Articles from March 2007



Iran worries continue to push up oil prices

Oil hit 6 month highs yesterday as the developing news story of the week, the capture of 15 British Sailors by Iran, continues to threaten supply. The price of Light Sweet Crude rose to $66 per barrel and Brent Crude to $67 per barrel.

Iran is the world’s 4th largest exporter of oil and although there has not been any disruption to supply as yet, prices are being pushed up as the failure to develop a swift diplomatic conclusion to the situation increases the chances of military conflict.

The issue of oil in relation to the US economy was touched on earlier this week. We mentioned that rising prices, especially as we approach the heaviest period for oil consumption, could have a serious impact on the disposable income of the US consumer.

This could be expected to lead to an easing of inflationary pressures which has been a major concern to Ben Bernanke in recent months. The FOMC is suffering from mixed signals at the moment but if the above scenario occurs at least it can be decisive and act by initiating another phase of interest rate cuts.

However, rising oil prices may force US industry to push up the price of their goods and services which could exacerbate the mixed signals and economic imbalances which has been such a factor of Fed indecision recently.

The Dollar failed to capitalise on an upward revision of Fourth-Quarter GDP yesterday. As the components of the report we’re fully digested any initial gains were unwound.

Negative sentiment continues to surround the Dollar. Today’s major figures, Personal Incoming & Spending for February and Chicago PMI for March, may give traders another reason to sell it off.

In the Eurozone, French unemployment data is expected to show that the country’s high unemployment rate is being addressed. The European Central Bank, hardly mentioned this week, will be looking for continued signs of improvement so that it can continue to tighten monetary policy.

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 4th Quarter GDP revised down

The Pound was unable to advance on the exchanges as UK 2006 fourth-quarter Gross Domestic Product (GDP), the key gauge of economic growth, was revised down to 0.7% from 0.8%.

Losses were limited however as the figure still contributed to an overall growth figure of 3% for the year as a whole and did little to dampen expectation that the next move by the Bank of England’s Monetary Policy Committee will be a near-term 0.25% hike in interest rates.

Also in the UK, a survey by the Nationwide Building Society showed that annual house price inflation had slowed to 9.3% from February’s 10.2%. There are growing signs that the MPC’s three most recent quarter-point rate rises are starting to filter through into the housing market.

Nationwide said that although the rate of increase was slowing due to a fall in demand (driven by more expensive borrowing terms), a shortage of supply would see prices remain buoyant.

The Federal Reserve Chairman, Ben Bernanke, addressed Congress yesterday and he echoed recent concerns and uncertainty about the state of the US economy. He also said that recent measures of inflation were ‘uncomfortably high’. This clearly limits the FOMC’s ability to loosen monetary policy in light of the downturn in most other economic indicators.

This uncertainty spread to US Stock Markets yesterday, with the Dow Jones down over 100 points and the NASDAQ down 20. Yesterday’s US Factory Orders showed an increase of only 2.5% against expectations of a 3.5% rise.

The Japanese Yen was the beneficiary of carry-trade unwinding yesterday and rose over 1 per cent against most major high-yielding currencies. Investors, looking to increase yield by purchasing assets in high earning currencies (e.g. GBP, USD, NZD, AUD), funded by borrowing in cheaper currencies such as the JPY, reversed many of these positions yesterday as concerns about the US economy and political tension with Iran surfaced again.

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.

Bernanke plays down need for rate cuts

Ben Bernanke challenged market expectations of early US interest rate cuts on Wednesday, saying he remained comfortable with rates on hold in spite of recent adverse economic data.

However, the Federal Reserve chairman said the risks to both inflation and growth had increased in the past few weeks and the US central bank would be flexible in responding to future economic news.

Mr Bernanke told the joint economic committee of Congress: “To date the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation.”

The Fed’s recent policy statement – which baffled markets when it was released a week ago – was not intended to signal that the Fed now had a neutral policy stance, he said.

“I want to emphasise that we have not shifted away from an inflation bias,” he said.

Mr Bernanke said changes to the Fed statement were intended to give it greater scope to respond quickly if the outlook for either growth or inflation deteriorated significantly. “We are looking for a bit more flexibility given the uncertainty we face.”

