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.

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.

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.

Wise Money reflects on UK growth

Data from the British Retails Consortium, out last night, showed no signs of a slow down in UK consumer spending. Healthy growth in March gives further support to those pushing for a rates rise as early as May.

Retail sales growth was up from 5.6 per cent last month to 6.2 per cent for March an increase that was expected by the market but not by such a high margin.

Further upside for the Pound against the euro and Dollar was helped by an interesting article in the FT, about overseas dividend payments possibly being exempted from UK taxes.

The FT report explaining that the UK Treasury could possibly allow UK based companies to repatriate money made from foreign profit tax free, which was the key element, was welcomed by many and the positive boost was hence reflected with the Pound strengthening. As a result the Pound hit a high of $1.9815 and €1.4750 yesterday afternoon.

This afternoon the ECB will meet to discuss interest rate levels with the market expecting them to keep rates on hold at 3.75 per cent. However with the Hawks circling and the inflation argument ready to be used, the market players are looking to see if Jean-Claude Trichet opts to use the term "strong vigilance," his typical signal that rates will be lifted at the next policy meeting.

Across the water in Asia the Japanese Yen felt further pressure from the carry trade, a speculative strategy where investors borrow low-yielding currencies and lend high-yielding ones, which has helped weaken the Japanese currency as of late.

The low Japanese interest rate, which is currently just 0.5 per cent, has been put in place by the Bank of Japan to further tighten monetary policy and help nurture economic recovery. The pressure on the Yen is being mostly inflicted by the high yielding currencies of the Australian and US Dollar as well as Sterling.

Over in the US the Federal Open Markets Committee meeting notes from March explained that Inflation was "uncomfortably high", with the Fed seeing inflation as the "predominant concern" for the US economy.

The Fed explained that further policy firming might be needed to cool inflation but also mentioned that there was clear concern about the US economy’s growth. The explanation left some market participants in double mind as to whether the Fed will raise rates any time soon citing the FOMC communication as being slightly inconsistent.

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.

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.

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.

Wall St consolidates gains

Hints that the Federal Reserve was no longer biased towards raising interest rates sparked a strong rally on Wall Street this week, raising investors’ hopes that the recent slump had run its course.

While the Federal Open Market Committee statement on Wednesday was carefully worded, stirring debate about its meaning, the equity market’s response was unequivocal.

The S&P 500 index bounced back into positive territory for the year with its biggest weekly rise in four years. The rally pushed the benchmark index above its 30-day moving average, an encouraging technical sign for bulls.

The S&P closed 0.1 per cent higher at 1,436.11, its fifth successive day of gains that put it up 3.5 per cent on the week. The Dow Jones Industrial Average rose 0.2 per cent on Friday to 12,481.01.

The recovery came as Blackstone, the buy-out group, prompted reflection on the recent private equity boom by filing for an initial public offering to raise $4bn.

Energy stocks made the biggest gains this week, buoyed by both rising oil prices and broad strength in equities. The S&P Energy index stands at its highest point since December, 17.3 per cent above its low for the year.

Exxon stock surged 7.4 per cent to $75.02 this week, while Chevron rose 8.3 per cent to $73.70. The odd one out in the sector was Halliburton, the oil services group, which slid 3.1 per cent to $31.08 after warning about weak US demand.

Homebuilders began to make headway on the back of sound housing data. Sales of existing homes and housing starts were both in excess of depressed expectations.

Concerns about tighter mortgage lending standards hitting demand for homes checked the gains. The S&P Homebuilders index rose 2.4 per cent this week, but remains more than 20 per cent off its high for the year.

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.

Interest Rates and Inflation likely to dominate currency converter's week

The FOMC meeting on Wednesday and the accompanying statement are likely to be the focus for financial markets this week. Expectations remain for the FED to leave rates on hold at 5.25% although some anticipate the statement may offer acknowledgement of softer growth and perhaps trouble in the sub prime lending sector.

On that note, this weeks U.S housing data (Tuesday & Friday) will be of particular interest in light of the recent focus on the faltering sub prime market.

In the UK a number of important releases are scheduled this week. Tomorrow the annual CPI Inflation is expected to fall slightly to 2.6% from the previous 2.7%. Wednesday sees the Bank of England minutes from the March meeting released, where most analysts are expecting no members voted for a hike.

Hopefully the minutes will shed some light on whether it is now a minority of members who feel the risks are consistently high enough to warrant a further hike this year. On Wednesday the Chancellor of the Exchequer will deliver his budget statement.

Finally UK Retail Sales for February will be released on Thursday. After the January sharp fall this is forecast to rebound in the region of 0.8% putting the annual figure somewhere in the region of 4.0%

In Japan the Bank of Japan begin their two day meeting today and forecasts are unanimous that tomorrows outcome will leave the target rate on hold at 0.5%. This places the focus on Governor Fukui’s subsequent speech and the BoJ’s monthly report which will both be closely monitored for signals of future rate hikes.

For those with an interest in or an exposure to China the Peoples Bank of China announced a 27bp hike in both the benchmark lending and interbank deposit rates on Saturday. The move was widely expected after the PBoC Governor said CPI had become worryingly high.

In the short term the stock market may not react well to the hike, but on the currency front pressure on the CNY appreciation will probably intensify. This is now the third time the Central Bank has raised interest rates since last April.

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.