Articles from July 2005



Berlusconi can’t dent the Euro!!!

The dollar remains softer as we end the week and the month despite some controversial comments (to say the least!) by Italian Prime Minister Silvio Berlusconi yesterday. He blamed the nation’s economic difficulties on the Euro and the way that Romano Prodi, his political arch-rival, steered Italy into Europe’s monetary union. In contrast in June after the French referendum, such comments would have caused the Euro to fall sharply.

Whilst the dollar has been consistently strong in recent months and weeks speculation is now growing that all the good economic news is now “priced in” and the USD is indeed now more vulnerable to downside surprises rather than surprises on the upside. In particular against the Euro the dollars four failed attempts to breach the $1.2000 level in the past two weeks suggests momentum is waning.

Two key data releases today will be the Eurozone CPI inflation for July and U.S 2ndquarter GDP.

In Europe higher oil prices pushed inflation up from 2.0% to 2.1% in June and are expected to push it up to 2.2% in July. Much focus will be on the US GDP number where expectations are for a rise in the region of 3.3%.

Next week the Bank of England MPC meet and Investors are increasingly gunning for a quarter point interest rate cut to 4.50%. In the latest Bloomberg survey of 36 banks, some 31 forecast a 25bp reduction. However, perhaps the bigger story is the way investors are viewing the MPC after that. History would suggest the policy committee dropping into a fairly aggressive rate cutting cycle. In the past it has tended to maintain rates for lengthy periods, and then move (one way or the other) in very quick succession.

This time round, many feel the MPC will operate quite differently indeed, with next week’s expected cut an isolated ‘insurance’ measure. The economy isn’t especially weak, but with consumer spending waning a little, there is a feeling that CPI could just undershoot the 2.0% target, hence just a small measured move.

If the BOE emphasises this uncharacteristic fine tuning in the August inflation report (published just 6 days after the MPC conclusion), then the market may need to quickly adjust from its current positioning for a further rate cut around the turn of the year.

US Dollar drops despite strong durables

Following some very robust industrial data out of the US yesterday, the Greenback had an initial flutter towards highs against the Euro and Sterling. However, as the big Dollar failed to push through new levels following the Durable goods figures, investors sold off USD against the Euro.

US durable goods orders rose 1.4% in June, and the rise in May was revised up to 6.4% from 5.5% – not bad at all.

With very little in the way of economic data to get excited about today, attention moves to tomorrow’s US second quarter GDP figure. Strong data out of the US recently suggests a solid outcome for Q2 GDP, with markets expecting a figure of 3.5% (annualised). As the raft of robust economic data continues to flow from across the Atlantic, global investors continue to eye US interest rates with enthusiasm. The Fed Reserve has raised interest rates at nine straight meetings taking the fed funds to 3.25%. However, to put a spanner in the works, the Fed’s Beige Book released last night was considerably more subdued than recent months. Markets had expected an upbeat trend to continue – watch this space…

Locally, from the Nationwide housing survey this morning, house price inflation in the UK has dipped to its lowest level for over nine years. The survey said house prices in July rose 0.2% from the previous month, reversing June’s fall, the annual rate of increase dipped from 4.1% in June to 2.6%, the lowest rate since May 1996. Only a year ago, annual house price inflation was standing at 20%!

And for those who are interested the Reserve Bank of New Zealand kept interest rates on hold overnight at 6.75%.

Focus shifts to the US and Europe as little impact of Chinese revaluation realised

The improvement in yesterday’s Ifo business climate survey contained mixed sentiment from retailers and executives. The survey stated that optimism among retailers declined in July, partly on concern about the Christian Democratic Union’s proposals.

The CDU, which leads Chancellor Gerhard Schroeder’s Social Democratic Party in national polls ahead of September’s election, says it will use revenue from VAT to cut employers ‘ wage burdens and boost employment prospects.

This was also reflected in a decline in consumer confidence in Germany’s Gfk index for a 4th month as unemployment stayed close to a record high.

German consumers’ pessimism however, is at odds with more positive economic data in recent weeks. Optimism among German execs unexpectedly rose to a 5-month high in July, Ifo said yesterday, as the euro’s 11% decline against the dollar in 2005 boosts prospects for exporters.

The yield on Germany’s 10-year bonds yesterday rose the most since July 14 from the German figures and improved business sentiment in Italy. European bonds may fall after a survey showed business confidence in France rose more than forecast to a 4-month high (from 99 to 101, forecast was for 100).

