WISE MONEY

Today’s highlight is set to be the ECB meeting and subsequent statement and Q&A by ECB President Jean Claude-Trichet. As always the tone of his speech will be monitored extremely closely for any hawkish comments.

In particular any mention of upside danger in relation to the inflation rate will be interpreted as hawkish given Mr Trichet went to extraordinary lengths last time to avoid commenting on the above target inflation rate in a hawkish way.

This morning has seen Eurozone PMI data miss forecast slightly but any effect was more than offset by positive German retail sales and French unemployment data (which Trichet will undoubtedly cite when he talks about a broad based recovery in the Eurozone, laughable when you think about the state the periphery economies are in).

With the large amount of data and the ECB meeting this mornings Euro trading has been volatile, with the single currency up around half a cent against Sterling and the Dollar.

Fed Chairman Ben Bernanke had been the focus over the last few days with his statements to both houses (which we so similar he may as well had the first one taped and played back).

The real interest was in the Q&A session after the prepared address, in which Mr Bernanke talked about further QE and the Fed’s plan regarding short term interest rate.

The overall impression was that the Fed are not in a hurry to raise rates and that they will still not rule out further easing if the economic situation, especially in the labour market continues to deteriorate.

For the Dollar this meant mild softening as the speech progressed but all of Sterling’s gains yesterday afternoon have been given back in early trading this morning.

Policymakers are focusing on inflation, but the perception of dangers being created remain diverse with the Bank of England and Federal Reserve still erring on the swift return to normality whilst the ECB argue that pressures will persist and that higher inflation will become embedded. Wise Money expects to hear a more hawkish tone from the ECB President Trichet at the press conference following the Central Bank’s policy setting meeting.

There is little chance that official rates will be raised tomorrow, but the market now has it in mind that Euro rates will be the first ones to go, with Sterling and Dollar interest rates likely to remain where they are until the middle of the year.

Turning back to yesterday, BoE members appeared before a Parliamentary Treasury committee, testifying on financial regulation, but touching on various other things.

They talked about the problems that would be created for the MPC by further increases in commodity and energy prices, but warned that to raise interest rates as a gesture would be self-defeating and would not be sanctioned.

They were however quite bullish on the recovery commenting that UK growth had picked up during the first couple of months of the year and Sterling stopped weakening.

Ben Bernanke was also testifying yesterday afternoon, this time before Congress in his semi-annual address on monetary policy.

Like his BoE counterparts, the Fed Chairman spent most of his time re-affirming previously communicated policy decisions, but did say that there was no strategy for debasing the US Dollar and referred to the need for a sustained improvement in job creation.

All eyes therefore on the ADP number this afternoon ahead of Friday’s non-farm payrolls data.

With little data of note out yesterday, this left the stage clear for US Federal Reserve Chairman Ben S. Bernanke’s speech to the House Budget Committee.  Bernanke explained that the unemployment rate is likely to remain high “for some time” despite the biggest two month drop in the jobless rate since 1958.

Whilst the fall in the jobless rate in December and January “do provide some grounds for optimism,” he warned that “with output growth likely to be moderate for a while and with employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level”.

Bernanke and the Federal Open Market Committee are waiting for further proof of a durable pickup in the job market as they press forward with their plan to buy $600 billion in Treasury securities to boost the pace of recovery.

In its January 26th statement, the panel said the recovery “has been insufficient to bring about a significant improvement in labour market conditions”.

Bernanke’s remarks, his first since a Labor Department report on February 4th showed the jobless rate unexpectedly fell to 9 percent in January, were similar to remarks he gave last week at the National Press Club and testimony last month to the Senate Budget Committee.

Today it is all about the UK with December’s industrial production release at 9.30am showing a slightly lower than expected (but weather related) +0.5% m/m.

A slightly disappointing outcome but not far enough away from consensus to cause anything but a minor wobble in Sterling’s value.

All attention now shifts to the midday announcement from the MPC. The majority of market players are assuming no change in the level of liquidity addition and no shift in interest rates.

The euro posted its largest weekly gain in almost two years versus the dollar after successful auctions of Portuguese, Spanish and Italian debt received more demand than expected and Germany’s Chancellor Angela Merkel pledged to do whatever’s necessary to ease the sovereign debt crisis. The 17 nation currency rose last week against all of its major counterparts except the Swedish krona and Danish krone including a 4.2% weekly gain versus the US Dollar and a 2.1% move higher against the British Pound.

It was another round of positive news for Uncle Sam on Friday’s with data indicating that consumer spending is coming back to life.

Inflation pressures on the other hand, remain negligible, based on the core reading stressing the Fed’s concern that inflation is running constantly below the target level.

Therefore it looks like it will be a long time, most likely late into 2012 before we see a rate rise in the US.

