WISE MONEY

The inflation report is the first since the introduction of QE in March and the report was eagerly awaited to assess the inflation projections in the UK. Mr King was downbeat in his assessment of the UK economy and emphasized the uncertainty in the economy stating “it would be extremely unwise for anyone to claim they know what the future is to hold” and he also intimated that there would be no end to credit easing and interest rates will remain low for the foreseeable future.

So not particularly cheery from Mr King and this certainly takes the shine off yesterdays “green shoot” declarations from various economic pundits for the UK- in fairness a conservative approach is sensible to avoid the market trading on sentiment rather than reality.

Following the report sterling dipped from 1.53 against the dollar to 1.5139, against the euro sterling dropped from 1.1190 to 1.11. In other data from the UK we saw unemployment jump to its highest level since 1996 in a leaked report yesterday afternoon….the number of UK unemployed jumped by almost a quarter of a million in the first 3 months of the year taking the total levels to 2.2 million.

However manufacturing production fell by just 0.1% compared to expectations of a drop nearer to 1%- continued improvement in manufacturing production will be essential to drive growth and stop the rot of unemployment levels surging higher still…

Elsewhere, we saw China post a higher than forecast retail sales number but lower industrial output data….good news that the Chinese consumer is buying but they will hope to see an improvement in output soon.

One currency pair to watch is EUR/USD which earlier broke through 1.37 before retracing to 1.36- the increase in Oil to $60 per barrel driving this pair higher for now.

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.

The 3.0% level is still well above the Bank Of England’s 2% target for inflation and this data suggests that interest rates may not need to be cut in March as previously thought.

However inflation will remain a concern for the Bank Of England- Mervyn King has already signaled that inflation could fall sharply this year and todays BOE minutes will give us more insight to the sentiment of the MPC.

The euro was the big loser in the currency markets yesterday falling to 2 month lows against the dollar and also retreating against the pound…real concern is now prevalent on the health of eastern European banks.

With the threat of a downgrade in credit looming over eastern European subsidiaries of Swedish and Austrian banks coupled with the expectation of more banking losses in Europe forcing the euro lower.

The EUR/USD moved to a low of 1.2548 and 1.25 is now the key target before a break to 1.2312…GBP/EUR failed to hold above a move back to 1.13 yesterday, however this will again become the target as the spotlight remains on the euro and its woes.

Overnight the final approval was placed on the US stimulus package of $787bn which is desperately hoped will kick start the global economy. The urgency of Obama to introduce this stimulus was justified as General Motors and Chrysler have requested another $21.6bn on top of the $17.4bn already received.

This caused a sharp sell off in equities- in particular the Dow as risk aversion kicked in.

One to watch in the markets at the moment is USD/CAD which has broken a key resistance level of 1.26…with risk aversion and the falling value of Oil we could see this pair re-test the 1.30 level in the near term.

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.

Going back a few hours, Mervyn King, fronting the BoE at their release of the Quarterly Inflation Report, made it very clear that the Bank views the risks in the economy at present to be growth or rather the lack of it.

He stated that inflation next year would fall to 1% with a possibility of it actually going negative in the 12-18 month timespan. This meant that interest rates would be cut further and sooner rather than later. HSBC this morning are calling for a 50bp cut at each of the next 4 MPC meetings.

Personally, I think that is too much. I can see real interest rates being cut to zero but with core inflation still sitting at a tad above 2% and not really moving, I feel a further 100bp cut would be ample.

Talking of Money Markets, the coordinated rate cut that I earlier mused might follow this weekend’s G20 meeting in Washington is still on the cards even more likely should tomorrow’s Eurozone GDP figure come in as dire as is being predicted. Let’s get the cuts out of the way and we can all settle down to enjoy the festive season.

In the US, Paulson is still fiddling with his Banking rescue package, now deciding that the fund will not be used to buy distressed assets but rather, and in line with European examples, to purchase stakes in Financial Institutions.