Over is Asia, speculative interpretation ceased as the realisation ensued that the revaluation has had a little impact economically…at least not until the next move.

In Japan, bonds fell, pushing 10-year yields to their highest in a month after Reuters reported that some central bank members expected deflation to end this year. The BOJ kept interest rates almost at zero and maintained the pace at which it pumps cash into the world’s 2nd largest economy as it struggles to overcome deflation of more than 7 years.

Yesterday’s CBI figure from the UK came in at +6, the first positive output balance since April (from -5). However, in quarterly terms, output balance remained negative at -1 in the three months compared with -10 in April. CBI’s Ian Mc Cafferty said that the weak quarterly results would“reinforce the case for a cut in interest rates on August 4”.

Stateside, consumer confidence slipped to 103.2 in July from 106.2 in the prior month. During the first 6 months of 2005, consumer confidence averaged 103.2 so there’s very little change. US 10-year treasuries may rise in Europe on expectations that durable goods orders fell in June for the first time in three months.

Orders probably fell because of fewer bookings for Boeing Co. aircraft. Excluding transportation equipment, a volatile category swayed by aircraft, orders probably rose by the most this year. The Commerce Department is due to release figures at 08.30am in Washington (1.30 BST).

Demand may also increase for 10-year treasuries pending a release on Friday at 1.30pm BST of Q2 GDP for the US, that is forecast to show economic growth was slower in Q2 compared to Q1.

Look out for New Homes sales from the US out at 3.00pm BST and the Beige Book at 7.00pm BST.

A a quick glance at commodities, gold headed for a 1-week low as a stronger dollar made the precious metal more expensive for buyers using other currencies. Crude oil fell in New York for the first day in four on speculation that an Energy Department report today will show US inventories of distillates, including heating oil and diesel, rose for a tenth straight week. Futures touched $62.10 a barrel on July 7, the highest for the contract nearest expiration since trading began in 1983.

Focus remains on China and UK outlook appears weaker

Talk is still on China this morning as the yen fell against the dollar and euro for a third day on speculation that China will delay any further strength in the yuan, limiting the benefit to the competitiveness of Japanese exports. However, statements from Asia yesterday attempted to clarify speculation of China’s prospective future moves.

Japanese Finance minister Sadakazu Tanigaki said yesterday at a regular press conference in Tokyo after the Cabinet met stated that “It’s too early to evaluate China’s action…we must closely watch how China manages the currency”.

Li Jen believes currency flexibility is Beijing’s ultimate objective, so as to enhance the ability of the PBOC to be more independent from the Fed’s policy. He thinks the market’s interpretation that China is doing this to help reduce the record US deficit is a gross misunderstanding.

Elsewhere in Asia, Bank of Japan policy makers will probably keep interest rates at almost zero and pump cash into the world’s second biggest economy at the same pace this week as they seek to send seven years of deflation, economists said.

South Korea’s economy grew in Q2 at the fastest pace in more than a year as consumer spending, investment and construction picked up.

Strong housing numbers from the States yesterday highlight the robust economy there, again predicating higher interest rates and more support for the dollar (especially against low yielding currencies such as the JPY).

The dollar also strengthened as the US Conference Board’s index of consumer confidence probably rose this month to 106.2, the highest in 3 years. Figures are released at 3.00pm BST).

On commodities, gold declined from a two-week high before US figure releases this week, eroding the appeal of the metal as an alternative investment.

As predicted, BP Plc, Europe’s biggest oil company, said that Q2 profit surged 29% as prices jumped for crude oil, gasoline and other fuels.

The world’s 70 biggest oil companies are expected to report a net income this year of $230bn, 26% more than last year. The total is almost as big as Poland’s economy!!

In the UK, gilts may advance for a 2nd day as slowing growth in Europe’s second biggest economy increases the appeal of UK government debt. The Confederation of British Industry’s index of factory orders probably rose modestly (out at 11.00 BST) and gilts may offer better value from a risk perspective on the back of this. The pound may fall if speculation is correct that UK factory orders stay near its lowest in more than 18 months however.

Higher Oil and Gold prices after Chinese revaluation and terrorist scares…

After the flurry of activity last week and the unfortunate events of last Thursday in which no one was hurt thankfully, today begins quieter with the only prominent out for release is US existing home sales for June (3.00pm BST).

