Articles from January 2006

All eyes are on the FOMC meeting

US Personal Spending rose by 0.9% in December exceeding expectations of a 0.7% rise and incomes rose by an expected 0.4%, with a resultant savings rate of -0.7%. The PCE prices showed a rise of 2.8% YoY. All eyes will now be focussed on US Consumer Confidence and Chicago PMI data and the all important FOMC decision where a rise of 25bps is expected and the accompanying statement.

The Norwegian Krone weakened considerably from 6.6620 early Monday to 6.7350 later in the day as retail sales unexpectedly declined (-0.3%) in December with the market expecting an increase of 0.8% MoM. The market was left reassessing the pace of rate rises this year.

French unemployment released this morning fell with the rate moving from 9.6% to 9.5%. Consumer confidence numbers rose by more than expected. This data continues the strong run of economic data out of the Eurozone and highlights the fact that we may well see a 25bp rise by the ECB in March.

On the contrary, German December retail sales surprised on the downside this morning coming in at -1.4% MoM, with expectations of a 0.8% rise. The German ILO Unemployment rate showed a rise from 9% to 9.1%. The Federal Labour Statistics data showed a seasonally adjusted rise in unemployment of 69k and a rise in the rate from 11.2% to 11.3%.

GB’s Pound has recovered from the 1.7640 lows of yesterday to recover the 1.7700 handle. EUR is struggling this morning to remain over the 1.2100 level. EURGBP has trended lower as a result, taking a look at the 0.6830 area.

Today sees the all important US FOMC meeting, consumer confidence data and Chicago PMI. Domestically we see consumer confidence, CBI Trade report and consumer credit numbers.

US GDP weaker than expected- USD Stronger?

The US GDP came in weaker at 1.1% annualised for Q4 against expectations of a 2.8% rise and down from a rate of 4.1% in Q3. Personal consumption came in much stronger at 1.1% (0.4% expected) for Q4 and the GDP price index came in stronger. US new house sales rose in December more than expected, lending support to a market that is easing.

The weak GDP number certainly makes an interesting backdrop for the FOMC meeting next week where the market expects another 25bps rise taking the Fed Funds Rate to 4.5% and further throws into debate whether we will see a subsequent rise in March.

ECB council member Webber warned against market complacency in relation to risks not being fully priced in these times of low interest rates and the fact that the ECB is monitoring economic developments and is ready to act in a swift and timely manner. No mention here of whether, when or by how much.

The USDollar made massive gains on Friday afternoon with a rapid move higher, the market focussed on the strength in personal consumption, the price index and housing. We saw GBP fall 150 points and EUR 100 points in an hour. The move was prompted by selling which took the currencies through key levels.

This broad move has continued with GB Pound now having visited 1.7650 from a high of 1.7870 on Friday and EUR dipping below 1.2100 briefly from 1.2230 highs on Friday.

Data due for release this week includes UK Consumer confidence and PMI. The ECB meets with no change likely to interest rates. A full data week in the US with the FOMC meeting, Personal income and spending, Consumer confidence data, ISM and non-farm payrolls.

Currencies await US GDP data

US Durable Goods orders beat forecasts coming in at 1.3% in December against an expected 1% rise. Business investment in new plant and equipment made a strong showing in the numbers. Initial jobless claims rose less than forecast, highlighting continued strength in the labour market.

The Canadian Central Bank in its accompanying statement to its Jan 24 interest rates decision, raised its economic growth forecast for 2006 and said their will be a modest increase in interest rates to keep inflation on target, which it sees slowing from Q1’s 2.5% to 2% by half year 2007.

Swedish December retail sales rose 0.3% against an expected drop of 0.2%. This is consistent with the Riksbank’s thinking in raising interest rates last week by 25bps to 1.75%, with further increases expected in 2006. Consumer confidence also put in a strong showing with the index posting the strongest reading in five years.

Today sees the early estimate of GDP in the US. The market is expecting a lower annualised rate of 2.9% for Q$ following a strong Q3 growth of 4.1% on the back of relatively weak consumer spending and net exports – fuel import volumes remain high in the fallout of the hurricanes that hit the US.

December New Home Sales are also released today and expected to show a decline following a disappointing Existing Sales figure earlier in the week.

Eurozone upswing gains momentum

Considering the volume of data released yesterday we seem to be opening up this morning little changed from the open yesterday.

First we kicked off with the German IFO survey which came in considerably more favourable than expectations both in assessment of the current situation and expectations for the next 6 months. Manufacturing, construction and retailing were signalled out as showing positive signs.

