US unemployment rate hits 26 year high

America's unemployment rate hit a 26 year high of 9.7 per cent after companies cut 216,000 jobs in August.

The Labor Department also revised job losses for June and July, increasing by 49,000 the number of jobs lost in those months.

The job cuts in August were not as severe as the 225,000 cuts expected by economists. In fact, it was the lowest number of monthly job cuts in a year. 

The Dow Jones industrial average rose 29.32 points to 9,373.93 while in London the FTSE 100 index added 64.91 points to 4,861.67.

But, the unemployment rate, which dipped to 9.4 per cent in July, ratcheted up because 73,000 workers who had previously given up looking for jobs started hunting for employment again, increasing the potential labour force.

US unemployment is expected to hit 10 per cent by the end of the year. The country has lost about 6.9 million jobs since the recession started in December 2007 and there are now 14.9 million unemployed Americans.

However, the August report confirmed the pace of cuts was easing from early this year, when nearly three quarters of a million jobs were lost in January.

The Federal Reserve warned on Wednesday that the job market was still "poor" and companies would remain cautious about putting on workers despite increasing signs of an economic recovery. 

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European Central Bank falls into line and embraces quantitative easing

ECB falls into line and embraces quantitative easing by following the policy first adopted by the Bank of England and America's Federal Reserve.

The European Central Bank has cut interest rates a quarter point to a record low of 1pc and embraced quantitative easing (QE) for the first time, catching markets off guard with plans to buy €60bn (£53.5bn) of covered bonds.

The hotly-disputed move to purchase assets brings the ECB into line with the central banks of the US, Britain, Japan, among others, that have begun "printing" money to stave off debt deflation.

The step-change in policy follows an open clash within the ECB's governing council over its handling of Europe's worst slump since World War Two, pitting national governors from southern Europe and Ireland against the ECB's German-led hawks. Bundesbank chief Axel Weber has fought a rearguard battle to head off QE, calling it an "undesirable option" that risked inflation later.

The majority also overruled his insistence on a 1pc "floor" for interest rates. Jean-Claude Trichet, the ECB's president, said the bank had not ruled out further cuts, "depending on future circumstances".

The refusal to accept Frankfurt's lead is a turning-point for ECB, which inherited its authority a decade ago from the Bundesbank. The upsets touches on a raw nerve in Germany where critics have always suspected that EMU would turn "soft". It may set off a political backlash.

The ECB also extended its liquidity scheme from 6 to 12 months and opened its window to the European Investment Bank, giving it a new crisis role.

David Marsh, author of The Euro - The Politics of the New Global Currency, said the ECB is loath to follow Anglo-Saxon banks in purchasing government bonds because this would give most help to big debtors such as Greece and Italy. "They don't want to be seen as bail-out merchants by acting as a bond purchaser of last resort for hard-pressed nations," he said.

The IMF says Europe's banks have written down just 17pc of likely losses, compared to half for US banks. They may need $500bn in fresh capital. "If the IMF is correct, the risk of a credit crunch is bigger than the ECB likes to admit," said Mr Annunziata.

The European Commission has slashed its eurozone forecast to minus 4pc and highlighted the danger off a more vicious downward spiral if "adverse non-linearities" take hold. "One cannot exclude the risk of social and political unrest," it said.

The ECB's policy shift is a vindication for Cypriot governor Athanasios Orphanides, a 17-year veteran of the US Fed, who has battled tenaciously for bold action.

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Wise Money radar set on Thursdays ECB rate decision

The European Central Bank (ECB) surprised the markets by only cutting interest rates by 25 basis points to 1.25% last month.

A record low but when compared against the UK interest rates of 0.5% and against the US of 0-0.25% then comparatively still high in the current global climate.

The markets wanted to see more aggressive action amid rising unemployment and shrinking growth and all eyes will turn to the next ECB rate decision on Thursday. It is expected that another 25 basis point cut to 1% will materialize and the ECB may engage in additional "non conventional" measures- basically some form of Quantitative Easing to help the economy.

Stateside, the Fed plans to deliver results of stress tests on US banks to executives today that may show about 10 firms need additional capital to weather a deeper recession. An obvious way for banks to fill their capital requirements is via conversion of preference shares to common shares.

