Articles from September 2007



US housing continues to slump

US final GDP rose at a revised annual rate of 3.8% for the second quarter which was right on expectations. Note this is for the period April to June prior to the recent turmoil. US initial jobless claims for the week unexpected dropped for the week ended September 22.

US New home sales resumed falling in August, sinking to the lowest level in seven years, and prices tumbled, signalling the housing sector will remain a drag on the U.S. economy. Sales of single-family homes decreased by 8.3% last month to a seasonally adjusted annual rate of 795,000, the Commerce Department said Thursday.

July new-home sales rose 3.8% to an annual rate to 867,000; originally, the government said July sales rose by 2.8% to 870,000.

UK Retail sales growth slowed slightly in September to its weakest in almost a year, a Confederation of British Industry survey showed yesterday. The CBI’s monthly distributive trades survey’s reported sales balance fell to +12 from +15, exactly as predicted by analysts. Retailers had predicted a reading of +17 last month.

Banks unexpectedly borrowed close to €3.9 billion ($5.51 billion) in overnight funds at a penalty rate of 5.00% Wednesday, indicating that financial market conditions remain tense, data from the European Central Bank showed on Thursday. This is the highest use of the marginal lending facility since October 2004, when banks borrowed €7.9 billion.

ECB VP Papademos commented that the ‘effects of the market turbulence on the Euro area economy have not been significant’ and that ‘the potential effect will depend on future financial market developments’.

German September inflation accelerated to the highest in six years, rising from 2% to 2.7%. Speaking yesterday, ECB President Trichet said that it was too early to say whether the recent market disruption will hurt Euro zone growth, only that uncertainty had increased.

On a positive note, Europe has seen a doubling in new bond issuance following the Fed rate cut according to a data provider with solid subscriptions albeit at a higher spread than prior to August and early September. US issuance remains subdued although it didn’t suffer the same drop as Europe but the total stock outstanding has reduced again on the week.

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.

US Dollar bounces back

The dollar recovered slightly from a brief dip following weak durable goods orders, as market participants had time to digest the volatile data to decide they were not as bad as feared.

Durable goods orders in the world’s largest economy came in far below expectations, dropping 4.9 % in August, and by 1.8 % excluding transportation goods, compared with forecasts for declines of 3.1 % and 1.2 % respectively. The August orders report looks weak at first blush.

But the decline should not be too much of a surprise, especially in view of the unsustainable upward spikes in machinery and motor vehicles orders in July. The order backlog still remains solid, and shipments moved up by 0.8 % in August, suggesting that business equipment and software investment is still on track to make some positive contribution to third quarter growth.

The dollar was still at close to record lows against the euro though following Tuesday’s disappointing housing and consumer confidence data.

The market will look to today’s GDP and new home sales data to provide further signs on how the US economy is performing after the summer’s turbulence. The final GDP number for the second quarter is expected to be revised down slightly to 3.9 % from the initial 4.0 % reading. New home sales for August are expected to fall to an annual rate of 830,000, down from 870,000 the prior month.

Meanwhile, the pound fell back as anxiety resurged over a Bank of England report that showed lenders expect credit conditions for businesses to tighten further in the next three months. The pound was also pressured by growing speculation that the BoE’s next move in its monetary policy will likely be to cut interest rates in the face of this growing risk.

We do believe there is a high probability that interest rates will fall sharply over the next 12 months as the BoE attempts to fend off any further potential fallouts from the current credit market turmoil.

Yesterday the Pound got a mild boost after it emerged that the Bank of England’s auction of 10 bln stg worth of emergency funds, at an interest rate of 6.75 %, was completely ignored by commercial banks.

Analysts had expected scant take-up of the auction because the Libor rate has been falling sharply in recent days, as banks become more willing to lend to each other again. The zero-bid result, however, came as a surprise and helped offset earlier sterling weakness, which followed a BoE report that showed lenders expect credit conditions for businesses to tighten further in the next three months.

The prospect of more expensive, less available credit increases the downside risks to business confidence, investment and employment over the coming months, and is likely to increase expectations that the BoE could trim its benchmark interest rate before the end of the year.

The euro meanwhile, showed little lasting reaction to a weak confidence reading. The GfK market research institute said its consumer climate index for Germany is forecast to fall to 6.8 points in October from 7.4 points in September, which was revised down from 7.6 points. The October reading missed economists’ expectations for a smaller decline to 7.0.

Earlier, the European Central Bank injected 50 bln eur into money markets via a longer-term refinancing operation. This compares with 75 bln eur leaving the market on the expiry of a previous longer-term refi.

Elsewhere, the Australian dollar strengthened, buoyed by stronger metals and oil prices and Norway’s central bank raised its benchmark rate for the sixth time this year to 5%, following rate increases earlier this month by Switzerland and Sweden.

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.

Deposit Insurance for lenders?

The news making headlines overnight is the report in the Independent newspaper that the Financial Services Compensation Scheme has a war chest of £4.4bn for its deposit protection plan.

The GB Pound was heavily sold on almost all crosses on this revelation as the FSCS apparently had a fund worth £9bn which has reduced through payouts to depositors of collapsed credit unions. This is interesting news given that the government is considering depositor protection of up to £100’000.