In the UK the Bank of England released its minutes showing members voting 8-1 in favour of keeping rates unchanged – the opposing member being Stephen Nickell who suggested a 0.25% cut. Other members continue to cite concerns over high oil and gas prices.

Q4 GDP was also released showing +0.6%, considerably ahead of expectations, supporting the markets view that the MPC will keep rates unchanged at the next meeting at 4.5% until they receive more conclusive evidence of the strength of consumer spending.

The US released its Existing Home Sales for December showing a fall of 5.7%, the third consecutive monthly decline and the longest run of falling prices in 3 years. This could be the start of the widely anticipated softening in the housing market. The significance in terms of deterrence for the Fed to raise rates, both in the meeting next Tuesday and in March is widely debated.

Today sees a reasonably quiet day for economic data releases following yesterday’s multitude of info. The US Durable goods orders for December headline today (due at 1:30pm GMT) with higher aircraft orders likely to boost durable goods orders for the third month in a row. There has been a recent weakness in US automobile sales which could partially offset any substantial gains here. We also have US Jobless Claims due out early afternoon, with a slight rise expected here. There’s nothing of mention due out of the UK or mainland Europe.

The US Dollar takes a breather

Sterling has retreated after approaching 1.7900 and rejecting it to see a revisit of the low 1.7800 area. Likewise EUR rejects the 1.2320 area to have a look at 1.2260 again. EURGBP again pressures 0.6890.

The Bank of Canada raised rates by an expected 25 bps to 3.5%, the fourth time in five months. Interestingly it stated that it expected further rises to be modest.

The UK’s CBI January Industrial Trends total orders declined to a reading of -28 against a forecast of -22, the lowest level in five months. On the positive side, the monthly gauge of export orders increased to its highest level since August 2004. The measure of expected output in the next three months also rose.

ECB Chief Economist Issing was interviewed by the German newspaper Die Welt and commented that he expected Germany to meet the EU deficit rules by 2007 and that the Euro 12 countries must heed ECB deficit warnings. On interest rates he stated that the ECB will act when necessary and that the rate hike in December was the right decision.

Today’s French business confidence was unchanged for the third month in January as the manufacturer’s index of sentiment remained unchanged. Also important will be the German IFO business climate index to be released today.

Today sees the release of UK Bank of England Minutes and GDP.

US Dollar weakening continues

US Leading Indictors Index for December rose 0.1% with market expectations of a 0.2% rise, suggesting a moderation of growth in the next 6 month period. Fed Governor Olson commented that policy makers were watching ‘very carefully’ for signs for inflation, signalling that the cycle may not yet be over.

ECB council member Liebschier stated that the direction of interest rates was ‘indisputable’ and ‘very, very low and expansive’. This added further fuel to the ECB rate hike fire and EUR strength and broader USD weakness. ECB Chief Economist Issing said that ‘we would always act on time if we saw risks to price stability’.

The USD weakness we saw on Friday night and yesterday has paused here but nevertheless remains intact. The market awaits important European and US data later in the week.

Canadian Federal Elections have yielded a Conservatives win, but with not enough votes to form a majority government. This has been slightly CAD negative initially as the market was looking for an outright win. More importantly the Bnak of Canada meets today to set interest rates.

Today sees the release of UK CBI Industrial Trends.

ECB signals inflation fears

UK retail sales rose for the fifth month by 0.4% in December equating to an annual rate of 4%, the strongest since November 2004. On the UK budget side of things, the budget deficit widened to £6.5bn from £6.1bn a year earlier- which was wider than forecast.

US University of Michigan sentiment index increased for the third month in January to 93.4 from 91.5 in December, higher than market estimates. A lower oil price and an improving labour market improving consumer sentiment.

Crude oil continues its march higher touching a four month high over USD68 bbl with the geopolitical instability emanating from Iran’s activities and Nigerian oil issues.

Sweden’s Riksbank raised interest rates by 25 basis points to 1.75%. This has been the first move since 2002 with pending inflation pressures the concern. The market is now looking for a further 25 points in February.

Late Friday saw ECB official Christian Noyer stating that rates were too low for price stability and Bini Smaghi stating he saw the risk of quicker inflation. This has led the Euro sharply higher. Also, US Fed official Poole’s statement that they are in a stable inflation environment which will continue has added to general USD weakness.

This week sees the BOE meeting minutes released with the market looking for the balance of the vote to ascertain future possible moves. Equally important will be the release of GDP data.

In the US this week, we see leading indicators, durable goods orders and GDP data. In Germany we see the IFO Business Climate Index released.