Mr Bernanke also brushed aside comments by Alan Greenspan, his predecessor, that the expansion looked to be ageing, raising the possibility of a recession. Expansions did not “die of old age”, he said.

Mr Bernanke played down the threat from the subprime mortgage market and highlighted a new risk to growth from weak business investment. His comments came as the Department of Commerce released figures showing that durable goods orders bounced back weakly in February after a plunge in January.

“The possibility that the recent weakness in business spending will persist is an additional downside risk,” he said.

The Fed chairman hinted that the weakness had been a surprise: “The magnitude of the slowdown has been somewhat greater than would be expected given the normal evolution of the business cycle.”

But he added: “Despite the recent weak readings, we expect business investment in equipment and software to grow at a moderate pace this year.”

He was less alarmed than many investors by the distress in the subprime mortgage market.

“At this juncture…the impact on the broader economy and financial markets of the problems in the subprime market seem likely to be contained,” he said.

He recognised the risk that the housing market correction “could turn out to be more severe than we currently expect, perhaps exacerbated by problems in the subprime sector”. Overall, he indicated that the US central bank remained relatively upbeat about prospects for growth.

He said consumer spending “has continued to be well maintained so far this year” and said consumption “should continue to support the economic expansion in the coming quarters”.

Mr Bernanke added “the economy appears likely to continue to expand at a moderate pace over the coming quarters”.

He reiterated a series of reasons for the Fed to remain concerned about inflation. “The high level of resource utilisation remains an important upside risk to continued progress on reducing inflation,” Mr Bernanke said.

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 weakens on Housing Data

The US Dollar has started the week under pressure following weaker than expected New Home Sales figures for February. The Dollar had received a boost towards the end of last week when Existing Home Sales figures came in above consensus. The mixed housing data only adds to the confusion surrounding the state of the US economy which we highlighted in yesterday’s posting.

Many analysts had predicted an increase in sales of new homes, especially in light of the encouraging release last Friday and the warmer weather setting in. The general opinion was for a rise of about 3.5% to 970,000.

Economists were therefore shocked to see the figure come in at just 848,000, a fall of nearly 4% and the weakest performance in this sector for nearly 7 years. Compounding the misery was the year-on-year picture – data from February 2006 was 18.3% stronger – and the downward revision by 170,000 of the previous 3 month’s numbers.

The Dollar was understandably sold off in the aftermath of the report. Sterling briefly rose over the 1.97 mark and the Euro surged three-quarters of a cent to settle in a new range around 1.3330.

The Buck, given the mixed signals about whether the Federal Reserve’s next move in interest rates will be up or down, was hardly in a position to absorb such shocks. The negative sentiment surrounding the currency now leaves it vulnerable to releases later in the week, notably today’s Consumer Confidence report (a fall to an index figure of around 105 from last month’s 112.5) at 3pm and Friday’s Chicago PMI (Purchasing Managers Index).

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 converter look for direction in data filled week

A slew of economic data, heavily loaded towards the back end of the week, might not be enough to give traders a clear indication of the direction and timing of monetary policy in the major economies.

Despite the huge volume of data this week, the lack of influence of any one particular piece of news could see continued uncertainty on the exchanges leading into the first week of April.

Direction next week will be influenced by a few key events, including the Bank of England’s Interest Rate announcement and the US Non Farm Payrolls.

Uncertainty about future interest rate movements in the world’s largest economy continues to surround the US Dollar. It is hard to remember a time in recent monetary policy history when the view has been more divided.

A lack of hawkish rhetoric (no mention of ‘additional firming’) at the latest Fed statement was one reason for the recent Dollar sell off and the Pound and the Euro rose towards the highs of recent ranges against the Greenback last week.

However, the US economic variables are not entirely balanced at the moment – signs of an economic slowdown have not really fed through into an easing of price pressures.

Subsequently those economists calling for Fed cuts are matched in number by those wanting to remain cautious on inflation. US New home sales for February (Today; 3pm) and US Consumer Confidence for March (Tuesday; 3pm) are the most likely market movers at the start of the week.

