteriorate before any improvement for increased tax revenues are seen.

That's not to say that this is not the right way forward for the UK economy in the short term.

Bringing forward labour Government construction projects to stimulate and underpin the UK building and civil engineering sectors could certainly prove to be inspirational.

The problem is that despite having a fistful of factors that they are able to influence, the UK Government is unable to do anything about the one thing that is fundamental to the economy's recovery. That is increasing consumer demand from its current lows.

Confidence is at such a low that even if No. 10 were able to slash interest rates, it is going to be some time before the consumer returns to the High Street in any numbers. It looks as though it is going to be a long winter……

Elsewhere, Iceland becomes the first sovereign state since the UK in 1976 to go cap in hand to the lender of last resorts, the IMF.

For those of you old enough to remember the results in the UK following the IMF loan to the then labour government, the restrictions likely to be imposed upon Iceland will be draconian making redemption of the frozen deposits (no pun intended) a distant prospect.

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As we start the last week of Summertime

Wise Money begins the Financial Markets week in the same vein as we spent most of the last few days, with a previously supposed rock solid institution, ING, having to seek Central Bank injection in order to strengthen its capital position.

The Swedish authorities didn't quite go as far as rescuing individual Banks, but has established a €˜financial stabilisation fund' just in case.. This morning we have had confirmation that the German Cabinet have approved the conditions for their own Banking Rescue Package.

I suppose the BIG question now is, will the newly €˜over-capitalised Banks be more ready to put their over borrowed clients into liquidation spreading the turmoil from the Financial sector into the Commercial arena?

This week there are several potential market moving events on the calendar. First up, and possibly the most severe is tomorrow's deadline for insurers of Lehman Brothers' debt CDS contracts to pay up on billions of Dollars of policies.

The problem here is no-one is sure what the net settlement (after hedging) will be and who, ultimately holds the risk.

Estimates for the settlement range between $5 billion and $300 billion underlining the magnitude of the unknown.

Any large hits will emerge quite quickly with the danger being for the hedge funds and the resultant cash/margin calls. The minutes of the last €˜MPC Meeting' which didn't take place, will make for interesting reading on Wednesday.

With expectations of large cuts in interest rates over the next 12-months, confirmation that a much more relaxed monetary policy had been discussed will be sought. On the same tack, we are expecting to see interest rate reductions this week in Sweden, Australia and New Zealand.

Added to these factors we have some important economic data throughout the week from UK, Eurozone and US but with confirmation of recession looming large across the major economies, more data telling the same story will be largely ignored.

More relevant will be Bernanke's testimony on Economic Stimulus Legislation to the House Budget Committee at 3.00pm this afternoon and the outcome of the OPEC emergency meeting on Friday.

On the Money Markets, period rates have continued to ease in line with official policy and expectations with Dollar rates exhibiting the largest decline. We are seeing LIBOR rates in Dollars, Sterling and Euro fixed lower on a daily basis and the magnitude of change should increase as anticipation of severely lower official rates grows.

This development could of course prove detrimental to the currencies with ‘further to go' as regards to rate cuts, ie Sterling and Euro, both of which are likely to find the next 12-months very negative in terms of currency strength.

Stock markets and commodity prices are again likely to be the focus for traders in the early part of the week, so keep a wary eye on news that will have a direct impact on these 2 sectors. Sterling has started in buoyant fashion against Dollar and Euro but I don't expect this to last given recent history and upcoming economic conditions.

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Labour nationalises UK banks

Gordon Brown took the momentous decision to invest about £50bn into the financial system to nationalise the majority of the UK banking system in the largest state theft in British history.

The details of the part nationalisation of UK banks are still unfolding but so far we know that the labour government will buy preference shares, the BoE will make at least £200bn available for banks to borrow under the special liquidity scheme and the government will provided a guarantee in the region of £250bn to help refinance debt.

As stated by Alistair Darling €˜these steps are the necessary building blocks to allow banks to return to their basic function of providing cash and investment for families and business.

