Articles from April 2006

China raises loans rates as Bernanke’s hint on US rate pause dents dollar

China moved to tackle a surge in new bank loans and investment by lifting its benchmark one-year lending rate by 0.27 of a percentage point to 5.85 per cent, sparking a brief sell-off in commodities and shares tied to the booming Chinese economy.

China’s rate rise was its first since October 2004 and surprised markets, which had expected Beijing initially to use administrative measures to rein in credit growth and investment spending.

This showed the difficulty Beijing faces in managing credit in its domestic economy while at the same time holding down the value of the renminbi by purchasing billions of US dollars in foreign exchange reserves.

The rise comes barely a week after China announced its economy had grown by 10.2 per cent on an annualised basis in the first quarter. New bank loans expanded by Rmb1,260bn in the same period, more than half the government’s target for all 2006.

The US dollar meanwhile fell to seven month lows against the euro on Thursday after Ben Bernanke, chairman of the Federal Reserve, prepared the markets for a halt in the US rate-tightening cycle that began in June 2004.

However, US stocks rose as investors interpreted Mr Bernanke’s comments as signalling that the Fed would go on hold after raising rates by one final quarter point to 5 per cent at its next meeting in May.

Mr Bernanke told the joint economic committee of Congress that the generally strong economic data since the Fed’s last policy meeting in March “have not materially changed” the assessment it reached then about the risks to inflation.

Minutes from that meeting, released on April 18, said “most members thought that the end of the tightening process was likely to be near”.

He told members of Congress “even if in the committee’s judgment the risks to its objectives are not entirely balanced at some point in the future, the committee may decide to take no action at one or more meetings.”

The chairman said such a pause would allow the Fed to wait and see how the economy was evolving before taking further steps. But he emphasised it would not prevent the Fed from raising rates again if the outlook for inflation deteriorated.

Mr Bernanke said “rising energy prices pose risks both to economic activity and inflation” and warned that there may be periodic price spikes.

However, he said there were still few signs that high energy prices were feeding through into increased core inflation in the US, thanks in part to strong productivity growth and fierce competition.

Questioned by Democrats, he said he would be prepared to allow wages to rise at a faster clip without raising interest rates, provided these increases were offset by productivity gains or declining profit margins.

US Dollar feels heat of the spotlight despite strong data

The Greenback continued to drift lower against Sterling and the Euro yesterday in spite of a stronger than expected set of US economic data. It hit fresh 14-year lows versus the Canadian dollar and new 7-month lows against the Euro.

An upbeat batch of US economic reports failed to deter the selling of the big Dollar with markets maintaining their bearish sentiment towards the currency. Durable goods orders in March far outpaced expectation for a decline of 1.6% from February’s 2.7% reading, instead shooting up by 6.1%.

This cracking number exemplified US economic strength, but also sparked fears that the Fed Reserve may have to raise rates beyond initially anticipated. Meanwhile, new home sales for March in the US exceeded forecasts for a slight increase to 1.106million units, rising instead to 1.21millions units at its highest rate in over a decade. The jump marked a rebound in both existing and new home sales for March. In other market conditions, such a brace of strong data would have given the Dollar some much needed buoyancy, however not this week Uncle Sam…

In the commodity zone, gold futures climbed yesterday to tally a two-session gain of more than $18 an ounce, as the strong U.S. economic data failed to spur a climb in the US dollar. June gold futures climbed to a more than 25-year high of $645 in Asian trade overnight.

Your daily dose of data… locally this morning we’ve seen the Nationwide’s UK house price survey for April; this morning’s release showing that price growth has slowed sharply this month, dropping to just 0.1% month-on-month in a reversal of March’s sharp 1.1% gain. The annual rate also dropped markedly from 5.3% last month to 4.8% for April.

It’s actually not that busy on the economic data front today, with the major piece of note being the German Unemployment figure for April – due just before 9:00am BST. Out of the US this afternoon, we have the weekly Jobless Claims released.

The most important data of the day however, released whilst we all slept blissfully, the Reserve Bank of New Zealand held interest rates steady as expected at 7.25 percent; the highest level in the industrialised world, and reiterated they would stay on hold for the rest of the year.