German business confidence in September dropped to a 19 month low this morning as the strength of the Euro has caused caution on the part of companies in light of the current financing conditions.

The Euro saw highs in excess of 1.4100 yesterday and this is concerning given the state of the US economy and the reduced prospects for export growth.

The Bank of Japan August meeting minutes where released and provided comment on the nature of the decision not to raise rates. It showed that the swings in global financial markets were of concern.

They stated that they would adjust rates when the markets stabilise. As a result the JPY has strengthened against the US 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 look to the US for forex lead

The dollar strengthened a touch from its record lows against the euro after Federal Reserve official Richard Fisher said the Fed’s rate cut last week prevented an excessive slowdown in economic growth.

Markets had been anticipating comments from Fisher and Fed chairman Ben Bernanke yesterday for clarification on the Fed’s thinking when it cut rates by a half-point last week to 4.75 %. The central bank is trying to prevent a severe economic slowdown following the collapse of the US subprime lending market. Fisher said the Fed would have risked ‘unacceptably slow economic growth’ had it not cut interest rates last week.

He said that recent trends on inflation provide ‘some wiggle room to adjust our course’ on rates, and that if a further correction either toward growth or against inflation is needed, ‘we will make it’.

Highlights of the US data released this week include today’s existing home sales and consumer confidence, Wednesday’s durable goods orders, and Thursday’s new home sales.

In terms of the dollar, though, other analysts believe the data will be weak enough to fuel speculation of further rate cuts, and consequently weaken the US currency.

The general tone of the US data this week is likely to compound expectations for further cuts in US interest rates, with market attention now settling on the possibility of a further quarter point-cut at the October Federal Open Market Committee meeting.

Meanwhile, further hints of Fed thinking will come as Bernanke speaks again on Thursday.

Things were quiet elsewhere on currency markets, although the euros continued strength is increasing speculation that European rate-setters may be forced to act to weaken the single currency.

The euro’s rise to over 1.40 usd, it hit an all-time high of 1.4129 yesterday morning, is prompting cries of complaint from business and political leaders in Europe, who want some devaluation of the euro to help beleaguered exporters.

French President Nicolas Sarkozy is at the fore of this movement and recently described the euro at 1.40 usd as a ‘problem’ for euro zone economies. He also applauded the US Federal Reserve’s half-point cut in interest rates last week.

The European Central Bank, which has independence over monetary policy, has refused to heed political pressure to cut interest rates as it is determined to keep inflation under control. Its benchmark interest rate is currently 4.00 %.

On the other hand, the BoE left its Bank rate on hold at 5.75 % this month since it said turmoil on financial markets, a consequence of the US subprime collapse, was clouding the economic outlook. Markets will be keen to see how much of the BoE’s anti-inflationary leaning has survived the market turmoil and credit crunch.

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.

US markets remain the focus

The dollar was steady above 15-year lows against a basket of currencies, as investors squared up positions following the currency’s sharp falls last week, in the wake of the US Federal Reserve’s half point interest rate cut.

There are many market participants who think that the dollar’s recent decline may have been overdone, especially as there are now growing signs that the economic slowdown in the US is beginning to be felt around the world.

That was most evident on Friday in the flash PMI estimates for the euro zone’s manufacturing and services sectors. Both showed a sharp drop. The manufacturing PMI fell to 53.2, the lowest level since November 2005, while services fell to the weakest since August 2005 of 54.0, both below forecasts for a smaller drop.

Though the readings remain above the 50 level that marks expansion in the sector, they confirm that the euro zone economy is taking a hit from the recent turmoil on financial markets and will further decrease the likelihood of the European Central Bank raising interest rates any further.

Nevertheless, the market’s main focus remains the US, and this week’s event risk remains high for the US currency. The economic data flow picks up, albeit that the market’s attention will still firmly rest on conditions in the credit markets, liquidity issues and the stronger euro.

Indeed, with the global focus still on US growth concerns, it remains difficult to expect the euro to soften over the week ahead even though the euro zone economic releases are likely to be on the soft side.

Earlier on Friday, the euro hit a new all-time high of just below 1.4120 against the dollar, contributing to the fall in the dollar index to a 15-year low of 78.398. Analysts said the inexorable rise in the euro may prompt some attempts by European policy-makers to talk down the value of the single currency.

Until August, the European Central Bank could afford to lean back and let the rising euro do some of the monetary tightening for the ECB, however, the turmoil in financial markets, the heightened uncertainty about the growth outlook and intense political pressure have changed the situation. The current surge in the euro to a new record high is a serious issue for the ECB.

Though ECB president Jean-Claude Trichet has stressed the bank’s independence in all economic matters, complaints from politicians have already begun. Speaking on French television, French President Nicolas Sarkozy continued to criticise the ECB’s rate tightening bias and called for increased consultation with politicians on monetary policy.

Elsewhere, the Canadian dollar broke parity against the US dollar, reversing earlier losses stemming from weak Canadian retail sales figures, as oil prices hit another fresh record high.

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.

