Articles from October 2006



Adding fuel to BOE rate hike expectations

After the strong data release from Hometrack (property website) at the weekend showed UK House prices rising at their fastest pace in 2 years and the release of M4 data yesterday, Sterling pushed through the 0.6680 level v the Euro and broke the 1.90 level against the US$ in afternoon trading.

M4 is the broad measure of money supply that includes bank lending. In September this figure climbed to a 16 year high of 14.5 percent. In recent months we have seen members of the MPC become more anxious concerning the relationship between money growth and inflation.

Money growth in September seems to have been driven by the housing market. Loans were approved for £30.3 billion of mortgages for 295,000 people. With all of this considered analysts are stating that the rate hike in August has done very little to slow down the housing market and has now paved the way for a further increase next week.

In the U.S. yesterday we saw the release of Personal Income that grew faster than expected at 0.5 % in September. In separate Data we saw PCE(Personal Consumer Expenditure) prices rose to 2.4% from 2.5% y/y.

The Fed’s Jeff Lacker then stated that core inflation is still running at an unacceptable pace longterm and noted the economy would withstand a further tightening policy, although it should be remembered that Mr Lacker has been an advocate for a rate increase at recent committee meetings.

In Japan early this morning we have seen the BOJ hold rates at 0.25%. Of more interest BOJ Governor Fukui stated that CPI remains positive and any need for interest rate hikes would be gradual.

In other news GOLD pushed through the $600 an ounce level with analysts stating that a sustained push above $606 would indicate the rally in metals is not over yet. Back to the currencies and it is reported that the UAE may re-configure its Foreign currency reserve with a reduction in their US$ holdings.

This would come just two days after the Swiss National Bank revealed it had added Yen along with other currencies whilst reducing its percentage holding of dollars.

At the time of going to press Nationwide have just revealed house prices jumped a further 0.7 % m/m taking the average house price to £169,623 in October.

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.

Dollar tumbles as US growth slows further in Q3

After the release of US third quarter GDP on Friday, which was lower than expected at 1.6%, we saw extensive dollar falls. The dollar fell to a one month low against a basket of major currencies with cable pushing up towards 1.90. The figures reinforced the message from the Fed that there is no need for a short term cut in US interest rates.

The yen slumped to an all time low against the Euro at Y150.80. The dollar also suffered its largest daily decline against the yen for one month. The DJIA also dropped 73 points or 0.60% on the back of the figures. The major figure this week that could reverse the slide in the dollar, would be a strong Non Farm Payroll figure, which is due for release on Friday.

The Australian dollar rose 1.4% to a two month high of $0.7685 against the dollar as inflation figures came in higher than forecast. This indicates that the Reserve bank of Australia, at its meeting next month, will raise interest rates for the third time this year.

An important week for interest rates this week with decisions from the Bank of Japan and the European Central Bank. The former are expected to keep their key policy interest rates unchanged at 0.25%.

The ECB meets in Frankfurt on Thursday to decide on eurozone interest rates, the expected outcome is key rates to remain unchanged at 3.25%. The recent ECB press release indicates that we will see a move up to 3.5% in December, with rates then on hold for the first quarter of 2007.

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.

Dollar tumbles as US growth slows further in Q3

After the release of US third quarter GDP on Friday, which was lower than expected at 1.6%, we saw extensive dollar falls. The dollar fell to a one month low against a basket of major currencies with cable pushing up towards 1.90. The figures reinforced the message from the Fed that there is no need for a short term cut in US interest rates.

The yen slumped to an all time low against the Euro at Y150.80. The dollar also suffered its largest daily decline against the yen for one month. The DJIA also dropped 73 points or 0.60% on the back of the figures. The major figure this week that could reverse the slide in the dollar, would be a strong Non Farm Payroll figure, which is due for release on Friday.

The Australian dollar rose 1.4% to a two month high of $0.7685 against the dollar as inflation figures came in higher than forecast. This indicates that the Reserve bank of Australia, at its meeting next month, will raise interest rates for the third time this year.