This marks a complete u-turn from the original announcement and could be the catalyst that starts freeing up the lending within the US.

Oil remains on a slippery slope with Brent crude at one point, a whisker away from $50 per barrel. As has been made clear in the past, cartels don’t really work during a period of rapidly declining prices.

Although OPEC talk a good game, cutting production quotas in order to put a floor under the price, the fact is that the smaller members maintain or even increase production in order to sustain their revenue.

What else? Oh yes, cable plunged through 1.50 on its headlong rush down and the Sterling Trade Weighted Index fell to a 12-year low this morning as traders took on board the BoE comments from yesterday. We saw a low of 1.4807 in USD/Sterling and 1.1919 in Sterling /Euro.

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The euro rose 3% to 81.95 pence, while the pound traded as low as 1.5270 its lowest level against the dollar since 2002. Figures out Friday showed the UK economy contracted by 0.5% in the third quarter compared with the previous three months, much worst than forecast.

Technically not a recession yet as second quarter growth was flat, however, both Prime Minster Brown and Bank of England Governor King have suggested that the UK is already in recession and therefore we should expect further negative growth in the fourth quarter.

The yen extended gains against the dollar and euro on Friday. The dollar fell to a 13-year low of 90.95 yen while the euro fell more than 10% to a low of 113.82 yen.

However, the Japanese currency fell back just before New York markets opened on speculation the Bank of Japan may have intervened to curb the yen’s rise. While intervention would not trigger a change in trend it could contribute to a stablisation of the market and would be consistent with the G7′s position of only intervening in disorderly markets.

Oil prices continued to ease despite a decision taken by OPEC at an emergency meeting on Friday to cut production by 1.5m barrels per day. West Texas crude traded as low as $62.85 on Friday, down 3.7% on the day and a whopping 57% decline compared to its peak of $147.27 back in July.

Gold was also trading lower at $680 losing nearly 6% of its value on Friday and 31% down from its peak of $987 in July.

The focus this week will be on interest rates.

There are strong expectations that US rates will be cut by at least 50 basis points when the Federal Reserve announce their rate decision on Wednesday.

Both the Bank of England and the European Central Bank are also likely to cut rates at their policy meetings scheduled for next week although it would not be a total surprise if they reduced rates early in a coordinated move with the Fed.

Credit pressures on the emerging market economies continue to increase with the IMF agreeing over the weekend to provide Ukraine with USD16bn of loans with talks between the IMF and Hungary in an advanced stage.

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This was not reflected on Wall street where the Dow Jones Industrial average closed up more than 4 percent on the day. This was underpinned by positive earning signals from companies such as IBM, Google and Advanced Micro Devices.

There was also a feeling from some investors that certain stocks are cheap at these prices.

On the currency front, price movements remained volatile with poor liquidity , making it hard to find any near-term direction.

The US Dollar sagged against the euro but held steady against another perceived safe haven currency the Japanese Yen.

Sterling has climbed slightly against the Euro but has no real impact on the Dollar. At the time of writing Sterling/Euro trades at 1.2895.

Overnight oil rose more than $3, rebounding from a 15-month low below $70 on a late rally on Wall Street and growing expectations of an OPEC production cut.

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.

It was reported that Treasury Secretary Henry Paulson spent much of yesterday meeting with, and contacting lawmakers to persuade them on the benefits of the package to mainstream America and not just to Wall Street banks.

The news was taken as a positive sign by markets that the plan will be salvaged and that there could be an approval before the end of the week. This allowed US equities to record their biggest one day gain in six years after the S&P; 500 index increased by 4.7% and the Dow posted gains of 5.2%.

Asian stocks also benefited from the news to pare some of the previous days losses with the Nikkei finishing 1.2% higher.

Admittedly, the release of economic data is having next to no impact on market movements at the moment however yesterdays releases did paint a slightly mixed picture.