In the US the fed announced that they will purchase US Commercial Paper in an attempt to support the financing needs of corporations. The Fed will lend against a special purpose vehicle and the issuer will pay an upfront fee based on the commercial paper initially sold to the vehicle.

This will be in place until the 30 April unless the Board of Governors agree on an extension. Following this announcement global stock's regained some poise, however this was short lived with the S&P 500 down 5.74%, Dow Jones down 5.11% and the FTSE 100 by 0.3%.

Bernanke comments during his press conference to the National Association for Business Economists highlighted that the outlook for economic growth had worsened and the downside risks to growth had increased, this leads to a greater probability that the Fed will cut rates at their next meeting on 28-29 Oct if not before.

Furthermore the markets are predicting an even greater chance that the central banks will group together to announce a coordinated global interest rate cut. It seems that the longer this decision takes the greater the lack of confidence in the markets becomes.

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Debate escalates on Fed bailout plan

Another day of falling crude oil prices and the morale boost investors experienced on reports of Warren Buffet's $5bn investment in Goldman Sachs saw the dollar gain ground against the euro and other major currencies yesterday.

First thing this morning the Pound regained its upward momentum against the dollar following comments from Bank of England member Andrew Sentance stating that the central bank must control its response to the financial crisis and remember its mandate of inflation control.

There has been a shift in thinking within the Bank of England to that of a more "€˜dovish stance". That said there is still a large proportion of people who believe the Bank of England will lower rates when they next meet on October 8th.

The ongoing debate between US Treasury Secretary Paulson, Fed Chairman Bernanke and Congress has seen scepticism from both Democrat and Republican politicians. Congressman from both sides wanted assurances that the Treasury Asset Relief Programme wouldn't result in a waste of public funds.

Paulson attempted to provide comfort by explaining “the program we have proposed is not a spending program. It is an asset purchase program, and the assets which are bought and held will ultimately be resold with the proceeds coming back to the government".

George Bush expressed his support through a broadcast to the nation on primetime television, urging them to back the plan in order to ease a “serious financial crisis".

Furthermore, John McCain emphasised that he was prepared to suspend his presidential campaign until a solution was agreed, pressuring Obama to do the same. The uncertainty surrounding which aspects of €œPaulson's Plan will be approved forced a flight to safety which saw interbank lending rates hit record highs yesterday.

Whilst economic releases continue to take a back seat in determining the direction of the markets, German IFO figures fell to a lower than expected 92.9 in September at€“ it's lowest rate since May 2005, pointing to the growing threat of recession in the Eurozone economy. US home sales also reported a fall to its slowest pace in 17 years.

Some key data out in the US today; New home sales, Unemployment claims and Core durable goods orders.

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.

Focus on Congress for vote on bailout

The focus remains on the uncertainty surrounding the U.S. bailout package and the details of how exactly the final version will look.

In their speech to the Senate Banking Committee, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson told members of Congress that the U.S. economy and its financial markets face serious risks if the rescue plan for the crippling toxic assets isn't swiftly approved.

Bernanke urged Congress to pass the $700bn bailout plan to "stabilize the situation". He stressed that "global financial markets remain under extraordinary stress" and "if financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse."

Paulson reiterated that further delay in implementing the plan would “threaten American families' financial well-being, the viability of businesses both small and large and the very health of our economy".

Fundamentally, the US Treasury aims to purchase all the toxic assets that are currently clogging the financial system and sell those assets at a profit once markets have improved. The scheme could cost the US taxpayer as much as $1 trillion, increasing the country's national deficit to over $11 trillion.

Earlier gains on the U.S. stock market were reversed as the saga unravelled and oil prices dropped from Monday's peaks, to close last night at around $107 a barrel, boosting the dollar.

The Euro Zone escaped the limelight yesterday due to the focus on U.S. events. Attention in the Euro Zone was on PMI where the index now points to a 0.2% decline in quarterly gross domestic product.

The data provides little evidence that the outlook will improve significantly in the near term and it looks like the third quarter is going to be challenging.

In the UK, British mortgage approvals fell 64% on the year to a record low in August. This seems to suggest there is no imminent end in sight for the country's housing market woes.