Last week’s Q1 GDP growth came out as low as expected growing q-o-q 0.4% and 1.7% y-o-y, the slowest quarterly growth in the UK economy since December 1993.

Property website Hometrack showed that UK house prices fell for a 13th month in July, reinforcing speculation that the Bank of England will cut the base rate as soon as next week.

Stateside, there are a number of figure releases this week including Consumer Confidence for July which probably rose 106.2 it is forecast, the highest in three years (due at 3.00 BST tomorrow). This will reinforce the antithetical effect on US interest rates, signalling their probable continued hike.

The US government will announce today the amount of two-year notes it will sell in two days. The treasury will probably sell $20bn of the securities. Yields on two-year notes are close to its highest in almost four years on expectations that the Federal Reserve will continue to raise rates to keep inflation from accelerating. Two-year securities are among the most sensitive to changes in interest rates.

Lastly, declines in treasuries may be tempered by expectations that durable good orders declined last month (released at 1.30 BST Wednesday).

On the commodities front, crude oil was little changed after rising on speculation that a stronger Chinese currency will encourage refiners to buy more crude oil as imports gets cheaper. Exxon Mobil Corp., B.P. Plc and Royal Dutch Shell Plc, the world’s three biggest publicly traded oil companies, this week will probably report record Q2 profits because of surging oil and gas prices. World oil consumption is forecast to rise 2% this year, led by rising demand in the US and China, the world’s largest consumers, OPEC said in a forecast last week. They added that demand in China will rise a whopping 6.1% from a year ago.

Gold may rise for a second straight week as well on speculation that a revaluation of the Chinese Yuan will increase jewellery sales in Asia and demand for the precious metal as a hedge against a falling dollar. Gold for August delivery rose $3.70 ounce last week, surprising the majority of analysts who expected a decline.

The yuan looks to be the biggest story driving commodities such as gold coupled with the speculation of more terrorist attacks which may disrupt global financial markets.

Watch out also for the German IFO-business climate survey out at 9.00am BST tomorrow. Business confidence in Germany, France and Italy, the biggest EU economies probably rose in July as the euro’s decline helped exports.

China floats Renminbi’s peg to US dollar

China has bowed to intense foreign pressure and growing domestic economic imbalances by revaluating the renminbi and replacing its decade-old currency peg with a more flexible exchange rate regime.

The People’s Bank of China, the central bank, on Thursday announced a 2.1 per cent revaluation and a system that set the currency’s value with reference to a basket of unspecified currencies.

Since 2000, the renminbi had been trading against the dollar within the range of 8.276 to 8.28. Starting Friday, it can fluctuate by 0.3 per cent against the dollar in daily trading while moving in a wider band of 1.5 per cent, up or down, on currencies other than the dollar.

The decision is a victory for the administration of President George W. Bush, which had urged Beijing to revalue but also fended off congressional demands for trade sanctions if China refused to move.

John Snow, US Treasury secretary, said the mechanism provided “significant amplitude for the currency to move”. The Treasury would track how well it reflected underlying market conditions over time, officials said.

A senior Treasury official added: “They have not indicated that it is capped. We take them at their word at this point that this mechanism will be orientated toward market supply and demand.”

The International Monetary Fund called for maximum currency flexibility under the new system, saying it would allow Beijing to run a more independent economic policy.

The Group of Seven leading industrial nations lauded China’s decision to revalue its currency, saying it would help global economic growth.

“This more flexible exchange rate regime will contribute towards global economic growth and stability,” ministers said.

Beijing’s policy change was consistent with its aim of modifying the currency system only gradually, to maintain the economy’s high growth rate. The intention, the bank said, was to “promote basic equilibrium of the balance of payments and safeguard macroeconomic and financial stability”.

With China’s trade surplus rising sharply and its foreign exchange reserves reaching a record $711bn last month, the bank’s ambition of equilibrium in the balance of payments also suggested Thursday’s small revaluation would not be the last. The bank said market developments would influence its decisions to make more adjustments to the renminbi’s value.

China hopes the announcement will ease rising tensions with the US and clear the way for a successful visit to Washington in September by Hu Jintao, China’s president.

Analysts said the revaluation, although small, and the introduction of more currency flexibility, would help boost consumption in China and take the steam out of rapidly growing exports, now rising by 30 per cent a year. “Both domestic fiscal and monetary policies are likely to gear towards stimulating domestic demand,” said Hong Liang, of Goldman Sachs, in Hong Kong.

