Articles from September 2005



US Dollar struggles as oil fears re-emerge.

The dollar spent the day predominantly in the red yesterday, with the market increasingly concerned about the latest rally in crude oil prices. Analysts also said the U.S. currency had been undermined by the fact that Wednesday’s much stronger-than-expected U.S. durable goods orders had failed to encourage buyers.

This helped to confirm the view that investors are now convinced that the Federal Reserve will continue raising interest rates anyway, and so there is little reason to react to strong data.

Instead, the focus has been on crude prices which rallied after the U.S. authorities suggested that as much as 15% of the U.S. refining capacity would remain out of order for a few more weeks. Sentiment wasn’t helped by signs that the latest inventory figures from the U.S. didn’t take into account the impact of Hurricane Rita.

This suggests that they could still do so at a later date.

The dollar’s slide against the euro was also being driven by optimism in Germany that party leaders Gerhard Schroeder and Angela Merkel may be reaching a compromise after discussions Wednesday that could lead to the creation of a grand coalition for governing the country. Many, however, don’t expect a final decision to emerge until after a delayed vote due to take place in Dresden this Sunday.

This morning however, the dollar has been able to post gains against the pound, as another bad batch of economic data over yesterdays session has taken it’s toll on Sterling.

The Nationwide confirmed what many fear, that house prices are still on the slide, with a report showing that prices were down 0.2% this month after a similar decline in August. The annual increase was 1.8%, the slowest increase since 1996.

Richard Lambert, a member of the Bank of England Monetary Policy Committee, added to the gloom by suggesting that economic risks remain on the downside. This will encourage the view that the bank could be contemplating another rate cut as early as November.

A barrage of data for the day has already begun in France, with the triple release of September Consumer Confidence, August unemployment, and 2Q Final GDP. Consumer confidence came in at -29 off a -28 forecast – a slight improvement after the July/August dip. Unemployment rate dipped once again to 9.9% in August, following on the theme from June/ July. This has been attributed to strong retail spending, and government measures to reduce youth unemployment. GDP came in as expected at +0.1%.

Next up from the Eurozone we have the simultaneous release of September flash CPI inflation, and the September European Commission Survey. Expect inflation to tick up to 2.3% as the energy spike makes it’s mark, whilst along the same theme, look for business confidence and consumer confidence to also weaken marginally (-9 and -16 respectively) as oil prices impact.

10:30 sees the release of UK Consumer Confidence for September, and after a sharp deterioration in August, look for a continuation of the trend (thanks again to oil) in Sep. A -5 forecast, and although negative this remains oddly high on a historical basis/ given the current climate…

1:30pm sees the first of the US data, in the form of Personal income and spending for August. Income should stay relatively subdued at 0.3% given the small increase in wages and hours worked, whilst spending should drop 0.2% as auto sales dip dramatically.

At 2:45 we have the Michigan sentiment (Sep-final), and after the preliminary reading plunged 12.2 points to 76.9, expect little change in this figure.

Finally for the day, at 3pm we have the September Chicago PMI release. Last months PMI had the biggest drop on record, down 14 points to 49.2, and expect little respite this month as the Empire and Philly Fed have both posted in the red – 50.0 forecast.

Dollar lower despite strong durable goods/ weak UK fundamentals

After dropping heavily in recent days, cable (GBPUSD) managed to hold its own overnight, despite a barrage of further weak U.K. data, and stronger than expected durable goods from the States.

Sales volumes at U.K. retailers slumped in September as both sales and expectations for sales fell to the lowest level recorded in the Confederation of British Industry’s Distributive Trades Survey’s 22-year history.

Retail sales volumes declined to a balance of -24 in September, compared with -18 in the August survey. Adding salt to the wound, second quarter GDP was also revised down to 1.5% on the year from 1.8%, as the Q2 figure declined to a disappointing 0.3% (the slowest growth rate in 12 years!!).

The data may encourage the Bank of England to cut base interest rates again, though policy-makers may be reluctant to do so in face of rising inflation. The bank cut rates to 4.5% in August but kept them steady in September.

Also adding to the party was the whopping +3.3% Durable Goods figure (+0.7% forecast) from the US. This was largely/ entirely shrugged off by investors however, as the data pre-dated hurricane Katrina and Rita, thus dumbing down the significance of all current economic data – be it good or bad – over the next few months.

Data for the day starts with the German unemployment figures for September at 8:55am. Look for a slight improvement to -1 in the seasonally adjusted figure, but full time employment still looks to be weak at -100.

Next up from the UK we have the 9:30am release of Consumer credit and mortgages for August. Look for an improvement back to 99k in New mortgages (levels not seen since 2000), whilst consumer credit should materialise at £1.4bn off 1.2 in July.