The British Bankers Association blamed the drop on uncertainty regarding the government's policy on stamp duty along with the continued affordability pressures and tight lending conditions.

With these poor fundamentals for the housing market it remains uncertain as to whether the recently announced labour government measures to support the housing market will have any significant impact in stabilising activity or prices.

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's concerns rise over Fed bailout

Friday's dollar rally was replaced by yesterday's sell-off as jitters about the US government's $700bn bailout plan for the financial sector set in and investors mulled the inflationary implications of the government plan.

The greenback felt the pressure as investors flocked to precious metals and oil. USD experienced the biggest one-day drop against the euro since the currency was formed nine years ago, whilst sterling hit a 3-week high against the dollar.

The flight to commodities forced investors who were betting on falling oil prices to cover their short positions due to the massive surge in crude oil.

Failure to do so would have resulted in traders being obliged to take physical delivery of the oil. The largest one-day rise on record saw oil jump to an intraday high of $130 a barrel before falling right back to this morning's opening price of $108.

Meanwhile, Alastair Darling took the opportunity at Labour's Manchester Conference to speak about the "unprecedented economic challenges" facing the UK, saying that he was committed to restoring financial stability through more stringent legislation and regulation of the financial system.

The market will be watching closely as the terms of Hank Paulson's financial relief programme are unveiled. Both he and Federal Reserve Board Chairman Ben Bernanke are due to testify before the Senate Banking Committee today.

Market data will probably take more of a back seat once again, with the most likely market mover being the euro zone PMI survey for September.

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Investors weigh up the Feds rescue package.

Friday saw initial gains made by the dollar slip away as investors weighed up the effects of the US government's colossal takeover of bad assets from financial firms.

US Treasury Secretary Hank Paulson highlighted the requirement to address the root cause of the current financial turmoil. He called for a government sponsored package that would effectively remove the illiquid mortgage assets "€˜that are weighing down our financial institutions and threatening our economy".

Under the draft Treasury plans, any financial institutions with €˜significant operations in the US' are eligible to sell or auction their bad debts to the Treasury fund – this morning, the scope of the $700bn plan was widened to include assets other than mortgage-related securities.

Although the change to include other devalued assets may force an increase in the size of the package as the legislation proceeds through Congress, George Bush defended the plan, saying the cost to taxpayers of shoring up markets was better than the alternative of job losses and diminished pensions. Ben Bernanke and Hank Paulson will provide testimony to Congress this week.

Meanwhile, fears that Morgan Stanley and Goldman Sachs would not be able to survive the continuing pressure have been allayed by the Federal Reserve granting their requests to change their regulatory status.

Last night, both become bank holding companies, allowing them to take deposits from investors as opposed to using borrowed money “ the leverage that led to the undoing of Bear Stearns and Lehmans. The move concluded that there is no future remaining in investments banks now that investors have determined the model is broke.

The dollar fell against most major currencies, except the yen, as risk aversion receded. The weekend press emphasised that the implications of the US bailout plan could undermined the dollar due to the inflationary impact and the fact that US Treasuries would be less attractive to foreign investors and central Banks.

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 unite to increase liquidity

The central banks announced in a joint statement yesterday that they will pump an additional $247bn into the financial system to ease the liquidity constraints which had deteriorated this week.

This action was an attempt to alleviate the pressures in the US Dollar short-term funding markets, and as a result the overnight US Dollar rate declined to 3.84% after a three day increase to the highest level since January.

In an attempt to curb manipulative trading, the FSA and SEC have announced that they will be placing a ban on investors from short-selling financial stocks. The FSA ban is set to last to the 16 Jan, after which the FSA are then due to issue comprehensive new shorting rules, whereas the SEC ban will last to the 02 Oct.

Along with the news of the ban on short-selling there were also reports that congressional leaders had met late on Thursday with Hank Paulson and Ben Benanke to decide on a solution to the financial turmoil.