The renminbi was steady at 8.11 to the dollar by midday Friday while US 10-year Treasuries recovered in Asia after yields hit a two-month high overnight. Investors were concerned that China, as it dropped the dollar peg, would begin reducing the amount of foreign exchange reserves held in US assets and debt instruments. Trading in Singapore on Friday showed, however, that the market had calmed and was seeing a fair amount of bargain-hunting.

In an immediate response to the renminbi move, Malaysia also dropped its currency peg against the US dollar and switched to a managed float against a basket of currencies. On Friday, the ringgit rose 0.46 per cent to 3.783 against the dollar by midday.

The currency, which remains untradeable offshore, was fixed at 3.8 to the dollar in 1998

Sterling still weak

The pound weakened yesterday following the release of the Bank of England minutes from the last MPC meeting that took place earlier this month.

The minutes showed that four of the nine members voted for a rate cut. The pro-change camp argued that revisions to the national accounts at the end of June had made the outlook for the economy become softer. They also noted that output growth had been below trend for three quarters, the recovery for business investment seemed likely to disappoint, and the labour market appeared to be softening.

“Overall, the risks that inflation would be below target in the medium term appeared to have risen”, they said. Make a note in your diaries for August 4th as the day when rates might be cut by 0.25% to 4.50%. As is always the case, the FX markets are already pricing this in with sterling falling to a 4-month low versus the euro and a 19 month trough versus the dollar. The yield curve now indicates that in one year’s time rates will be further below 4.50%.

At 9.30am this morning UK Retail sales for June are due for release. The BRC and CBI surveys gave conflicting messages for June, but the trend is clear, retail sales growth is fast approaching zero. Expectations are for a small rise of sales in June of 0.3% m/m which is not enough to prevent the y/y growth slowing from 1.3% to around 0.8%.

Over in the U.S. a slightly different view on interest rates is being speculated on. Yesterday the Fed Chairman Mr Greenspan made some rather hawkish comments by painting a robust picture of the economy in his semi-annual monetary policy report to Congress. Mr Greenspan foresaw sustained economic growth, suggesting no imminent pause in the Fed’s ongoing removal of monetary accommodation. While inflation is still seen as contained, he spoke of the risks to his central scenario from rising labour costs and energy prices. Worth noting that the Fed also revised up its inflation forecasts from 1.5 to 1.75% in this year and next to 1.75 to 2.0%. Interest rates look set to rise for the foreseeable future.

At 1.30 and 3.00pm our time the US release weekly Jobless Claims and Leading Indicators for June. With the latter expectations are for this to rise by 0.4% – the first increase in 6 months. Much later after European markets have closed the Philadelphia Fed index reading and FOMC minutes from the June 30th meeting are due. With the former expect a rise to a reading of 5.0 from –2.2 the previous month.

US Dollar strength continues

The prospects for US interest rates (rises) remained at the top of the agenda for financial markets yesterday as many awaited the Fed Chairman Alan Greenspan’s testimony on economic conditions to congress today and tomorrow.

Comments made by Mr Greenspan on Monday showed he felt the US economy was coping well with recent oil fluctuations. Interesting to note that global fund managers expect U.S. rates to rise to 4% before the Federal Reserve will stop tightening monetary policy – a Merrill Lynch poll showed yesterday. In its latest monthly survey of 300 portfolio global managers, Merrill found greater confidence about the outlook for the US economy in the wake of better than expected economic data.

The interest rate expectations helped push the dollar up against a host of currencies – in particular the Yen and Swiss reaching 14 and 15 month highs respectively. The euro also weakened against the greenback in spite of a strong business confidence survey from Germany’s ZEW Institute.

Just for good measure, the ZEW surged to a reading of 37 in July, well ahead of consensus expectations of 22 and the June reading of 19.5 – aided by the weaker euro, low Bund yields and stock market strength.

The pound was broadly weaker falling further against the euro and the resurgent dollar. Much of yesterday’s moves against the euro (and overnight in Asian markets by the look of it) were said to be caused by UK fund managers buying Amsterdam listed shares in Royal Dutch Petroleum ahead of the completion of the company’s merger with London listed Shell.

At 9.30am this morning attention will switch back towards UK interest rates and whether or not a rate cut could be forthcoming in early August. The Bank of England release the minutes from the last MPC meeting earlier this month. If you recall last time round the minutes showed 2 voting for a cut. All will be revealed as they say….