Prospects for another interest rate increase in the UK remain strong even if the timing of such a move is still up for debate. The major gauges (such as Consumer Price Inflation) used by the Bank of England’s 9-strong committee have been and gone.

The Nationwide house prices survey, due for release on Friday, will be watched to see if there are any early signs of a housing market slowdown in the UK. However, the MPC are unlikely to act until definite longer-term trends emerge in this sector.

The major news in the Eurozone will come, as usual, from Germany. The IFO Business climate survey is due for release on Tuesday at 9am and Unemployment for March is out on Thursday morning.

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.

Wall St consolidates gains

Hints that the Federal Reserve was no longer biased towards raising interest rates sparked a strong rally on Wall Street this week, raising investors’ hopes that the recent slump had run its course.

While the Federal Open Market Committee statement on Wednesday was carefully worded, stirring debate about its meaning, the equity market’s response was unequivocal.

The S&P; 500 index bounced back into positive territory for the year with its biggest weekly rise in four years. The rally pushed the benchmark index above its 30-day moving average, an encouraging technical sign for bulls.

The S&P; closed 0.1 per cent higher at 1,436.11, its fifth successive day of gains that put it up 3.5 per cent on the week. The Dow Jones Industrial Average rose 0.2 per cent on Friday to 12,481.01.

The recovery came as Blackstone, the buy-out group, prompted reflection on the recent private equity boom by filing for an initial public offering to raise $4bn.

Energy stocks made the biggest gains this week, buoyed by both rising oil prices and broad strength in equities. The S&P; Energy index stands at its highest point since December, 17.3 per cent above its low for the year.

Exxon stock surged 7.4 per cent to $75.02 this week, while Chevron rose 8.3 per cent to $73.70. The odd one out in the sector was Halliburton, the oil services group, which slid 3.1 per cent to $31.08 after warning about weak US demand.

Homebuilders began to make headway on the back of sound housing data. Sales of existing homes and housing starts were both in excess of depressed expectations.

Concerns about tighter mortgage lending standards hitting demand for homes checked the gains. The S&P; Homebuilders index rose 2.4 per cent this week, but remains more than 20 per cent off its high for the year.

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.

Bank of England minutes surprise markets

The Bank of England minutes from their 8th March meeting released yesterday provided a surprise for the financial markets. Neither of the two hawks expected to vote for a rate increase did and one member, David Blanchflower actually voted for a rate cut.

With the other 8 members voting to leave rates on hold the “dovish” minute’s poured cold water on expectations of an interest rate rise in April or May. Speculation of a rate rise had grown after the above forecast inflation data earlier this week.

Initially Sterling lost some of its recent allure falling more than half a U.S cent although the underlying recent Dollar weakness helped it to recover over the course of the afternoon.

Whilst on the subject of Interest rates the U.S Federal Reserve after its two day meeting announced last night that it would hold Interest Rates at 5.25% and dropped a reference to possible further rate hikes in the post-meeting statement. Although the Fed said after the meeting that inflation was still its main concern, investors took the change in the statement as a sign that a rate cut may be near and sold the dollar.

There were no particular references to the sub-prime mortgage sector, which did come as a relief to markets as the Fed probably wished to indicate it did not see the current sub-prime problems as threatening to the economy

As a result of the U.S Federal Reserves announcement the USD again came under pressure. The Pound reversed all of its losses seen earlier in the day and the Euro rose to the highest point since March 2005 as markets expect more eurozone interest rate hikes this year from the current 3.75%.

U.K Retail Sales for February will be released this morning closely watched by the markets. The number contracted sharply in January -1.8% so expectations today are for a rebound of around 0.5% but it is thought the general trend over the next few months will remain one of a weakening retail sector.

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 Inflation unexpectedly rises in Feb

Data released yesterday showed Britain’s Inflation rate unexpectedly rose in February further above its target keeping expectations alive of another interest rate hike this year. Consumer Prices rose by 0.4% last month taking the annual rate to 2.8% still someway above the Central Banks 2.0% target.