UK GDP expected to rise generating consensus that BoE will not drop rates any time soon

The U.K. economy, Europe’s second largest, is expected to have expanded 0.6 percent, when then UK GDP (1st estimate for Q1) is released today, the same pace as in the three months through December.

An accelerating economic expansion around the world is helping British exports. The Bank of England says overseas sales, investment by companies and consumer spending may lift growth rate to 2.7 percent this year from a 13 year low of 1.8 percent in 2005. The Central bank has kept the benchmark interest rate at 4.5 percent since August and the consensus that there will be a reduction this year has departed amid signs economic growth may accelerate.

The UK manufacturing sector continued to exhibit further signs of improvement in April as demand began to edge up, it was announced yesterday. However, this industrial trends survey from the Confederation of British Industry revealed that firms are still cutting jobs in the face of rising cost pressures. In its April Survey of the sector, the CBI said a balance of -11 pct reported order books above normal, the highest figure since February 2005.

In the US today Durable Goods Orders for March are released with expectation that they are to rise at 1.8%, rising for the second month in a row, as businesses invested in new equipment to meet demand. Orders for goods made to last for at least several years are forecast to rise 1.8 percent, after 2.7 percent in February. Excluding transportation, which is volatile from month to month, orders are expected to have risen 1 percent.

New home sales for March are also released this afternoon which is expected to be 1150k in March a rise, despite mortgage rates rising of 70k from February, following the decline in last month of 10.5% which found the number at 1080k.

The final piece of data out today is the US beige book this evening, the past four beige books all described the economic activity as continuing to expand. If the Fed are seeing unreliable signs of slowing, some indication could be made in the first sentence of this report, otherwise if it is said that the economy is continuing to grow, it may suggest the Fed’s expectation of slower growth is being driven by their models as opposed to what it is hearing from their contacts.

In the US it was announced that after five months of declines, existing-home sales have risen for two months in a row in March, following a strong rebound in February. Total sales rose 0.3% to a seasonally adjusted annual rate of 6.92 million units, from a pace of 6.9 million in February, but were 0.7% below the 6.97 million-unit level acquired in March 2005. U.S. consumer Confidence continued higher in April, reaching its highest level in almost four years, rising to 1.9.6 from a revised 107.5 in March. The increase was unexpected, it was forecast to slip slightly to around 106-107 on higher gasoline prices.

In Europe yesterday The European Central Bank said that euro zone growth has been supported by increased spending by oil production countries, and this has offset some of the negative initial effects of the recent rise in oil prices.

Sterling climbs following stronger than expected data

Sterling was slightly higher against the Dollar yesterday, with early morning gains on the back of stronger than expected UK data. Although UK Retail sales have slowed in the first three months of 2006, following a period of increasing growth seen towards the end of last year, it was announced yesterday retail sales rose 0.7% for the month of March – higher than the expected number, and bringing the annual rate to 2.6%.

This was a quick acceleration from February’s revised growth of 0.3% monthly and 1.6% yearly. The upbeat numbers dampened expectations that the Bank of England could cut rates from the current 4.50 percent in coming months, a move which could be especially negative for Sterling at a time when other major central banks are tightening policy.

Today the UK CBI industrial trend report for April will be announced which, according to the CBI, show conditions among manufacturers have improved sharply in recent months. Output expectations are currently at their highest level since February 2005. Higher oil prices and a rise in Sterling against Dollar may possibly dampen confidence a little in April. It is forecast that April’s CBI industrial trend will increase +9.

In the US, Existing home sales for March are published. Following February’s jump up at a pace of 6.9m, after trending lower for the five previous months, the latest pending home sales index is consistent with existing sales of 6.7m, and it is forecast for March to come around that level.

The final data for the day is US Consumer Confidence for April which is expected to fall from the highest level in almost four years, suggesting slower economic growth in coming months, it has been forecast. The Confidence Board’s index rose to 107.2 in March from 106.2 in February – the highest figure since May 2002.