Last week, the Fed delayed the release of the tests that were originally scheduled for yesterday, as banks challenged some of the conclusions. 19 banks have been stress tested. Citigroup and Bank of America were allegedly among the banks found to need additional capital. It is rumoured that both firms disputed the Fed's determination.

Yesterday Citi rose 7.7% and Bank of America 19% after denying it was working of a plan to raise $10bn. I would be surprised if we didn't hear more soundbites about the stress tests. The results are likely to be made public later this week.

GB Pound is performing well testing the 1.50 level against the USD. The last time we were at this level was in mid April. A break above this level opens up the 1.52 level where we saw resistance in early January. GBPEUR has rallied and is currently trading at 1.1270 level, still off the 1.1381 high seen in mid April.

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Risk aversion trades take centre stage

Swine Flu continues to dominate wise money chatter.

Unfortunately it is the unknown that is causing the problem rather than anything definite and until we know whether the infectiousness of the virus, which originated in Mexico, can be contained by the World Health Organisation then we won't be sure of the financial impact.

The death toll in Mexico has risen to 149 and the WHO has upgraded its alert level to phase 4, one stage below the much more serious pandemic category. Phase 4 was the level at which the latter stages of the SARS outbreak was categorised.

Initially the Mexican Peso and the Antipodean currencies were hit hardest but concerns remain that if the situation worsens then sectors other than just agriculture will be affected.

The mediterranean countries are earmarked as likely targets (Portugal, Italy, Greece and Spain) with a downturn in air travel and tourism at a time that these countries can least afford it.

The Euro slipped sharply, not only on the move into Dollars but also following comments from ECB members Nowotny and Trichet. The former stated that Eurozone rates would stay low for a long time and that the Central Bank was ready to use additional measures if necessary.

Trichet reinforced this message saying the ECB will take decisions on new measures at their May 7th meeting- for the next week or so, the Euro is vulnerable all round.

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Eurozone interest rates at record low of 1.25pc

The European Central Bank has cut interest rates in the eurozone to a record low of 1.25pc, down from 1.5pc.

Economists had been expecting a bigger reduction of half a percentage point to 1pc, but speaking at a press conference after the monthly decision ECB president Jean-Claude Trichet did not rule out further cuts.

He said that rates may be cut "in a measured way," adding that while inflationary pressures were subsiding, the outlook for the economy remained poor.

"The latest economic data and survey information confirm that the world economy, including the euro area, is undergoing a severe downturn. Both global and euro area demand are likely to remain very weak over 2009, before gradually recovering in the course of 2010," he said.

The ECB's Governing Council has reduced interest rates by a total of three percentage points since early October, after the global financial crisis intensified following Lehman Brothers' collapse in September.

Mr Trichet said the ECB would announce "non-standard" measures at its policy meeting in May in an attempt to stimulate the eurozone economy, which officially entered recession at the end of last year.

The Organisation for Economic Co-operation and Development (OECD) predicted earlier this week that the eurozone economy would contract by 4.1pc this year. That is a significantly bigger drop than the 2.2pc to 3.2pc fall forecast by the ECB.

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Where now for the pound?

Following another rollercoaster week in the currency markets we have seen the Pound rally and then submit its gains.

Today and tomorrow we have the G7 meeting in Rome and the recent weakness in the pound is expected to be a confrontational topic.

It is expected that French and German ministers will confront the chancellor following the dramatic sell off in the pound over the last year- the currency has evolved from a strong safe haven currency to a shadow of its former self- losing over a quarter of its value.

Today we have seen GDP data from Germany showing a larger than expected contraction of 2.1% and following this we have seen EMU GDP contract by 1.5%- this is the deepest contraction on record and emphasizes today’s contraction in Germany with Spain, France & Italy also posting negative GDP.

This is worrying news from the Eurozone and there is little light at the end of the tunnel- GDP is expected to fall by 3% in 2009.

Looking at the market fluctuations we have understandably witnessed lots of volatility- this morning we have already seen early gains in the pound against the dollar and the euro.

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UK BRC retail sales figures are reported surprisingly strong.