In the UK, consumer confidence stayed close to a record low in September with a reading of minus 32 and GDP was confirmed as flat for the second quarter of this year. Euro-Zone inflation eased to 3.6% YoY for September. While in the US consumer confidence unexpected rose in September with the index increasing to 59.8. Other US releases showed that home prices fell and business activity slowed.

The growing expectations that the Bank Rescue Plan will be agreed in the coming days, resulted in the dollar trading near a two week high against the euro.

Oil jumped $4 a barrel yesterday on the back of the strong equity rally, which also supported the US dollar strength.

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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.

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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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Equities slumped while government bonds rallied as risk aversion returned to the markets. Oil also continued to edge towards $100 a barrel and the dollar retreated from earlier highs against the Euro and GBP.

Yesterdays data showed a sharper than expected decline in US pending homes sales for July, declining 3.2% vs. expectations of a 1.4% drop. The data is volatile and tracks sales before the GSE announcement (and consequent decline in mortgage rates) but underline the sensitivity of investor sentiment globally to the state of the housing markets.

In news closer to home, the National Institute for Economic and Social Research stated that the UK was contracting for the fist time in a decade as GDP declined 0.2% between June and August. Falling house prices and the global credit squeeze were familiar woes accredited to the gloomy outlook.

In the UK we saw data releases yesterday, showing the housing market continues to show signs of deterioration. The RICS house price balance came in slightly better than expected at -81% (predicted -84%) but from the data the details warned that sales had fallen to a record low due to the unavailability of mortgages.

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We continued the slide towards this price overnight and start the day at around 108. To be honest I would have thought that both producers and users would be more than happy for oil to stabilise at about $100 and that a reduction in ‘speculative volatility’ would enable the global economy to plan for growth whilst still allowing Manchester City to tear the football transfer market apart.

As before, the Dollar was the main beneficiary of the move lower in commodities with cable and euro/dollar both lower on European opening.

We are now getting into interesting territory in the Money Markets. The OECD, in a report issued yesterday, announced that in their opinion the UK would be the only one of the major global economies that would go into recession.

They predicted that the UK would see negative growth in both the 3rd and 4th quarters, the implications being that, in tandem with Prof Blanchflower’s thinking, interest rates would need to come down and sharpish.

We still think that this month’s MPC meeting will produce another split vote possibly 3 to“ 5 to€“ 1 (with 3 for a cut, 5 on hold and 1 still concerned about inflation) but that we will see a cut in October with more to come next year.

With the yield curve still very much higher than official rates there will be some downshift with the likelihood that the curve itself will become negative as we head towards next year. Time looks ripe to push Sterling deposits out slightly longer before rates come down. In the US there have been calls from certain smaller banks for the Federal Reserve to increase the Discount Rate, putting borrowing costs up.

This has been done before to apply a temporary brake for the economy but would have no tangible effect on Money Market rates unless the Fed Funds target rate was moved in tandem. There still looks more chance that rates will need to be eased however with the current more buoyant mood in the US proving temporary.

On the exchanges, several of the smaller Far Eastern Central Banks intervened in the Forex market to sell Dollars in support of their currencies (Malaysia, Indonesia, India and The Philippines were mentioned, whilst South Korea were verbal interventionists).

The selling was not deemed to be part of any concerted action and as such likely to be just a smoothing operation to control the move. In Europe today, if commodities keep falling then the Dollar will strengthen further. We are now within the congestion area for Cable mentioned yesterday and it is probable that without a further down move in Euro/Dollar, cable’s fall will slow and profit taking could become a reality.

Trouble is, in the current environment, any move back to/above the 1.80 mark will likely prove to be in market terminology ‘ a dead cat bounce’. SterlingEuro is holding on by its fingertips. There is some good data out today, with several PMI indicators from Europe this morning plus the 1st estimate of the Q2 Eurozone GDP. This afternoon we have US factory orders and after we go home, the US Fed Beige Book.

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.