It has been said that discussions centred around addressing the root cause of the credit crisis by removing the troubled assets from the balance sheets of American Institutions. The move would involve the creation of a US government sponsored vehicle that would be used to house the toxic assets in an attempt to return confidence and liquidity to markets.

The release of the information led to a rally in US stocks with the Dow Jones up 410 points at 11,020 and the S&P up 50 points to 1,207. This rally continued overnight in Asian markets as the Nikkei climbed 392 points to 11,881 and to no surprise has allowed the FTSE to jump 300 points in opening trade.

UK Retail Sales reported an unexpected increase as sales climbed 1.2% in August and 3.3% for the year. This is further support that the BOE will want to see inflation risks ease before they consider cutting rates.

In the US the initial jobless claims rose by 10,000 to 455,000 in the week ending 13 Sep, this is led by an increase in filings in Louisiana following Hurricane Gustav.

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.

Dollar rally stalls

The dollar came off recent near term highs on the back of oil's jump to a 2 week high.

The higher oil price was prompted by a combination of heightened geopolitical uncertainty stemming from Russia's decision to halt cooperation with NATO and warning that Saudi Arabia may scale back its recent increase in production.

The once resilient Euro zone economy is succumbing to the downward pressures of a strong Euro, a slowing global economy, high oil and food prices and tight credit conditions.

According to 2007 GDP estimates, the IMF expects the world's largest economy to grow at only 1.7% in 2008 and 1.2% in 2009 compared to 2.6% in 2007.

The main reason the ECB is not cutting rates already is because inflation is well above a level consistent with price stability and the central bank wants to avoid second-round effects of energy prices in wage and price setting.

Will we see EURUSD back at 1.40? The Euro has been very weak over the past month and this trend is expected to continue.

The Eurodollar has fallen from highs following a shift of interest rate expectations in favour of rate cuts by the ECB and rate hikes by the Fed. The market is predicting the Fed to increase rates by 75bp over the next eight FOMC meetings.

Today, Fed Chairman Ben Bernanke will be scrutinized for hints on future policy moves and any indications of support for Fannie Mae and Freddie Mac.

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Wise Money sees a hint of a recovery in the US

The main focus yesterday was on the US and we saw some sign of recovery.

Stocks rebounded and closed up 276 points, 2.52%. Oil is down in value by 10% at just over $135 a barrel (if it comes down anymore maybe Mr Darling will change his mind and reverse his decision).

However, yesterday's prediction on US inflation was slightly lower than it actually was as they see inflation at its quickest in 17 years up 1.1% for the month at 5% year-on-year.

Indications from Bernanke and the FOMC minutes seem to be that inflation is going to take precedence over growth and that there would be rate hikes, though can we really expect to see them until 2009?

Today sees the US Initial jobless claims, expectations are an increase of around 40,000. We will also see US housing starts with the signs that both starts and permits are flattening. Not much else out today though tomorrow we will see German PPI.

In the UK today is the Debt Management Office Gilt auction.

On the currencies, the main focus is on the Greenback, Sterlings recovered yesterday down below $2 again and EUR/USD backed away from the 1.60 level and if we see it lower than 1.5760 we could see it much lower.

Three main reasons for the USD recovery; falling oil prices, intervention from the Fed and the FOMC minutes which indicated the view that rates may need to be hiked to curb inflation.

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.

Another day another Dollar- just weaker than yesterday!

Mr Bernanke will be talking today at his semi-annual monetary policy testimony before the Senate Banking Committee.

He will probably highlight the current concerns over the spiralling energy and commodity prices and their resultant effects on inflationary pressures. He will probably emphasise the urgent need to control these.

It is unlikely though, that we will see him give a clear indication as to when to expect interest rate rises in the US. The tone of his address however will say more than words ever can. The testimony, along with US PPI & Retail Sales (both due out around lunchtime) will cause traders to cut short their lunches today and be back at their desks prior to the 1.30 data release time.

Retail sales are expected to come in flat, a solid result considering the rise in unemployment and fuel prices. PPI is expected to rise, which won't be a surprise to anyone but will ensure that inflationary pressures remain at the forefront of minds.