It has to be assumed that the deep discounting that was seen supporting the figures prior to Xmas has been continued going into the New Year and bargain-hunters remain resilient to the downturn.

The UK RICS house price survey was less optimistic with an average of only 3.3 properties sold per estate agent per month reported.

The problem for the housing market seems less with demand (viewings were well up as people perceived that current property prices presented a good opportunity) but more with the provision of finance.

Again, market demand will be eagerly watched. Last night, the US Senate passed President Obama's stimulus plan which paves the way for Treasury Secretary Geithner to outline the Administration's Financial Stability Plan.

This evening, he is also scheduled to testify before the Senate Banking Committee on TARP so plenty of official dialogue out later on today.

Nearer to home, the Euro was adversely affected by the Russian Banks' debt restructuring plan. The head of the Russian Association of Regional Banks said that the rescheduling of loans worth about $400 billion was under discussion. This caused both the Euro and equities to dip and, although there is no confirmed link, saw the BIS buying Euro at this morning's market opening.

Comments from ECB member Webber (who we have said before was always very hawkish on rates) again confirmed his shift of views, stating that the ECB must NOT avoid aggressive rate actions if such policy is necessary. A further reason for the market to test the downside in Euro/Dollar.

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Interest rate announcements are in the spotlight

But neither having a materially long-term effect on exchange rates. The market perception of lower interest rates to come remains unchanged in the market but differences of opinion as to magnitude of cut and timetable are starting to emerge.

Comments from Trichet and Andrew Sentence yesterday added to the uncertainty with the former intimating a pause in ECB rate cutting whilst Sentence appeared to argue both camps for Sterling.

The traditionally arch-hawk of the committee warned of a further weakening of the manufacturing sector in the UK (this followed the report that industrial output in October had fallen by 4.9% y-on-y - the biggest drop in over 6-years) with the recession lasting longer and going deeper than had been previously forecast.

He warned however that policy makers needed to look at different methods for handling the problem implying that interest rates being continually being reduced has less and less impact going forward.

The Zew data from the Eurozone and Germany yesterday were terrible which immediately caused the Euro to tumble through 1.2800. Rumours of semi-official demand however, caused the market to pause which was enough to see it rise sharply back towards 1.3000 where it stopped and near to where we start today.

Sterling fell on the weak UK data and then was hit with the double whammy when Euro rose against the Dollar. This left the cross hitting a new all-time low below 1.1400. This afternoon's testimony in front of the Treasury Select Committee by the Chancellor, Alistair Darling looks like the next chasm for Sterling to negotiate. Although neither party will be out to put the skids under Sterling, the conversation and comment might be viewed very nervously from abroad.

Elsewhere the Canadians did indeed cut their rates as expected but by a larger amount, 0.75%, than had been anticipated. More rate cuts to come from them in the near future. The same conclusion can be reached for Sweden following the release of the sharpest fall in inflation (down from 4% to 2.5%) in their country in 15-years. The Riksbank are expected to progress with their rate cutting programme, with a target of 1% being achieved over the next 3 policy meetings.

In the US, the extreme short end of the Treasury market remains the focus. On Monday, the 3-month bill auction was completed at a yield of a mere 0.005%, but that was surpassed by the 4-week bill sale last night. The minimum bid rate was set at 0.00% with the 'high' bid being established at -0.06%.

In addition, even with a zero yield, the issue was covered 4.20 times and amazingly €˜non-professionals' took 47% of the total - the second largest participation on record. In other words, it wasn't just dealers causing those incredible results - the non-financial market is also quite willing to accept a zero yield (or less) in return for through year-end safety.

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UK tax increases loom

For those of you who have been away on a desert island for the past few weeks, today sees the UK Chancellor unveil his Kick Start for the economy thinly disguised as his pre-Budget Statement.

It is difficult to ascertain just how much of the recent press coverage is actual and how much is speculative. Suffice to say that whatever emerges will be the blueprint for the economy for the next couple of years and the analysis of the measures will determine the immediate direction for Sterling on the exchanges.

The one factor that is a cast iron certainty is that the BoE/MPC will be cutting rates further in December. The statement to Parliament commences at 3.30 this afternoon.

