WISE MONEY

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.

The newest member of the Bank of England’s interest rate setting Monetary Policy Committee hit the headlines this morning.Britain faces “significant” risk of a fresh slump into recession according to Dr Martin Weale, who said it would be “foolish” to rule out the possibility of a double-dip downturn. He also thought the Banks central outlook on growth could be too optimistic in light of the fiscal cuts currently being implemented.

The BoE forecast is for growth of about 2.8% in 2011 and 3.2% in 2012. Sterling has dropped over a cent against the dollar following the news and has traded as low as 1.5371.

M&A activity in the US, helped lift sentiment yesterday, unfortunately this did not last for long and both main stock indexes closed marginally down on the day.

There is little economic news again today so focus is likely to remain on the existing home sales in the US which is out this afternoon at 15:00. Figures are expected to show that sales of existing US homes fell to an annual rate of 4.67million in July from 5.37 million in June.

Sterling is trading up 50 points after the release of the Bank of England minutes showed one member, Andrew Sentance, voted to start the withdrawal of the exceptional monetary stimulus. This is the third straight meeting that Sentance has been the lone dissenting voice calling for a 25 basis point increase in the banks base rate.

He argued that the economic recovery is gaining momentum and the Bank needed to act to make sure inflation expectations are not allowed to deviate from current levels due to the current inflation rate stuck stubbornly above target.

Traders have taken this as a positive sign for the UK economy and the Pound now has just broken through 1.56 against the Dollar and 1.21 against the Euro.

The Euro regained ground against the US Dollar as Ireland’s 2014 and 2020 bond auctions largely passed without incident.

Spreads were already tightening ahead of the auction, and final bid-to-cover ratios of 5.4 and 2.4 respectively showed that demand remains firm.

Spain also sold 5.5 billion euros of 12- and 18- month bills at lower yields than in previous auctions in July. We wait to see if ECB intervention was the main reason for the strong demand.

The European data picture was less rosy, however, as the ZEW Economic Sentiment survey was much lower than expected at 14.0 (consensus. 20.0), though the current situation index was firm at 44.3 (cons. 24.0).

The Bank of England has announced it is to overhaul its macroeconomic model (the excitingly titled- The Bank of England Quarterly Model) after a glut of large revisions to GDP and inflation figures.
In addition to the GDP forecasts it’s inflation forecasts haves been above target for 42 of the 51 months, triggering seven letters from BOE Governor Mervyn King to the Chancellor over the same period.

A chat over a few pints of beer and a packet of crisps are no longer deemed an acceptable method of assessing the health of the UK economy and the Bank plans to spend £3.5 million (or 350,000 magic eight balls) on overhauling and improving their forecasting model.

The announcement has led some commentators to suggest the markets may start to lose credibility in the Bank’s ability to forecast inflation and this could feed into Sterling weakness.

But since the story broke Sterling has hardly budged and along with us at Wise Money, the market probably sees the announcement as good rather than bad news.

The Financial Times yesterday also reviewed the BoE forecasts and discovered that the most reliable method of predicting future UK inflation and growth was to look at what happened in the previous quarter and copy those figures forward to the next quarter. Simples.

The Bank of England has kept its economic stimulus programme and record low interest rate of 0.5pc in place yesterday amid lingering doubts among rate setters over a sustained recovery for the fragile UK economy.The nine strong Monetary Policy Committee (MPC) was not swayed by the UK economy’s rapid 1.1pc advance between April and June, with growth expected to fade in the second half of 2010 as the biggest Budget cuts since the Second World War take hold.

Mervyn King, the Governor of the Bank of England, has repeatedly emphasised that there is no guarantee that the recovery which began in the fourth quarter of 2009 is sustainable.

The MPC held rates at the historic low of 0.5pc – where they have been since March 2009 –and maintained its target for bond holdings at £200bn, when it announced its monthly decision at noon.

The MPC maintained the ultra loose policy stance it established when the crisis took hold, despite a return to economic growth and a persistent failure to meet its 2pc inflation target.

The consumer prices index – the official measure of inflation – has been above 3pc since the beginning of the year. The Bank is expected to raise its inflation forecasts when it publishes the August Inflation Report next week, to reflect above-target inflation for most of 2011.

Mr King has stated that a failure of banks to lend, as well as weakness in Britain’s key export markets, could hamper growth in the UK.

Fears that Britain’s recovery will slow were reinforced by a snapshot of the UK services sector in July on Wednesday.

Economists had expected a slight improvement to 54.5, and the disappointing news for the economy helped to drive sterling pound down almost a cent lower against the dollar, to close at $1.5877.

Today is all about monetary policy meetings with the UK and the Eurozone committees all deciding on levels for interest rates for the next month.
As with previous months it is a fairly common view that both the MPC and the ECB will decide to leave their respective rates on hold, resolving to also leave the levels of QE unchanged as well.

For the MPC, that will be it for a week or so until the minutes of the meeting are released.

I would expect Andrew Sentance to once again prove to be the lone dissenter for leaving rates unchanged although it would be a shock if there was not evidence of protracted discussion amongst the members over the stubbornly high level of inflation and its effect on the UK economic outlook.