A unanimous rate decision last night saw BoJ leave their rates on hold, this was expected and likely to have a neutral effect on the currency. They did imply in their statement that followed however that they would not hesitate to push rates up should conditions dictate.

In the EuroZone today the only data out is the ZEW survey in Germany. This is expected to come in lower than the previous release as the market sees Germany's industry weakening sharply on the back of higher oil prices, stock market losses and declines in monthly orders.

An article in this morning's Daily Telegraph in fact suggests that the EuroZone as a whole is in fact already deep into a recession with the likely result being that their economy will suffer even more than that currently being experienced in the US.

At home today we have already seen the release of the UK RICS house prices survey in which home sales fell to their lowest for at least 30 years - extremely weak.

The ratio of sales to stocks of unsold property fell from 19.4% to 18.2% in the three months to May, meaning that for every 100 properties on the market only eighteen were sold. We will also see CPI out at 09.30, with inflation expected to increase by at least 3.5% with the largest factor being the 5% increase in petrol prices.

With the all the interesting data out from the US unless there is a break over 1.6000 in EUR/USD we may not see much action. Another reason for the EUR to remain subdued may be the massive amount (€49Bn) Euro coupons and redemptions released in the Far East over the last two days.

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Gloomy housing data precedes Fed's home loans decision

The day before the US Federal Reserve is due to announce its decision on interest rates, figures released on Tuesday by the Conference Board reported that US consumer confidence has fallen to its lowest level in 16 years.

The index slipped to 50.4 in June, down from 57.3 in May and lower than the 56.5 predicted by economists. This was the sixth consecutive monthly fall in consumer confidence and is the result of a combination of factors including the ongoing housing slump, rising unemployment and soaring energy prices.

The crisis in the housing market is seen by many as being at the heart of the US economic problems and so news that the S & P index recorded a standout 15% decline in the prices of homes in 20 of the largest US cities during April, will only add to the shadow hanging over the US economy.

Former Fed Chairman Alan Greenspan argued in a speech yesterday that the US is still on the brink of a recession but that the actions taken by his successor in the first quarter of 2008 had reduced the risk of a “severe recession".

Whilst the market expects the Fed's current chairman Ben Bernanke to keep rates on hold today, his apparent support for a rate hike in August or September in order to contain inflation and strengthen the dollar, could be brought into question if further evidence emerges that the US is in the grips of a severe slowdown in growth.

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Bernanke's speech ignites Dollar jump.

After Europe's close we saw US Fed chairman Bernanke emphasise his concerns over inflation.

He stated the Fed would strongly resist an erosion in inflation expectations. This helped push the dollar to a three-month high against the yen (106.83). He also added that the latest surge in energy prices is adding to the dangers from inflation and that the risk of a substantial downturn in the U.S. economy has receded.

Wise Money also heard several other US officials saying they are keeping an eye on the dollar while keeping open the option of dollar-buying intervention to stem its slide.

This morning we have seen a release from the British Retail Consortium showing like-for-like retail sales have been the strongest in 4 months +1.9% y/y. Attributing warm weather for people splashing out on new clothes and summer food and drink.

This is the strongest reading since January this year,The BRC was proceeded by the RICS house price balance up at -92.9 in May from -94.7 in April. Also helping to painting a slightly brighter picture than of late in the UK economy.

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Bernanke talks currencies....

The US Dolar strengthened yesterday afternoon on comments made by Fed Chairman Ben Bernanke.

Breaking with tradition and commenting on currency matters, typically the domain of the Treasury Secretary, Bernanke made clear the US does not want any further USD weakness given the risk this poses to inflation.

Bernanke also commented that interest rates are well positioned to promote growth and stable prices signalling the Fed is done cutting borrowing costs. The dollar rallied 0.2% against sterling and 0.6% against the euro. Oil and gold prices also fell following the comments to $126 and $875 respectively.

Earlier in the day European GDP growth came in stronger than expected at 0.8%, beating analyst forecasts of 0.7% for the first quarter. Investment and construction spending helped the region weather record oil prices and impacts of the stronger Euro.