Finally for the day, from the US we have the simultaneous 1:30pm release of Q2 GDP (final) and Weekly jobless claims. Look for GDP to remain at the preliminary reading of 3.3%, with the Price deflator at 2.4%, whilst the claims rate is forecast to dip to 410k off 432 at the last reading – still very high as the ‘Hurricane effect’ continues.

Dollar lifts to 2 month high on Fed comments

The US dollar was around two month highs versus the euro, sterling, and the yen on Tuesday, continuing to be boosted by the comments from Federal Reserve officials suggesting the rate tightening cycle has some way to run.

Federal Reserve Bank of Kansas City President Thomas Hoenig stated that the economy will likely face temporary headwinds from Hurricanes Katrina and Rita but was in “reasonably good shape” overall, despite the hurricanes somewhat clouding the outlook.

“It’s important for the Federal Reserve to stay focused on its primary mission for attaining a neutral monetary policy that is both able to contain any inflation pressure and still allow us to grow in a stable way for the long term. That is our primary mission.”

Hoenig’s comments came after Fed Chairman Alan Greenspan sounded an upbeat note on the economy earlier Monday, noting that homeowners could weather a possible drop in housing prices.

Analysts said the remarks underline the sense that the Fed is still some way from completing its rate hike cycle, which has seen interest rates rise by increments of 25 basis points in each of the last 11 meetings.

The Fed raised rates to 3.75% last week. The yield on the 10-year U.S. Treasury note lifted to its highest level in a month and a half overnight following the comments. The Fed continues to point the way toward risks that the funds rate might have to be raised significantly more in order to preserve a well-fought battle for price stability.

Data for the day has already begun in France, and comes in the form of French Business Confidence for September – in at 100 off 96 last time out, as stronger consumer spending over the summer offsets the hit from higher oil prices.

Next up from the UK we have the 9:30 release of Q2 National accounts. This is the third release related to Q2 GDP, and should materialise at a 0.5% on the quarter (1.8% yr). Accompanying the National account at 9:30 is the Current account for Q2.

After the previously released narrowing in trades in goods and services, look for the smallest deficit in 2 years, as oil profits help narrow the figure. Forecast is for -£4.1bil (or 1.3% GDP) off -£5.8bil last quarter.

At 11am we have the UK CBI Trades Report for September, and after the weak figures from the previous 2 months, expect an improvement in this months data to -12 (-18 last time out). This is partly due to the cut in interest rates, but bear in mind this is still a negative balance…

Finally for the day, from the US we have the 1:30pm release of the weeks choice data – August Durable Goods Orders. This is forecast for a 1.3% rise with ex-transportation up 1.0% as Boeing aircraft orders help boost the figure.

Dollar relieved on Rita, but pressured by profit taking

The dollar was little changed to slightly positive through Monday, helped by relief that Hurricane Rita wasn’t as damaging as originally expected, but pressured as some investors are tempted to take profits after the dollar’s rise to multi-week highs. Given the weaknesses in Europe it’s a case of which currency is the weaker.

Rita hit the Gulf Coast on Saturday, but quickly weakened into a tropical depression, causing less damage than many had feared, and missing the concentration of refineries in the Houston area.

Relief over the situation is helping push down crude oil prices, and is likely to lessen concerns that storm-related damage from both Hurricane Katrina and Rita could cause the Federal Reserve to refrain from raising rates at upcoming policy meetings. This has been further ratified overnight, as Fed official Hoenig commented ‘inflation is now high enough to get your attention’, – a statement the market has taken as heavily hawkish.

Equity markets also joined in the jubilant mood, with every Global bourse posting in the black on the day. The FTSE rose to a four year high at 5453, whilst the German DAX index posted a 2.4% gain. US markets were slightly more reserved, as continuing scepticism over the twin deficits (and the impact cost of Katrina on these) played on investor minds.

Data for the day begins in the eurozone, with the 9am M3 (Aug) release. After 3 months of successive gains, look for a +0.7% continuation of the trend in August, pushing the annual growth rate up to 8.1%. 9am also sees the release of the German IFO business climate for September.

The recurrent energy theme (nay crisis) should overshadow the predominantly positive data from Germany of late, with a forecast of 94.4 off 94.6 last time out (the election was too late to impact the number further).

At 3pm we have the US Consumer Confidence figure for September, and after Katrina and the Oil shock (once again) look for a rather paultry 89 off 105.6 last time out. 3pm also sees the August New Home Sales release from the states, and after a record high last month (1410mil), look for a slight cooling to 1.3mil this time around.

Dollar recovers after China changes and Rita receeds….

The Greenback gained solidly on Friday and over the weekend, as many investors focussed on recent dollar-positive events over the negative – namely the political woes in Germany following an indecisive election last weekend, and the Federal Reserve’s indication on Tuesday that it remains on track to continue tightening interest rates (despite the widespread destruction and spike in energy prices that followed Hurricane Katrina and Rita).