UK eyes will be on UK retail sales

The UK’s retail sales number for December which will be released this morning will be interesting given the sharp rise posted in November. Indicators like the CBI survey point to a good number, in conjunction with positive figures recently from retailers.

However volatility in consumer spending is greater at this time of year so it is much harder to forecast accurately. Retail sales and the inflationary ramifications thereof will be viewed closely by those speculating on the likely moves on interest rates going forward.

A mixed bag of economic data and renewed threats of terrorist attacks on the US ultimately had little impact on the dollar. A tape broadcast on Al Jazeera purportedly by Bin Laden warned of further attacks on US soil, saying preparations were being made. There was a knee-jerk reaction to the announcement but the move was ultimately short lived.

Weekly jobless claims came in better than the 317k as expected at 271k. Housing starts dropped 4.4% versus a 2.9% increase in November. The data further supports the notion that the housing market is cooling off as a result of the Fed’s interest rate tightening. The biggest disappointment was the Philadelphia Fed survey which was expected to deliver a big jump in January from a 10.9 reading in December. Instead, the survey plummeted to a 7-month low at 3.3.

UK inflation remains well contained

As expected yesterday the UK consumer price index showed signs that inflation in the UK remains under control. CPI rose just 0.3% in December which in turn dragged headline consumer price inflation down to 2%, the first time in six months this measure came in line with the Bank of England’s target rate.

The data has rekindled talk of further monetary easing by the Bank of England following August’s quarter-point cut. Over night the RICS housing survey showed a net balance of +8% of surveyors saying prices are rising- the highest positive balance since June 2004.

The dollar strengthened as a brace of US data releases pointed to an economy in reasonable health. Industrial production rose by a faster than expected 0.6% in December, November’s number also received a revision higher. More importantly, capacity utilisation rose to 80.7%, its highest level since November 2000.

The Empire State manufacturing index came in marginally below expectations, however the individual components were stronger; the pricing received measure improved indicating that manufacturers may be beginning to recover some pricing power.

Today the market eyes UK unemployment and average earnings numbers at 10.30am to gauge the state of the labour market.

Across the water, the market awaits December’s CPI release; all eyes will be on the core number. November’s net foreign security purchases (TICS) are released at 1.30pm and have consistently delivered high numbers for the past five months; it will be interesting to see if this continues.

Yen shrugs off diving Nikkei

The Japanese yen tested 12 day lows against the dollar and euro after Japanese shares plummeted but shrugged off the nervousness of foreign investors who were liquidating their holdings.

Nervousness after prosecutors raided the offices of Livedoor, the web portal operator, on suspicion of securities law violations sent the Nikkei Average nearly 5 per cent lower at one point. Trading was halted for 20 minutes before the close because the trading system was on the verge of collapse. The Nikkei ended 3 per cent lower, having fallen a similar amount on Tuesday.

The Nikkei has been pushed to five-year highs of late, climbing 40 per cent last year, thanks to foreign investors’ enthusiasm but there were worries sentiment could be soured by this latest embarrassment for the Tokyo exchange.

Any weakness in the yen on worries of fund liquidation was offset by the undermining influence falling equity markets have on the dollar.

Many equity positions were leveraged on borrowed yen so there hasn’t been much associated selling of the currency.

Having fallen to Y115.89 against the dollar and Y140.11 the euro, the yen recovered to be up 0.7 per cent on the greenback to Y115.04 and 0.2 per cent on the euro to Y139.53. It gained 0.2 per cent on sterling to Y203.42.

Shinzo Abe, a Japan government spokesman, said the country’s economic recovery was solid despite the fall in share prices.

Other asian currencies held up well against the dollar. The South Korean won was up 0.7 per cent to Won982.4 and the Thai Baht 0.7 per cent ahead at Bt39.445.

Traders were awaiting the US inflation number for further hints as to whether the Federal Reserve will continue to raise interest rates after the rise of 25 basis points penned in by the markets for January 31. The core consumer price index is seen rising 0.2 per cent month-on-month in December, the same figure as seen in November.

Bearish sentiment toward the greenback is partly based on concerns about funding the massive US deficit and worries whether net inflows will continue to cover it. Repatriation of funds during 2005 under tax breaks related to the Homeland Investment Act will not be able to buoy the dollar this year.

The dollar fell 0.5 per cent on the euro to €1.2127, 0.7 per cent against the Swiss franc to SFr1.2791 and 0.4 per cent lower on sterling at $1.7663. The pound remained unmoved against the euro at £0.6857.