An important week for interest rates this week with decisions from the Bank of Japan and the European Central Bank. The former are expected to keep their key policy interest rates unchanged at 0.25%.

The ECB meets in Frankfurt on Thursday to decide on eurozone interest rates, the expected outcome is key rates to remain unchanged at 3.25%. The recent ECB press release indicates that we will see a move up to 3.5% in December, with rates then on hold for the first quarter of 2007.

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.

Sterling continues to benefit from Dollar weakness

The Pound opens up near the 1.89 level this morning as it continues to take advantage of negative sentiment surrounding the Dollar. Yesterday afternoon’s US Economic figures were fairly neutral and the market largely shrugged them off.

It continued to focus on the theme of the Federal Reserve’s post-policy meeting statement on Wednesday evening. The Euro also benefited from the buck’s demise and soared to 1.27 in the late New York session before encountering resistance at 1.2710.

Although the Pound’s relative strength against the Dollar this week is down to events on the other side of the pond rather than any significant developments in the UK’s economic performance, it did receive an independent boost after an upbeat assessment of the UK’s growth outlook.

In an interview with the Financial Times, Gordon Brown said that the balance of growth across the UK was better than it had been previously. This led to speculation that in accordance with the government’s hard line stance against inflation, interest rates may need to climb to between 5.5% and 6%.

In the US, weekly jobless claims came pretty much in line with expectation at 308,000 and New Home Sales for September increased only slightly to 1.075 million. The headline Durable Goods Figure for September looked encouraging initially, showing an increase of 7.8% for September.

However, when the transportation component was stripped out we saw only a modest increase of 1.0%. The transportation component distorts the Durable Goods figure due to the huge unit price of such items. As we suspected a large number of Boeing orders did indeed distort the true picture. Today’s 3rd Quarter US GDP figure (forecast at 1.2%) due at 1.30pm BST will be closely watched.

The Euro received some welcome comments from three influential sources which helped lift it versus the buck and the Japanese Yen. Jean-Claude Trichet, president of the ECB said that the Bank will remain vigilant in the face of inflation (nothing new here). He went a step further however by saying that inflation risks for 2007 remained on the upside.

The GfK Market research group predicted that it’s November index of consumer sentiment would hit a 5-year peak and Alan Greenspan (former chairman of the FOMC) told a conference that central banks we’re starting to diversify from the Dollar to the Euro.

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.

FED statement hits Dollar

The Dollar fell overnight as the market digested the Federal Reserve’s statement following it’s two-day policy setting meeting. The committee left rates on hold at 5.25% for the third month in succession – this was widely anticipated. The FOMC is in the middle of a ‘wait and see’ period as it attempts to assess the impact of it’s sustained tightening cycle which saw seventeen consecutive quarter-point hikes. The lone dissenter for the decision was again Jeffrey Lacker, who continues to press for a further increase in rates.

It was the tone of the accompanying statement which gave traders another reason to sell off the dollar. Sterling was lifted towards 1.90 and opens this morning well above that figure. The Euro was able to surge 0.5% against the buck to 1.2650 by the time London opened for business.

Some were hoping that a more hawkish tone, highlighting upside risks to inflation, would develop. Although there was a repeated and predictable warning that “some inflation risks remain” the market latched on to the more dovish elements.

“Inflation pressures seem likely to moderate over time” (as the effect of falling energy prices start to feed through to the consumer prices) and the economy seems likely to expand at a moderate pace”. These comments, if backed up by data later in the year, will justify the Fed’s decision to stop their tightening cycle when they did.

The German IFO survey for October, a snapshot of business confidence in the Eurozone’s largest economy, rose to 104.9 against expectation of a fall to 104.5.

This helped underpin the Euro earlier in the session and the FOMC statement later in the day gave a good case for bidding-up the single currency at further expense to the Dollar.

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.

Currency converters drift ahead of news from FOMC

US and eurozone forex markets drifted ahead of news on Wednesday from the Federal Reserve’s two-day rate policy meeting, but gilts suffered on growing expectations of higher rates next year.