The US Dollar continues to grind higher.

The United States ability to fund its trade deficit received a boost yesterday in the form of the US TIC portfolio flow data for May. This release showed net demand for US portfolio securities picked up after two soft months, with overall adjusted net inflows (net of US buying overseas) rising to $56 bln from $44 bln the prior month, but with net inflows remaining sharply below levels above $80 bln observed in the first two months of the year.

On a positive note for the US dollar, inflows in May remained dominated by private sector demand, with official institutions absorbing just $13 bln or about 20% of total net inflows ($12 bln including T-bill flows).

Euro zone CPI for June was reported at a 2.1% y/y rate yesterday, in line with consensus, although the core reading retreated more than expected, falling to 1.4% y/y from 1.6% y/y.

Whilst this number on its own is unlikely to change the ECB’s current view on interest rates it does probably help to reduce the immediate pressure in terms of calls for a rate cut. Today we will get the ZEW survey of economic sentiment for Germany, another closely watched economic release

In the UK the Rightmove house price index was reported down 1% m/m yesterday, the first decline in six months. However, the RICS house price index for June was released this morning, coming out at -42 which was better than expectations of -45.

Meanwhile, the Bank of England’s July meeting minutes are due tomorrow, and will be a crucial element in giving direction to the interest rate debate. Some economists believe the MPC minutes could provide some perspective of whether the question of lower rates is one of ‘when’ rather than ‘if’. Also due this week in the UK are June retail sales and the preliminary release of Q2 GDP.

The week ahead will also see markets focus again on the outlook for Fed policy, with Chairman Greenspan delivering his semi-annual monetary policy testimony and the Fed releasing the minutes to its June 30 meeting.

While the Fed is likely to signal that tightening remains on course to continue, markets are now already pricing more rate hikes and the dollar may get further benefit if the Fed stays on message.

Dollar ends five day losing streak

The US dollar gained this week, finishing a five day losing streak after positive news on the US twin deficits and then accelerating after news of growth in the industrial sector.

The US Department of Commerce said on Wednesday that the trade gap contracted to $55.4bn in May. Meanwhile, improved tax revenues were cited by the White House as it lowered its estimates for the fiscal deficit of the US federal government to a mere $333bn from $427bn.

With little or no reaction to the weak UK house prices data overnight in Asian markets it will be interesting to see whether the European markets position early today for sterling to remain under pressure as the week unfolds.

There were two reports that came out over the weekend, both highlighting the weakness of residential property prices. Internet based agents “Rightmove” reported price growth slowed to the lowest rate of growth in 10 years. According to them prices have dropped 1.0% m/m in the month through mid-July, which cut the y/y rate to just 0.2%. This is well down from last month’s 2.4% gain and the lowest since the summer of 1995. Meanwhile the Sunday Observer reported that the July RICS survey (published after the close today) would reveal the industry body expecting no growth in property prices at all this year.

This week the outlook for the consumer (and the housing market) is a key theme of the economic data releases. June’s Retail Sales figures are due on Thursday and any further signs of weakness in consumer spending will no doubt reinforce hopes that the Bank of England will start to cut interest rates. Some clues on this might be gathered from the minutes of the MPC’s meeting earlier this month, which are due for release on Wednesday. With downward revisions to GDP – the Q2 1st estimate is due on Friday – and a fall in employment are all likely to have convinced some members (more than 2 last time) to have voted for an immediate cut. Needless to say a 5-4 vote should go a long way to confirm that on the 4th August interest rates will move down to 4.50.

Meanwhile in the U.S. Mr Alan Greenspan the Federal Reserve Chairman will take centre stage when he delivers his monetary policy report to the House Financial Services Committee on Wednesday at 3.00pm our time. As usual, his testimony will be scrutinised particularly the mantra of a measured pace in interest rate rises is repeated. Other data that could cause a stir for the stronger dollar will be today’s TICS capital inflow numbers for May and later in the week the Leading Indicators for June, Philadelphia Fed survey and the FOMC minutes (June 30th).

In the Eurozone, analysts will hope to see a further improvement in the German ZEW business survey of economic conditions due tomorrow. E-Z Industrial Production figures for June are also due. This rose by 1.7% last month, which was better than expected. Can this be sustained? If both releases show further gains then the euro could receive a small boost.