Part of the dollar’s strength was also attributed to the fact that Hurricane Rita has dissipated from the worst-case scenarios that had originally been predicted – and as such the possible impact to the petro-chemical industry have diminished considerably.

Over the weekend the meeting of the Group of Seven finance officials gave currency markets little fresh material to trade on, but did warn that economic disruption from high oil prices would lead to a period of prolonged risk to Global economic growth.

In a joint statement released after the meeting, the group also welcomed China’s July decision to scrap its 11-year-old policy of effectively pegging the yuan to the dollar. It added: “We expect the development of this more market-oriented system to improve the functioning and stability of the global economy and the international monetary system” – a departure from their previous statements that effectively called on China to scrap the defacto pegged currency system at the time in favour of a more flexible system.

Most players had expected the G7 would welcome China’s moves toward flexibility, whilst maintaining in the statement that further flexibility is desirable. That the statement omits the latter means that upward pressure on the renminbi is perceived to be receding.

Data for the week a little thin on the ground, and revolves around the US Durable Goods Orders on Wednesday. Also of note however is US Consumer Confidence on Tuesday, Final US GDP Thursday, and EMU CPI on Friday.

Only data of note today consists the US Existing Home sales (Aug) – forecast at 7.05mil off 7.16mil – a small dip but still running at record highs.

Sterling fell one percent yesterday to 3 week lows against the dollar

A gauge of British factory order books improved only modestly and less than expected in September, while export order books saw their worse outturn in eight months.

The Confederation of British Industry indicated that the total manufacturing order book edged up to -27 in September, from a near 2 year low of -29 in August, but still showed sharply falling orders. The CBI said the survey found a sharp drop in demand from abroad for capital goods such as machinery and equipment.

Export orders were depressed by a weak European market pushing down the order balance to the lowest level since January. The report offered further evidence that the manufacturing sector in the UK remains weak. Soaring input costs stemming from oil prices, weak consumer spending and challenging world markets continue to restrain manufacturers.

In the US, hurricane Katrina fuelled a surge in initial jobless claims to 432k last weak, the highest level in more than 2 years. Claims linked to the storm totalled 103k last week and 91k the week before. The release had little impact on the markets as a boosted number was widely expected; moreover the underlying figure (outstripping the effects of Katrina) remained fairly robust.

Also in the US, the Index of Leading Indicators, a gauge of economic conditions 6-9 months ahead, fell 0.2% in August. Five of the ten indicators actually rose in August but had begun to lose a little momentum before the hurricanes and flooding. Ken Goldstein, the Conference Board’s labour economist said ‘the storms and floods will briefly lower investment spending and hiring. The net result is likely to be a slower economy for a few months, until the rebuilding efforts go into full swing.’

Concerns over hurricane Rita continue to dominate news headlines, and will be the focus for the markets in a very quiet day on the data front. Looking ahead to next week, eyes will be on the release of UK and US GDP data.

Bank of England minutes and hurricane Rita dominated yesterday’s news

All nine members of the Bank of England’s Monetary Policy Committee voted to keep rates at 4.5% this month, according to the minutes released yesterday that suggested policy makers are not poised for any imminent move. The section covering the interest rate debate was very short indicating the MPC, which was split 5-4 last month, had not even considered a move.

Sterling appreciated after the release pushing cable through the 1.8100 level. The minutes were relatively neutral and perhaps not as dovish as the market had anticipated. Concerns were raised over rising oil prices and the likely effect on inflation.

The committee did state though that consumer prices had been higher than expected for reasons other than increasing oil prices alone. ‘There remains a risk that oil prices could rise further. This poses an upside risk to the inflation projection,’ the minutes said adding that price expectations remain ‘well-anchored, though there is no room for complacency.’

Close attention will be paid to consumer spending data and UK growth over the coming weeks for further clues as to the next move by the committee.

Hurricane Rita has been upgraded to a category 5 storm. Fears of another devastating hurricane striking the US Gulf Coast pushed oil prices up to $68 a barrel and gold to new 18 year highs. The dollar suffered as a result, overshadowing signs from the Fed that further rate rises are coming.

Despite the Fed stating that the effects of Katrina would be ‘near-term,’ the likely effects of another hurricane are clear to see.

Today we see from the UK the release of the CBI industrial trends survey for September. Confidence in the industrial sector may well have deteriorated as a result of surging energy prices. In the US, weekly jobless claims and leading indicators are the focus for this afternoon.

Interest rates in the US increase for the eleventh straight month

The US dollar edged higher last night following the FOMC decision to raise interest rates by 25 basis points to 3.75%. The dollar strengthened on the back of the release, cable was seen below the 1.8000 level again, and $1.2130 against the euro.