US Treasuries edged higher as traders readied for the statement from the Federal Open Market Committee due on Wednesday afternoon. The Fed is expected to keep rates on hold, but hopes of a cut have faded and the focus will be on how the central bank characterises the outlook for growth and inflation.

Existing home sales data is released this morning. The figures will be closely watched for any light they shed on the extent of the property market slowdown and the possible impact on consumer confidence and spending.

Late on Tuesday afternoon in New York, after a well-received auction of $20bn of new notes, two-year yields were 0.9bp lower at 4.910 per cent. The 10-year yields were 0.6bp lower at 4.828 per cent.

UK gilts saw yields rise after data showing more companies plan to raise prices than in the previous month offset weaker manufacturing orders numbers.

Economists said the Confederation of British Industry survey for October showed a mix of weakening activity and rising price pressures, which would concern the Bank of England.

Shorter dated gilts suffered the most, with yields on the two-year rising 1.5bp to 5.103 per cent, while 10-year yields were 0.4bp higher at 4.708 per cent.

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.

Dollar claws back losses

The US Dollar was the biggest winner during Monday’s session. The buck gained half a per cent against the Euro and the Yen and advanced 0.7% against the Swiss Franc and the British Pound. There were no significant economic data releases to give traders direction so what drove the Dollar’s latest rebound?

As highlighted yesterday, the Federal Reserve’s stance on the risks to economic growth in the world’s largest economy is being closely watched this week. One of the reasons for the bout of Dollar-buying arose as investors speculated that the recent drop in oil prices would boost spending levels and thus stimulate growth in the crucial fourth quarter.

This could in turn fuel inflationary pressures, something that the Fed has already warned against. Any further warnings or hawkish comments from the Fed would give traders another reason to bid the buck higher.

The scale of the US economic recovery and the direction and timing of US interest rate expectations is up for debate and the markets want to see what the Fed knows. In reality, they probably don’t know anymore than the markets and are waiting for fourth quarter figures like the rest of us.

The Dollar also benefited from some technical trading in light of the thin economic calendar. The Dollar broke through 1.26 against the Euro and this sent the Dollar up across the board. It broke through 1.8755 against Sterling and, at the time of writing, is testing further resistance below 1.8700.

Whilst a rise in UK interest rates has already been priced into Sterling, contradictory comments about longer term prospects are leaving the Pound vulnerable. Whilst some see a continuing of the tightening phase others think this move will be the last in the series and that 2007 will see a move to a more accommodative monetary policy, driven by a cooling labour market and lower energy prices.

Expect sentiment to shift, and Sterling to gain a firmer direction either way, as speculation gives way to data.

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.

Focus shifts to Dollar after strong week for Sterling

The Pound could struggle for independent direction in the week to come in light of an extremely sparse calendar of domestic economic events. This follows a sustained strengthening against the Dollar and Euro throughout last week, driven by firming expectations that the Bank of England will raise interest rates to 5% at November’s interest rate meeting.

Furthermore, concern over rising inflationary pressures led by the booming property market has generated an early call for additional tightening to 5.25% from Ernst & Young’s ITEM club. Peter Spencer, ITEM’s Chief Economic Adviser said “Interest rates need to be raised again in November and…If house prices continue to accelerate, interest rates will have to rise further in 2007”.

Any data-led evidence to back up Spencer’s case in the final quarter of the year could underpin Sterling further.

The US Dollar has suffered against the other majors in the run up to the FOMC’s meeting this Wednesday. A weaker than expected Philly Fed Index at the end of last week hardly helped the buck’s cause. The chances of an interest rate increase by the Fed now seem very remote and, providing this is indeed the case, attention will shift to the accompanying statement and the third quarter GDP, due out on Friday.

It will be interesting to observe the Fed’s comments in relation to economic growth and inflation. The Dollar is likely to firm if expectations of a loosening in monetary policy (in a pre-emptive move to avoid the dreaded ‘hard-landing’) are pushed further into the future.