Consumer optimism may continue to decline as retail gasoline prices approach a record high, posing a threat to consumer spending that is expected to slow after a first-quarter surge. April’s consumer confidence figure is expected to stay around last month’s reading at 107.

UK Inflation fears grow

Oil makes new highs and fears grow that petrol prices will go through the £1 a litre. House prices have strengthened during Spring. Is inflation back from the dead? Well last week official figures say ‘no’. The MPC voted 7 – 1 at their last meeting and the feeling is that rates remain unchanged for the foreseeable future.

Around the World

Political pressure from the US against Iran and its nuclear power plans is likely to mean that oil and commodity prices continue to be volatile. Last week saw a 14% drop in the price of silver in a single day. Commodity prices are being driven by speculators and these kind of moves could prove expensive for investors.

The Fed last week indicated that rates maybe close to their peak. This caused a sell off in the US Dollar and many expect this move to continue.

Dollar finds well needed respite

A combination of soft economic data in Europe and positive reports from the States gave the big Dollar some much needed relief yesterday, enabling to stop a 3 day decline versus Sterling and the Euro. Lower than expected inflation figures in the UK, a retreat in Eurozone inflation, an unexpected decline in US jobless claims and modest rise in Philadelphia Fed business survey were all needed to stabilise the US currency.

The Philadelphia Fed area index rose to 13.2 in April from 12.3 in March, undershooting expectations of a 15.0 figure. However, the trend remains negative for this data, keep an eye on it for the months to come.

There’s nothing to get too excited about on the data front this morning. This suggests a quietish day moving into the weekend, and a much needed rest for a battered Greenback.

On the commodity front, gold had an incredible range of trading yesterday following the Dollar rebound, with a high of $645 and a low $607. Silver had its biggest one day fall in 20 years!

Oil prices continue to trade above $70 a barrel; isn’t it incredible how quickly petrol prices go up as oil prices increase, but when oil prices drop, the knock-on effect at the pump appears to be delayed…

US Dollar remains under pressure

The US Dollar remains in the spotlight – if not a slightly flickering one, following a bigger than expected CPI report. March CPI grew 0.4% following a 0.1% rise in February, while the core CPI rose 0.3%, its highest level in a year. However, the big Dollar plummeted back into broad selling after a short lived rally following the CPI report; this confirms deteriorating sentiment towards the US currency.

The Dollar could get another chance to rally today on the release of the April Philly Fed survey. This is expected to have edged up to 15.0 from 12.3. We also expect US Jobless Claims to draw markets’ attention, as they are expected to have risen to 325K last week from 313K, which would be the highest reading of the weekly unemployment claims since October of last year, following the Katrina & Rita Hurricanes.

Today has already seen a glutton of economic data, with the majority of it from China. The Chinese economic juggernaut continues to roll on in 2006 with the Quarter 1 GDP number being the highlight this morning; Q1 GDP increased year-on-year from 9.9% to 10.2%! Not bad really is it?

At 9:30am this morning we have the some key UK CPI figures with expectations for CPI inflation to remain at the 2.0% target for the year. The EMU’s CPI final March reading is also due out this morning with little revision expected here from the initial estimate of Eurozone inflation dipping to 2.2% from 2.3%.

On the commodity front, European Brent crude oil held firm overnight near its $74 record-high after a steep drop in US gasoline stocks fuelled fears of tight summer supplies at a time of growing anxiety over Iran’s exports. Elsewhere the US inflation data enforced the metals rallied to new highs, with gold hitting a fresh 25-year high of $640.90 per ounce in Asian trade.

Fed signals rate hikes coming to an end – USD thumped

The FX markets went off like a frog in a sock yesterday and overnight after weaker than expected US data and more importantly minutes from the Federal Reserve’s last meeting signalled the long running interest rate tightening cycle may be coming to an end.

The minutes from the March 27-28 policy meeting read: “Most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy”.

The market is still anticipating one more rise but this looks like it could be it. Tightening the noose around the USD was comments from San Francisco Fed President Yellen who stated the Fed was highly alert to the possibility of too much monetary tightening.