Annual growth at 2.2% was on par with expectations. Any gains the Euro made were erased by the comments made by Bernanke later in the day.

This morning Nationwide has already released its UK consumer confidence survey which fell to its lowest level since 2004. Cost of living increases and negative housing sentiment continuing to concern consumers.

These are key themes the BOE will be considering ahead of its interest rate announcement tomorrow. The latest Bloomberg economist survey had all 60 polled economists expecting the BOE to leave rates unchanged.

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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.

Weak dollar under pressure from FED comments

The dollar sank across the board, hitting a new 26-year low against sterling, in the immediate aftermath of comments from US Federal Reserve Bank chairman Ben Bernanke.

The central bank chief said the Fed is ready to counter the inflation risks caused by high oil prices, suggesting US rate-setters will be reluctant to lower interest rates further despite some signs of slowing growth.

Further sharp increases in crude oil prices have put renewed upward pressure on inflation and may impose further restraint on economic activity. There is no Goldilocks scenario from Bernanke who sees risks from inflation and an economic slowdown, the worst of both worlds.

Currency markets have been expecting the Fed to cut interest rates again in December, following reductions in the Fed Funds rate totaling 0.75 percentage points since the summer.

The central bank has said these cuts, bringing the benchmark rate to 4.50 %, were a pre-emptive move to stave off an economic slowdown as the housing market continues to decelerate and financial markets slowly recover from their turbulent summer.

Despite Bernanke's hawkish undertones, however, the dollar fell as markets appeared to focus on the negative economic tone of the speech. The US currency fell across the board, sinking to 2.11 against the pound, a new low since 1981.

The Pound had already strengthened to new dollar highs yesterday, after the Bank of England held rates at 5.75 %, quashing a growing minority view that it could reduce borrowing costs following a weak run of data. Nonetheless, analysts are convinced the next move in interest rates will be down, and some are speculating on a cut as early as next month.

With the economy facing the headwinds of previous interest rate hikes, considerable sterling strength, tightening credit conditions and rising energy costs, we see no need for the repo rate to remain at the present restrictive level of 5.75 %.

Mortgage calculators expect the first 25 basis point ease by February at the latest, with the clear risk that the BoE could begin as early as next month if leading indicators continue to soften rapidly.

The European Central Bank also held rates, at 4.00 %, a decision fully expected by markets. Most analysts believe the central bank will keep rates unchanged for some time as it tries to balance increasing euro zone inflation pressures with slowing growth.
Prices at the London open
GBPUSD – 2.1093
GBPEUR – 1.4367
EURUSD – 1.4680
GBPJPY – 237.38
GBPCHF – 2.3757
GBPAUD – 2.2789
GBPCAD – 1.9610
GBPZAR – 13.4263

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Bernanke plays down need for rate cuts

Ben Bernanke challenged market expectations of early US interest rate cuts on Wednesday, saying he remained comfortable with rates on hold in spite of recent adverse economic data.

However, the Federal Reserve chairman said the risks to both inflation and growth had increased in the past few weeks and the US central bank would be flexible in responding to future economic news.

Mr Bernanke told the joint economic committee of Congress: “To date the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation.”

The Fed’s recent policy statement – which baffled markets when it was released a week ago – was not intended to signal that the Fed now had a neutral policy stance, he said.

“I want to emphasise that we have not shifted away from an inflation bias,” he said.

Mr Bernanke said changes to the Fed statement were intended to give it greater scope to respond quickly if the outlook for either growth or inflation deteriorated significantly. “We are looking for a bit more flexibility given the uncertainty we face.”

Mr Bernanke also brushed aside comments by Alan Greenspan, his predecessor, that the expansion looked to be ageing, raising the possibility of a recession. Expansions did not “die of old age”, he said.

Mr Bernanke played down the threat from the subprime mortgage market and highlighted a new risk to growth from weak business investment. His comments came as the Department of Commerce released figures showing that durable goods orders bounced back weakly in February after a plunge in January.