While Bernanke is in no rush to increase rates, rumours are circulating within the European Central Bank (ECB) that they are more eager to pull the trigger for higher rates.

ECB President Trichet’s hawkish press conference last week caused a stir and marked a clear shift in ECB reaction towards a more hawkish stance.

So far this morning though, the euro has marginally fallen against the dollar, snapping last week’s five day gain, again on concern the region’s debt crisis will continue to worsen, even as European finance ministers meet today to hammer out a new strategy to stem the contagion.

Fitch’s decision to cut Greece’s sovereign debt rating to BB+, outlook negative, from BBB-, citing its “heavy public debt burden” which renders “fiscal solvency highly vulnerable to adverse shocks”, also weighed on the single currency this morning.

All three of the main ratings agencies now rate the country as sub investment grade.

2010 ended on an unpleasant tone particularly for eurozone equity markets- as well as the Aussie cricket team, due to continued fiscal and debt tensions.  The single European currency rose into 2011 but this looked more like position adjustment against a change in opinion.

The EUR/USD is likely to face a harsh reality around the 1.3500 level this week, with a fall towards 1.3000 more likely.

It’s certainly not the most favourable time for Estonia to be joining the Eurozone given the speculation of a possible break up that dominated headlines for the majority of 2010.

For the start of the year we will likely see continued focus on the troubles of Ireland after its bailout and with elections on the way this will ensure a turbulent start for the Emerald Isle.

Other members of the so called PIGS (Portugal and Spain) will also stay in the spot light as the variation in speeds of recovery among Eurozone country takes place.

Stateside, a drop in consumer confidence for December shocked  the market but pending home sales and the Chicago PMI beat expectations, leaving the US on an upbeat spirit to end the year.

This week there is plenty for investors to get stuck in to. In the US, the main event is the non-farm payroll figures out on Friday.

Ahead of this, we have the minutes of last months Fed FOMC meeting today, these will be under close examination against the background of rising US bond yields.

Bernanke will also speak on the monetary and fiscal outlook as well as the US economy to the Senate Budget Panel. The head of the Fed will once more defend the use of quantitative easing to keep his options open to extend it if required.

Concerns were growing over the weekend that Europe’s second largest economy could also be on the hit list for bond market short sellers according to the London Stock Exchange chief executive Xavier Rolet.The chief stated that “It won’t be long before bond investors turn to France after they have finished with Portugal and Spain”.

The chief then went on to say France has a much higher debt than people realise and markets could lose confidence in the euro completely if it becomes evident France cannot obey to Eurozone fiscal rules.

This latest revelation comes as head of the IMF Dominique Strauss-Khan places increasing pressure on the Eurozone to raise the size of its €440 billion bailout fund.

This is likely to be met with further domestic unrest in Germany as tax payers are becoming increasingly frustrated at paying out for Irish and Greek bailouts.

With regards to Ireland, their government will tomorrow vote on the emergency budget that is required to gain access to the emergency funding.

If the French were to become ensnared then that would be game, set and match for the euro as we know it.

On the other side of the pond- the greenback has regained some stability from a renewed focus on U.S quantitative easing.

The US Dollar moved higher off a three week low against the yen and two week lows against the euro- despite disappointing employment statistics on Friday.

Instead of an expected gain of 140,000, the payrolls only rose by 39,000, in addition the unemployment rate rose to 9.8% from 9.6%.

Fed Chairman Bernanke’s TV interview was the focus over the weekend as he defended Fed’s QE program and said that Fed’s “not printing money” as “the amount of currency in circulation is not changing”.

The money supply is not changing in any significant way.” And he hit back on criticisms and said fear of inflation is “way overstated”.

Bernanke said the program is for lowering interest rates by buying treasuries to stimulate the economy to grow faster.

The dollar now sits at 1.57 against the pound and 1.3310 against the euro.

The recent US Dollar weakness has been driven by the markets expectation of a monster bout of Quantative Easing (QE) over the next few months. Judging by current levels analysts have estimated that the market was expecting as much as $1trn in further asset purchases by the Federal Reserve.

However, recent rumblings from the American central bank has begun to indicate  that any further QE will be much smaller in scale, $100 billion or so (the number seems small fry now) and will be implemented over a longer time frame.

Mr Bernanke has already made the analogy between further QE and a golfer with a new putter on the final hole of miniature golf course.

He said that it is better to be conservative and strike the ball less firmly due to the unknown way the ball will react to the new putter.

Yes, I think it’s a rubbish metaphor as well- Little Toot would be better, but that does not change the fact that the market is very short Dollars at the moment and next week’s FOMC may see a spike in the value of the Greenback.

Shorts may rush to cover positions if QE is indeed on a much smaller scale than expected.

It will be interesting to see the reaction of the stock market, recently reacting as though on steroids in anticipation of shock and awe QE, deflates with a whimper or reacts violently as though the legs have been kicked from beneath it.