The result of the minutes and the weaker data saw the Euro hit a seven-month high against the USD, moving above 1.2300, while the GBP broke through 1.7800, last seen in late January. The EUR move was marginally stronger seeing GBP/EUR easing by around 20 points. The AUD was also a big winner breaking back through 0.7400 while the CHF hit a three month high versus the USD.

The JPY was also stronger versus the USD moving down below 117 briefly. The JPY may struggle to move much beyond the 116.50 level with rumours Japanese investors looking to buy USD assets as the USD/JPY moves towards 115.

Today’s potential market moving data is – Bank of England minutes and US CPI data.

Gold moved higher hitting new 25 year highs, trading as high as $624.40 an ounce, benefiting from the weaker USD and geopolitical concerns. Gold is now up circa 50% in 2 years. Silver continues to ride on gold’s coat tails, hitting a new 24 year high. Meanwhile Crude Oil was within sight of its record high above $71 with the concerns Iran, the world’s 4th largest oil exporter, may cut supplies.

Easter weekend hatches nasty news for US Dollar

When we knocked off for the Easter break on Thursday afternoon, GBP/USD sat comfortably around the 1.7510 level, with EUR/USD also sitting steady at around 1.2080. This morning sees a completely different story with both Sterling and the Euro well up against the big Dollar. Cable opens just over the 1.7700 figure; the last time we were at these levels was Tuesday March 7th.

The reasons for this USD tumble I hear you ask… A couple of key things here; increasing worries that the Federal Reserve could soon end its nearly two-year interest rate tightening cycle, and nervousness about Iran’s nuclear ambitions.

The beleaguered USD failed to benefit from yesterday’s net capital inflows report for February which jumped to US$86.9billion, well above the market consensus of US$60.0billion. However, also released yesterday was the US Empire State Manufacturing index, which fell to 15.8 in April from a revised 29.0 in March. This is the lowest level of activity since last October.

Some strong data from the States is now needed to halt the Dollar’s slide. Today we do see some key economic data from across the Atlantic, with US Housing starts for March, also March’s US Producer Price Index (both due at 13:30 BST), and the FOMC minutes from their March 28th meeting (due 19:00 BST). Markets are now looking for clues on the course of future monetary tightening and concerns over inflation; the PPI and the Fed’s minutes could give us some further insight into this.

Locally this morning, the UK RICS housing market survey came out up 4.1% from this time last year; also up 1.1% from March. This survey has now improved for the past ten consecutive months.

On the commodity front, in Asian markets earlier today, US crude oil futures continue to rise over growing tensions between the West and Tehran, oil futures hit their highest levels in nearly eight months at $70.50 a barrel; this is just shy of the record high of $70.85 struck last August. Gold also gained on the back of a tumbling Dollar, hitting a fresh 25-year high at $618.25 as investors continued to chase the yellow metal on fears that inflation could weaken the US dollar further.

Dollar benefits briefly from trade data

The USD moved broadly higher yesterday after the US Trade deficit was smaller than anticipated in February. The deficit came in at $65.7b, the third biggest on record, but less than the median forecast of $67.5b.

The benefit to the USD was relatively brief however as rumours were that central banks were buying the EUR as it cheapened. The EUR failed at key resistance level 1.2168 however and has fallen back to just above 1.2100. The GBP pushed below 1.7500 following the data but has pushed higher and is just shy of levels seen before the data was released.

There is also concern that the trade gap will widen next month with oil hitting all time highs during the month. With the Fed’s tightening policy possibly nearing an end the dual pressure on the USD may be too much to hold recent levels and to this growing geopolitical concerns and anything could happen.

Attention now turns to retail sales due later today in the US however any major moves are likely to be limited given the long weekend ahead. The markets attention may now shift temporarily away from interest rate differentials and onto global imbalances with a US treasury report on foreign capital flows and the visit from Chinese President Hu Jintao to Washington next week.

Elsewhere the NZD was one of the biggest movers of the day, jumping higher following strong retail sales data.

On the commodity front gold initially fell following the US data but has since rebounding on speculation the yellow metal will hit new highs in the coming weeks while geopolitical concerns are also helping it attempt to once again break $600. Oil fell after US crude stockpiles grew but was supported at $68 by the Iran situation.