“The possibility that the recent weakness in business spending will persist is an additional downside risk,” he said.

The Fed chairman hinted that the weakness had been a surprise: “The magnitude of the slowdown has been somewhat greater than would be expected given the normal evolution of the business cycle.”

But he added: “Despite the recent weak readings, we expect business investment in equipment and software to grow at a moderate pace this year.”

He was less alarmed than many investors by the distress in the subprime mortgage market.

“At this juncture...the impact on the broader economy and financial markets of the problems in the subprime market seem likely to be contained,” he said.

He recognised the risk that the housing market correction “could turn out to be more severe than we currently expect, perhaps exacerbated by problems in the subprime sector”. Overall, he indicated that the US central bank remained relatively upbeat about prospects for growth.

He said consumer spending “has continued to be well maintained so far this year” and said consumption “should continue to support the economic expansion in the coming quarters”.

Mr Bernanke added “the economy appears likely to continue to expand at a moderate pace over the coming quarters”.

He reiterated a series of reasons for the Fed to remain concerned about inflation. “The high level of resource utilisation remains an important upside risk to continued progress on reducing inflation,” Mr Bernanke said.

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Markets calm after massive drops but will this continue

Federal Reserve Chairman Ben Bernanke confirmed his positive outlook on economic growth and indicated that the latest move in stock prices will not alter the Fed’s plans for monetary policy.

Yet real concerns about the US economy still remain. We saw the largest percentage drop in new home sales in 13 years. The significant aspect of this is that the supply of new home sales increased which suggest the worst is yet to come. The Chicargo PMI was also down from an anticipated 50.0 to 47.9.

After yesterday's drop in world markets leaders came out to assure investors and try to calm the massive sell off. Starting with the Chinese government, officials at the Ministry of Finance reassured international investors that they are not planning to take some heat off the economy by enacting a capital gains tax.

Investors felt that tighter restrictions on foreign investment would inhibit potential growth. In the US, members of the NYSE attributed the collapse in the Dow to a computer glitch and not necessarily mass bearish sentiment.

The Euro was hit yesterday predominantly due to the rebound in the dollar despite positive data from the Eurozone. German Unemployment rate dropped from 9.5% to 9.3% and consumer confidence improved in the Eurozone region despite the prospects for another interest rate hike and the increase to Germany’s Value Added Tax.

Sterling was stronger across the board thanks to solid housing market data. The UK’s Nationwide Building Society reported 0.7% rise in house prices in the month of February. The market was looking at a 0.5% rise.

Bank of England Deputy Governor Lomax warned today that inflation could fall sharply in the months ahead and take the rate below the central bank’s target by the end of the year. Consumer confidence did not improve along with it as the GfK report dropped from -7 to -8.

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Currencies boosted by Bernanke

The US government bond prices hit one-month highs as investors took heart after Ben Bernanke, chairman of the Federal Reserve, said inflation is easing.

Weaker-than-expected data encouraged the bond bulls who felt Mr Bernanke’s comments heralded interest rate cuts in the face of slowing US economic growth

Testifying before Congress, Mr Bernanke offered a balanced assessment that contrasted with that of other recent Fed members who had emphasised the risks of further rate increases.

While inflation remained the primary concern, he indicated that “the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing of core inflation”.

However, investors focused on a perceived change of tone, as Mr Bernanke listed reasons to expect inflation would slow, including falling energy prices and the potential for accelerating incomes to be offset by higher productivity or lower corporate profit margins.

Investor concerns about the housing market were fuelled as starts data fell 14.3 per cent in January to a 10-year low.

US producer prices were also released, shrinking slightly more than expected in January, as energy prices declined sharply. On Thursday, a weak reading of business conditions in the mid-Atlantic region followed reports showing a surprise fall in industrial output and a surge in jobless claims.

The yield on the 10-year benchmark US Treasury was 1.6 basis points lower on the day at 4.694 per cent, down from 4.815 per cent on Monday. The two-year note yield was 0.9bp lower at 4.835 per cent, down from 4.929 per cent on the week.

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.