Although a minority of economists had expected the Fed to pause its rate hike cycle in the wake of Katrina, the decision to push rates higher had largely been priced into the markets.

The accompanying statement was on the hawkish side. The committee said that monetary policy was still ‘accommodative’ and rates could be raised at a ‘measured pace’. This would indicate that further tightening is likely in the coming months. They also stated that the effects of Katrina would be felt by the US economy in the ‘near term’.

The FOMC warned that rising energy prices could push inflation higher rather than having any major impact on economic growth. The decision to raise rates was not unanimous with one member voting to keep rates stable.

As the aftermath of Katrina continues to be well documented, Hurricane Rita is adding to energy price volatility as it sweeps across the Florida region. US crude rose by more than $1 a barrel amid worries that Rita would hit oil and gas operations in the Gulf of Mexico and refineries along the Texas coast.

Yesterday also saw the release of the German ZEW investor confidence survey. The survey dropped for the first time in four months as concerns about the nation’s election standoff and oil prices dimmed the economic outlook. The gauge of expectations fell to 38.6 from a reading of 50 in August, and came in well below expectations.

In the UK yesterday more light was shed on the current state of the housing market by the Royal Institution of Chartered Surveyors. Indications are that the market is showing signs of stabilising.

All eyes today will be on the release of the Bank of England minutes at 9.30am. August showed a clear 5-4 split in the decision to cut rates in the UK. A more unanimous decision is expected this month given concerns over oil prices and the likely negative impact on future growth and inflation.

Interest rates in the US increase for the eleventh straight month

The US dollar edged higher last night following the FOMC decision to raise interest rates by 25 basis points to 3.75%. The dollar strengthened on the back of the release, cable was seen below the 1.8000 level again, and $1.2130 against the euro.

Although a minority of economists had expected the Fed to pause its rate hike cycle in the wake of Katrina, the decision to push rates higher had largely been priced into the markets.

The accompanying statement was on the hawkish side. The committee said that monetary policy was still ‘accommodative’ and rates could be raised at a ‘measured pace’. This would indicate that further tightening is likely in the coming months.

They also stated that the effects of Katrina would be felt by the US economy in the ‘near term’. The FOMC warned that rising energy prices could push inflation higher rather than having any major impact on economic growth. The decision to raise rates was not unanimous with one member voting to keep rates stable.

As the aftermath of Katrina continues to be well documented, Hurricane Rita is adding to energy price volatility as it sweeps across the Florida region. US crude rose by more than $1 a barrel amid worries that Rita would hit oil and gas operations in the Gulf of Mexico and refineries along the Texas coast.

Yesterday also saw the release of the German ZEW investor confidence survey. The survey dropped for the first time in four months as concerns about the nation’s election standoff and oil prices dimmed the economic outlook. The gauge of expectations fell to 38.6 from a reading of 50 in August, and came in well below expectations.

In the UK yesterday more light was shed on the current state of the housing market by the Royal Institution of Chartered Surveyors. Indications are that the market is showing signs of stabilising.

All eyes today will be on the release of the Bank of England minutes at 9.30am. August showed a clear 5-4 split in the decision to cut rates in the UK. A more unanimous decision is expected this month given concerns over oil prices and the likely negative impact on future growth and inflation.

Emphasis on the Fed decision today along with German uncertainty and surging oil prices.

All eyes will be on the FOMC decision later on today, the big question being whether we will see an eleventh straight rate hike to 3.75% or a pause in tightening in the aftermath of hurricane Katrina.

The accompanying statement will offer the market guidance as to future moves by the Fed. The market will be looking to see if the central bank alters its pledge to raise rates at a ‘measured’ pace. The Fed’s comments will be important for the near term outlook for the dollar, a hike in rates could see the dollar strengthen given the uncertainty of what the decision will be.

Surging commodity prices yesterday were a key development. US crude oil rose to test $68 a barrel as the damage from Katrina further spilled onto US oil and gas production facilities, as well as transportation infrastructure in the region.

Fears that tropical storm Rita could wreak havoc in the oil-rich Gulf of Mexico, already battered by Katrina added to the woe. Gold prices hit 18 year highs, as worries of soaring US debt and subsequent dampening of the dollar filtered into the market.

The Euro was pummelled by investors as political chaos loomed in Germany following the election. The single currency sank to a low of $1.2101 before staging a modest rally to trade at $1.2155. It fell broadly against the yen, Swiss franc and marginally against Sterling.

The market looks ahead today, to the release of the German ZEW survey. A fall in expectations may well be witnessed as a result of the election and doubts about US growth.

In the UK yesterday, Stephen Nickell who sits on the Bank of England’s Monetary Policy Committee, said there is a ‘serious risk’ the British economy will not recover as strongly as forecast in August.

Focus will be on the minutes from the bank’s previous meeting on Wednesday to shed further light on these comments.