The RPI measure of inflation hit its highest level since August 1991 at 4.6% which may worry policymakers as most wage negotiations are based on this measure. The main reason behind Februarys rise in inflation was the hike in air passenger duty announced in the pre–budget report in December which added 0.08 percentage points to the annual rate. Sterling strengthened against both the USD and Euro as a result of the inflations number.

The USD weakened on the currency markets yesterday after comments from The Peoples Bank of China Governor Zhou were interpreted as USD negative. He was quoted as saying that China does not intend to accumulate further foreign exchange reserves. However, some analysts feel the dollars decline was unwarranted and Zhou’s comment may have been misinterpreted.

Gordon Brown delivers his 11th and possibly last Budget today before he is likely to succeed P.M Tony Blair. He is expected to promise strong growth and impose a tight lid on spending. He is also reported to be considering doubling road levies on the most polluting cars like 4×4’s and a range of tax breaks on energy-saving technologies.

Also in the UK today the Bank of England release the minutes of the March policy meeting. Markets are anticipating the committee voted 7-2 to leave rates at 5.25%.

In the States tonight the U.S Federal Reserve will announce their latest decision on U.S interest rates. It is widely expected that they will hold at 5.25% but markets will focus on the accompanying statement for clues on the health of the economy and the outlook for interest rates.

The recent losses for lenders operating at the riskier end of the U.S. home loan mortgage market have raised fears of slowing economic growth and led some to call for a cut in rates sooner rather than latter.

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.

Bank of Japan leaves interest rates on hold

The Bank of Japan kept interest rates on hold overnight leaving the overnight call rate target at 0.5%. The Financial markets response was limited as the unanimous 9-0 vote was widely expected.

The Central Bank raised its key policy rate to 0.5% from 0.25% last month by an 8-1 vote, judging that the economy would stay on track for steady growth with prices seen in an uptrend. In the subsequent press conference Bank of Japan Governor Toshihiko Fukui said “the Central Bank will focus on economic and price movements in guiding monetary policy, but will also keep an eye on currency movements and recent rises in land prices”

Fukui also offered some comments on the recent volatility in financial markets saying this was a “healthy correction”

In the UK today all eyes will be on the release of the CPI number. The headline annual number is expected to drop slightly from the previous reading of 2.7% to 2.6% still well above the Bank of England’s 2.0% target level.

Falls in petrol and food prices are expected to offset rises in airfares following the increase of air passenger duty. Most economists will monitor this very closely for any clues as the Central Banks next move on interest rates.

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.

Interest Rates and Inflation likely to dominate currency converter’s week

The FOMC meeting on Wednesday and the accompanying statement are likely to be the focus for financial markets this week. Expectations remain for the FED to leave rates on hold at 5.25% although some anticipate the statement may offer acknowledgement of softer growth and perhaps trouble in the sub prime lending sector.

On that note, this weeks U.S housing data (Tuesday & Friday) will be of particular interest in light of the recent focus on the faltering sub prime market.

In the UK a number of important releases are scheduled this week. Tomorrow the annual CPI Inflation is expected to fall slightly to 2.6% from the previous 2.7%. Wednesday sees the Bank of England minutes from the March meeting released, where most analysts are expecting no members voted for a hike.

Hopefully the minutes will shed some light on whether it is now a minority of members who feel the risks are consistently high enough to warrant a further hike this year. On Wednesday the Chancellor of the Exchequer will deliver his budget statement.

Finally UK Retail Sales for February will be released on Thursday. After the January sharp fall this is forecast to rebound in the region of 0.8% putting the annual figure somewhere in the region of 4.0%

In Japan the Bank of Japan begin their two day meeting today and forecasts are unanimous that tomorrows outcome will leave the target rate on hold at 0.5%. This places the focus on Governor Fukui’s subsequent speech and the BoJ’s monthly report which will both be closely monitored for signals of future rate hikes.

For those with an interest in or an exposure to China the Peoples Bank of China announced a 27bp hike in both the benchmark lending and interbank deposit rates on Saturday. The move was widely expected after the PBoC Governor said CPI had become worryingly high.

In the short term the stock market may not react well to the hike, but on the currency front pressure on the CNY appreciation will probably intensify. This is now the third time the Central Bank has raised interest rates since last April.

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.