This could happen if Fed officials continue to place emphasis on the risks of growth and inflation and choose not to draw attention to the housing market slowdown. September Durable Goods Orders (due out on Thursday) should be strong and will be exaggerated by Boeing aircraft orders; home sales figures on the same day should show a decline.

It is also a very quiet week for data in the Eurozone. Germany’s IFO business climate survey, due on Wednesday, is the only notable and potentially market-moving release. The consensus forecast is for a slight decline from September’s score of 104.9 although a small increase would hardly surprise the markets.

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.

New MPC members dissent on UK loans rates

Following the release of the Bank of England minutes yesterday, it is now widely expected that the base rate will rise by 25 basis points to 5.00 per cent in November. The two vacant posts on the rate-setting body have been filled by Andrew Sentance and Tim Besley, who both broke ranks and voted for an increase of 25 basis points.

The other seven members agreed that despite growth continuing above trend, they thought there was no requirement to raise rates this month. They justified this further by adding that an increase in October might encourage a further increase in market interest rate expectations, and therefore provide an additional degree of tightening that was not required at this time.

Assuming the expected November hike materialises, market participants will start to focus on the possibility of another rise in February.

Job data released yesterday in the UK left many analysts scratching their heads. Data published revealed unemployment hitting a five-year high; while simultaneously the number of people in employment also rose – to an all-time high of 29.02m.

This perplexing situation has arisen due to a ‘supply shock’ in the labour market, following the large increase of migrants from Eastern Europe seeking work in Britain after joining the European Union.

The old adage ‘you’ll never get fired for buying IBM’ took new strength yesterday. The company beat earnings forecasts and received an upgrade from Goldman Sachs, and rose 4.2 percent. This sentiment helped push the Dow Jones Industrial Average through the 12,000 barrier for the first time.

The largest surprise yesterday was the release of data on the US housing market. New home starts rose 5.9 per cent in November, although building permits remained weak. In general, core inflation remains high in the US suggesting the Fed are unlikely to cut rates soon.

There is another smorgasbord of data due for release today, including retail sales and public finances from the UK. Across the pond we see the release of initial jobless claims, leading indicators and the Philadelphia Fed for October.

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.

UK’s MPC moves closer to raising rates

The Bank of England’s rate setting body voted 7-2 to leave interest rates unchanged at 4.75 per cent earlier this month, a sharper than expected move away from consensus that reinforced the City’s belief that a hike will be delivered in November.

However, the Bank’s increasing concerns about inflation came at the same time as labour market data released on Wednesday showed that unemployment in the UK rose by 10,200 in September, to the highest level in nearly five years.

Minutes of the October meeting of the Bank’s monetary policy committee showed it was the two new members, Andrew Sentance and Tim Besley, who broke ranks to vote for an increase in the official base rate of 25 basis points.

The dissenters argued that since the Bank’s August inflation report was published there was evidence that growth had continued above trend, fired by resilient consumption and a healthy global economy. In addition there were increased risks that rising inflation could feed into higher wage demands.

“The August projection had been conditioned on the gently rising interest rate profile expected by markets at that time. A further rise in interest rates was consistent with the August central projection, and a rise in interest rates now might reduce the possibility of needing to make a larger increase later on,” was how the minutes summarised the dissenters’ views.

The majority on the committee was sympathetic to those concerns but “thought there was no pressing need to raise rates this month”.

Analysts said the tone of the minutes did little to change the prediction that interest rates will be raised to 5 per cent in November. The only surprise was that it was the two new members who voted for a change and not Sir John Gieve, whom the City had as favourite to be the first to break ranks.

Sterling initially spiked higher on news of the MPC vote but retraced its steps after traders absorbed employment data that called into question the view that a healthy labour market would support consumer confidence and lead to wage inflation.

The Office for National Statistics said the claimant count rose by 10,200 to 962,000, the highest level since December 2000 as job creation could not keep pace with new entrants into the job market.

Average earnings rose by a less than expected 4.2 per cent in the three months to August, down from 4.4 percent in the three months to July. Excluding bonuses, average earnings growth fell to 3.6 from 3.7 percent – the lowest rate since January 2004.

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.