Also on interest rates. The ECB President said on Friday that the ECB could cut interest rates again at their meeting next month. These comments were echoed by 2 other €˜high powered members of the Central Bank but it wasn't until ECB Director and Chief Economist Weber said the same thing later in the day, that anyone took any notice.

He talked off a remarkable decline in inflationary pressures and deteriorating economic prospects and culminated by stating that the Central Bank had leeway for further easing, if necessary.. it still looks as though we will see Euro interest rates 75 to€“ 100 bp lower by the spring.

Over the weekend we have seen further bail-outs, cash raising and capital increases in the Banking Sector. The most significant was the US Government ‘rescue' of Citigroup Inc, the second largest bank in the States, to the tune of $300 billion.

After last weeks continued weakening of the sector, this has come as a welcome reprieve with Banking stocks surging on the European bourses first thing. From the UK, Standard Chartered decided to raise £1.8 billion via a cash call to boost its capital base probably more to do with that they could rather than that they needed to.

Meanwhile in Ireland, the Irish Government has agreed to take part in a Euro 3 billion bail out of Bank of Ireland that will be led by private equity probably of US origin.

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Equity markets support central banks

UK and European moves to restore confidence in financial markets were met with strong approval by markets yesterday as the FTSE, Dax and CAC40 all rebounded.

The US recorded is largest one day rally since the recovery following the 1929 crash while Asian shares continued the trend overnight with the Nikkei climbing a record 14.2%, and the Hang Seng up 4%.

The FTSE gained 8.3% on the back of the details that emerged of the UK government's plans to inject some £37bn that will result in a part nationalisation of some British banks.

The UK model was mirrored in the Eurozone with a number of nations announcing plans. Germany guaranteed €400bn of interbank lending and provided a €100bn fund to inject capital while France guaranteed up to €320bn of interbank lending with a further €40bn at its disposal to provide new capital. The Dax and CAC40 both ended the day over 11% higher.

The US has this morning announced that it will invest $125bn in nine major American banks as part of its $700bn plan, with Treasury Secretary Henry Paulson is due to speak later today to discuss the plans which also involve a further $125bn to recapitalise financial institutions across the US. The Dow rose 11.08% yesterday.

Three month GBP Libor set slightly lower at 6.27 and three month Dollar Libor fell 7 basis points to 4.75, in what may be signs that interbank lending markets are reacting positively to government intervention.

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Hawkish ECB comments

In comments yesterday from the ECB, Webber from the governing council sounded out a hawkish tone, stating that much discussed rate cuts in the Eurozone are being expected too early.

The ECB has started to concentrate its concerns about operational issues on the collateral system: with comments again from Webber that 'The collateral that we take must also be traded in the market becasue only then is it priced accurately' . This may lead to ultimately tightening lending standards, showing unlikely good news for the economic growth in the EMU.

Further comments from the ECB vice-president Papademos also warned that further rate rises may be needed if second round effects materialised in the Eurozone. Remarks from the other ECB members, Bini Smaghi and Bonello, all suggested the central bank is attempting to temper market expectations of rate cuts ahead.

The USD was not helped yesterday by the hawkish comments yesterday from the ECB, raising the prospect of an interesting ECB policy decision next week, this continues the confusion over which path we will see currency rates take.

The broad decline in inflation and inflation expectations has lessened the need for rate hikes but this is evident in all G10 economies. With the US economy arguably in a more advanced stage of economic adjustment and with the Fed having already eased aggresively, the pressure is building on the Eurozone and other G10 economies to seek a more accomodative policy ahead.

The hawkish commentary will be increasingly unjustifiable and we see little scope for the significant yield gains in favour of the Euro.

Crude oil prices continue to edge higher, breaching $119/bbl off the back of feas over the disruptions from Tropical Storm Gustav, which is expected to strengthen into a major hurricane in the Gulf of Mexico.

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Dollar rally continues

Data released yesterday showed the Eurozone was moving closer to a recession after the economy contracted for the first time since the Euros launch almost a decade ago.