This is also the first meeting attended by Martin Weale therefore the minutes will also be awaited to discover his thoughts and voting intentions.

The Bank of England has kept UK interest rates on hold at a record low of 0.5% for the 16th consecutive month and the European Central Bank (ECB) has held eurozone interest rates at a record low of 1% for the 14th month running.
The banks have kept rates low to try and stimulate the economies following the global economic downturn.

Many analysts argue rates need to stay low as governments are cutting back on spending- which undermines growth.

The Bank of England’s Monetary Policy Committee (MPC) also decided not to inject any more money into the economy under its policy of quantitative easing (QE).

The decision had been expected but calls have been growing for an increase in rates to curb inflation.

The National Institute of Economic and Social Research (Niesr) estimated that the economy grew by 0.7% in the three months to the end of June, marking a slowdown from the 0.9% expansion seen in the three months to May.

The minutes of July’s meeting, which will reveal how MPC members voted, will be released in two weeks’ time.

Explaining the ECB’s decision to keep rates on hold, president Jean-Claude Trichet said the eurozone’s economic recovery continued in the first half of the year, adding “we expect the area’s economy to grow at a moderate and still uneven pace, in an environment of high uncertainty”.

The eurozone economy has been in the international spotlight in recent months, with concerns about high government debt levels hitting global stock markets and threatening to derail the economic recovery.

In recent weeks, attention has turned to bank debt, with investors eagerly awaiting the results of stress tests designed to see how well equipped banks are to cope with future financial crises.

Mr Trichet said the tests should “build confidence” in markets as investors learnt how exposed banks were to bad debt. Transparency, he said, would be beneficial.

The results of these tests are due to be published on 23 July.

The Euro reached a two month high versus the US Dollar late on Friday as investors remain content for the time being with better than feared results from the European Central Bank’s tender facility.The Euros surge continued into Friday afternoon’s session on the back of weaker than expected US Non Farm Payrolls data. The risk and commodity currencies took a bit of a hammering late on Friday with both the Euro and Sterling making headway going into the Independence Day Holiday affected weekend and have retained the move so far today.

This week is a busy one in terms of key central bank meetings.

First up is the Reserve Bank of Australia announcing its latest policy decision on Tuesday with the market consensus expecting no change to the base rate.

Next up on Thursday is the Bank of England’s turn. After several months of uneventful policy decisions by the BoE, Thursday’s announcement will be the most eagerly awaited for quite some time. Whilst no change in the bank rate is expected, it’s the first meeting since the emergency budget on June 22nd.

The minutes, due for release on July 21st will be scrutinised for any sign that fiscal consolidation could deter early rate hikes. Furthermore, signs of division on the committee have also recently emerged, culminating in MPC Member Andrew Sentence’s decision to vote for a rate hike at the June.

The Eurozone took yet another pounding yesterday as rigorous fiscal tightening threatens to dampen an already weak recovery.

The euro has crashed to 14 month lows of $1.25 after boosting to nearly $1.31 on Monday after the $1 trillion emergency rescue package was announced.

News that one of the “PIGS”, Portugal is attempting to cut €2 bn from its budget gap has done little to reduce the weakness in the Euro and with more tax hikes and salary cuts due, we could see ugly scenes like those witnessed from Greece.

ECB President Jean-Claude Trichet has stated the ECB is not “embarking on quantitative easing” and he reiterated that “the Governing Council will not tolerate inflation” leading to speculation a rise in interest rates could be on the horizon.

Sterling has also taken a hit this morning with news that the new coalition has already come to loggerheads. With two political parties with separate agendas leading the country, a schedule for cutting the deficit will take longer to agree, and with the credit agencies hovering, a negative outlook over the UK will remain.

A cut in the UK’s prized AAA credit rating would have disastrous consequences to the recovery. Data released yesterday showing the UK’s trade deficit widened more than expected damaged hopes for an export led resurgence.

The US Dollar has been the main winner from the negative news from Europe as investors run for their “safe haven”. The greenback has also been supported by encouraging figures from the US and expectations that the FED will be the first among the major central banks to raise interest rates.

The Greek debt situation continues to deteriorate with the terrible news that three bank employees were burnt during riots in Athens.

The EuroDollar lost almost two cents yesterday as continued worries over a Greek default and contagion fears in other Eurozone countries played on the minds of investors. At one point euro/ US Dollar broke through 1.28, the lowest level since March 2009.

Today, the ECB meet for it’s monthly interest rate decision, with the actual decision widely expected to be an non-event. That said, the press conference afterwards will be closely watched for any mentioned of the possibility of the ECB buying bonds (QE or printing money to you and me) and any further developments in the bailout package.

Leading economists continue to be sceptical on the success of the proposed bailout – history is littered with examples of countries receiving money from the IMF and then promptly defaulting. Whether Greece defaults will increasingly be decided not by their ability to pay, but rather by their willingness to.

From pictures reported yesterday of the strikes, and with more planned next week, it looks likely that some sort of debt restructuring will eventually have to be implemented.