The US Dollar made ground over night after better than expected manufacturing data and an unexpected rise in retail sales on Friday. This  has reduced concerns that falling consumer spending may weigh heavy on the economic recovery.

But the US Treasury’s budget shortfall remained in the trillions and the University of Michigan consumer confidence index fell to 67.9 points. Consistent high levels of unemployment (unchanged at 9.6% in September) and increasing initial job claims numbers are contributing to downside pressure.

Overall, the Dollar has spent the last 6 weeks sliding lower on the opinion that QE2 is required in order to firm up the declining US economy.

Ben Bernanke’s explanation on Friday indicated that additional monetary stimulus may be necessary, stating “there would appear… all else being equal… to be a case for further action” in order to “promote our dual objectives of maximum employment and price stability” yet gave no indication on how much, or when.

The USD pared losses and finished the day higher, which suggests the contrast between expectation and reality that can exist in currency markets and questions how much easing is already factored into the price. This in turn could make the Dollar susceptible to sharp rebounds.

The market will now seek direction from the FOMC meeting on November 3rd.

The Pound will be in centre stage this week, with markets watching to see what areas of the economy will be most affected by Osborne unveiling the details of the largest budget cuts in UK history and the release of the minutes from the Bank of England meeting (6-7 Oct) both on Wednesday.

We’ve already seen reports from the Centre for Economics and Business (CEBR) suggesting the Bank of England will expand its stimulus program by £100bn to boost the economy as growth begins to contract and austerity measures begin to curb spending.

They also stated that the central bank will keep its benchmark interest rate at a record low of 0.5% until at least “late” 2012

Expect some more significant volatility in currency markets over the week as central banks look to talk their recovery prospects up and their currencies down.

Today marks the start of a busy week in the wise money markets. A large amount of important data releases are scheduled for release this week and several prominent central bankers are due to speak.

This is set against the backdrop of further intervention by Japanese authorities, aimed at curbing Yen strength and further grumblings by the US of China’s refusal to let the Yuan appreciate to fair levels against the Dollar.

The Greenback is yet to recover from last week’s FED meeting and continues to struggle across the board, this afternoon the Chicago Fed National Activity Index will probably show a further slowdown in economic activity so expect the Euro and Sterling to cling stubbornly onto the gains from last week until tomorrow.

Later in the week US GDP is announced, with forecasts of a slight increase from 1.6 to 1.8 per cent. The Fed & markets will be following the figures intently, as disappointing figures may mark the start of the “exceptional measures” the Fed mentioned in the last meeting.

UK GDP figures are released on Tuesday; again the number is very important to the future path of Sterling, with positive growth vital in the face of the steep government spending cuts just over the horizon.

The fear among some economists is the announced cuts reduce growth below the levels needed to service existing debt payments and we enter into a death spiral of further cuts and further reductions in growth, leading to further cuts.

The UK housing market also showed further signs of slowing, all Britain’s regions showed monthly price declines in the Hometrack Housing Survey.

The highlight overnight was the release of the minutes from the August 10th Federal Reserve Open Market Committee meeting. Some Federal Reserve officials were concerned that a decision to keep securities holdings unchanged would inadvertently signal an intention to resume large scale asset purchases.

Also, a few policy makers said the economic effects of the decision “would be quite small,” but at the same time, some officials saw “increased downside risks to the outlook for both growth and inflation” and voiced concern that further shocks would cause “significant slowing in growth”.

The debate shows the challenge Fed Chairman Ben S. Bernanke may face in achieving consensus for any additional monetary stimulus to reverse a slowdown in growth and reduce joblessness more quickly.

In a speech last week, Bernanke said “Policy makers haven’t agreed on specific criteria or triggers for further action”.

In other important US economic releases, we had the Conference Board’s confidence index yesterday afternoon which showed that confidence among U.S. consumers rose more than forecast in August; a sign the biggest part of the economy may avoid a slowdown that would derail the recovery.

The Conference Board’s confidence index increased to 53.5 from a five-month low of 51 in July, figures from the New York- based private research group showed. More confidence may help ease concern that consumer spending, which accounts for about 70 percent of the economy, will falter.

As we approach the ECB meeting this Thursday, yesterday’s Eurozone annual inflation reading fell from 1.7 in July to 1.6 in August, coming in well under the ECB’s target of 2%. Inflation looks set to remain muted for the rest of 2010 and into 2011 as European governments implement austerity packages to shore up their sovereign balance sheets.

Yesterday we also saw German unemployment continuing to fall, for the 14 month in a row, slightly better than expected sparking a rally in the Eur/Usd which provided strong support going into the release of the Fed’s minutes. Investors had been keenly anticipating the release of these minutes but were somewhat disappointed as it lacked any new information triggering another move higher for Eur/Usd.