Gross domestic product fell 0.2% in the second quarter of 2008 after increasing 0.7% in the first. The year on year growth rate slowed for a third straight quarter to 1.5%. Technically a recession is when an economy shrinks for two consecutive quarters.

After European Central Bank President Jean- Claude Trichet last week said growth will be "particularly weak" through the third quarter, many economists now believe the Euro is on the verge of a recession.

Euro inflation data was also released yesterday at 4%; less than the 4.1% estimated earlier but still twice the ECB's 2% target. Food price increases accelerated to 6.7% in July, while energy-price inflation soared to 17.1%.

The central bank last month raised its target rate to 4.25%, a seven-year high, to curb high inflation levels. Even with the weaker growth levels announced, financial markets are only pricing in a slim chance of a reversal of the recent rate hike.

U.S. consumer prices jumped to a 17 year high in July, reducing the scope of the Federal Reserve to lower interest rates as economic growth slows. The index rose 0.82% month on month in July, ahead of market forecasts of a 0.4% monthly increase.

The annual rate of consumer price inflation is now 5.6% year on year, up from 5.0% in June and significantly higher than the market expectation for a rise to 5.1%.

The recent dramatic retreat in energy prices and an increasingly sluggish global economy are likely to put downward pressure on headline inflation rates in coming months. The markets therefore concentrated on the weak Euro growth story taking the Euro to its lowest level in six months against the USD, below $1.48.

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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
GBPUSD – 2.0235
GBPEUR – 1.3856
EURUSD – 1.4599
GBPJPY – 225.11
GBPCHF – 2.2918
GBPAUD – 2.3075
GBPCAD – 2.0438
GBPZAR – 13.6011

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.

Relatively quiet week on the forex data front

A week of choppy trading after a slew of important economic releases left GBP/USD modestly higher by the end of the week.

Overwhelming evidence that inflation pressures have eased in the UK economy kept Cable grounded, with PPI showing that input prices plunged 2.0 percent on petroleum product costs, while output prices jumped 0.3 percent as producers worked to boost profit margins.

Meanwhile, CPI fell materially lower at a rate of -0.8 percent, dragging the annual rate down to 2.7 percent - well below the critical threshold of 3.1 percent that would have prompted a warning action to UK parliament from BOE chief Merve ‘the Swerve’ King.

With interest rates in the UK and US at parity at 5.25 percent, Cable trade may remain turbulent as economic data from both countries gives neither bank the impetus to adjust monetary policy in the near-term.

The minutes of the February BOE MPC meeting will likely earn most of the attention for the week, as the market will look to the voting record for the committee’s bias on policy. Mild wage growth is likely to keep hawkish impulses in check.

After a quiet start to the month last week’s blitz of data finally created some action in the currency market. Unfortunately for greenback bulls, the majority of data was dollar negative.

For the week the EUR/USD gained 104 basis points as US economic condition clearly deteriorated. Specifically US Trade deficit widened to -$61B while the TICS inflows shrank to a miniscule $15B. No matter how you sliced it the balance sheet news was horrid.

The rest of the data was hardly inspiring as well with Retail Sales printing weaker than expected and weekly jobless claims jumping a very hefty 43k more than forecast.

In short the news suggests that US economy is slowing rapidly and if that trend persists dollars woes may only be beginning.

Next week the action once again slows to a crawl with only the CPI and Fed minutes to occupy the markets. We may again begin to trade in a narrow range but for now the bias in the greenback is to the downside and the onus is on the dollar longs to prove the market wrong.

Last week’s calendar in the Euro-zone was relatively subdued and EURO strength came from USD weakness rather than its own data. Both the Trade Balance and the ZEW missed estimates, but not by much. More importantly the EZ GDP was revised to 3.3% from 3.0% original estimate.

Next week the Euro-Zone calendar is also barren with one exception. The German IFO survey is due to be released on Friday night and is likely to be the marquee event of the week.

The market is looking for a small drop to 107.5 from 107.9 which if accurate, should not dent the unit much; IFO has hovered near record reading for most of the past year and has been one of the primary foundations for EURO strength. If it does not change much the unit is likely to remain well supported.

However, if the survey registers a massive drop due to the concerns over VAT, the EUR/USD could tumble hard.

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.