US Dollar slumps to new lows in credit crunch uncertainty

The US dollar languished at all time lows against the euro and slumped to parity with its Canadian cousin for the first time in 31 years as it succumbed to a sell-off in the wake of the Fed’s aggressive rate cut for a third day running. The euro broke through the 1.40 usd level early yesterday and found enough momentum to close in on 1.41 usd.

There were other reasons for the dollar’s losses as well. Speculation is rife that oil-rich Saudi Arabia may move away from pegging the riyal to the dollar. The Arab nation did not cut interest rates after the Federal Reserve’s 50 basis point reduction Tuesday, further fuelling the rumours.

An article in the Daily Telegraph suggested that the Saudis are preparing to break out of the dollar currency peg, something which would spark a ‘stampede’ out of the dollar across the Middle East.

Against this backdrop, Fed Chief Ben Bernanke’s words that the fallout in the US sub-prime market will continue. Delinquencies and foreclosures in the sub-prime mortgage market are likely to rise further, Federal Reserve Chairman Ben Bernanke warned a Congressional hearing yesterday.

His comments offset any benefit for the dollar from a more upbeat US Treasury Secretary Henry Paulson, who continued to downplay the credit crisis, telling members of Congress that the US is poised for continued economic growth.

Many analysts predict that US rate setters will have to reduce interest rates again to keep US growth on track.

Elsewhere, the Pound recovered moderately after strong UK retail sales data and a better-than-expected manufacturing survey decreased the likelihood that the Bank of England will cut interest rates soon.

The Office for National Statistics reported that retail sales in August rose 0.6 % on the month, just below July’s 0.7 % gain but well above analysts’ forecasts for a 0.1 % rise.

Meanwhile, there was further good news on the manufacturing sector from a better-than-expected survey from the Confederation of British Industry, while data showing strong money supply growth will make it even more difficult for the Bank to justify cutting interest rates.

Focus yesterday, however, centred on Bank of England governor Mervyn King’s testimony before MPs on the Treasury Select Committee where he was grilled on the central bank’s much criticised response to the Northern Rock crisis.

Rumours had been circulating that King could be forced to resign over the issue, but in the event King was seen as giving a good account of himself as he shifted the blame onto legislation, especially the Market Abuses Directive, which prevented his ‘preferred’ measure of using a covert lender of last resort operation.

Some analysts found comfort in King’s assertion that the central bank will not be taking short-term options.

Comments from other rate setters at yesterdays hearing also appeared to indicate support for King’s view. Kate Barker, the resident housing expert, said UK mortgage repossessions are ‘not alarming” despite recent rises in defaults, adding the housing market remains ‘relatively robust.’

Finally, The Canadian dollar reached parity with the U.S. dollar yesterday for the first time since November 1976. This week the CAD rose sharply against its U.S. counterpart after the Federal Reserve announced a dramatic half-point cut in its benchmark interest rates.

The Bank of Canada, meanwhile, has kept its equivalent rates stable. As a result, the spread between U.S. and Canadian interest rates widened, making Canada a more attractive place for German, Japanese, American and other foreign investors to put their money.

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 U Turn

In what amounted to a dramatic change in policy, the BoE yesterday announced that it was to auction in excess of £10bn three month money. This immediately brought deposit rates down and helped the FTSE rally up 2.8%.

The BoE had previously stood out amongst central banks by refusing to intervene and inject funds into the market to ease the liquidity problems. However, some are already saying that this is too little too late with the damage already done…

The pressure was mounting on the BoE to act after the Fed cut rates on Tuesday by 50bpts and inter-bank rates still remained inflated. These actions came on the day that the August MPC meeting minutes were announced which showed that a unanimous vote kept rates on hold last month.

Many now are forming the opinion that a rate cut next month may be on the cards, and at the very least we have hit the peak of interest rates for the time being.

CPI came in slightly softer than expected at 1.8% this week. Inflation appears under control after two consecutive months of being on target. Also the Fed appears to be shifting its focus from inflationary pressures to the economy at large, easing lending pressures on institutions and home owners.

This begs the question will the BoE follow suit and cut rates next month, something that until recently seemed extremely remote?

Clearly these are uncertain times that have tested the markets, central bankers and their policies. Predicting the next move is not going to be easy. A recent poll by Reuters asked 60 market experts to predict where they expect cable would be in 1 month out to 12 months, the ranges are quite surprising.

The average guess for the 1 month was 2.0110, the minimum 1.9570 and the maximum of 2.0600. The 12 month expectations were even wider in their scope. The mean was 1.9450, the minimum 1.7900 and the maximum 2.1200.

Clearly then even the so called experts can’t agree, illustrating the volatility and unpredictability of the forex markets. Certainty is now the commodity of the day and the desired goal of all risk managers with the employment of more sophisticated solutions.

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’s U Turn

In what amounted to a dramatic change in policy, the BoE yesterday announced that it was to auction in excess of £10bn three month money. This immediately brought deposit rates down and helped the FTSE rally up 2.8%.

The BoE had previously stood out amongst central banks by refusing to intervene and inject funds into the market to ease the liquidity problems. However, some are already saying that this is too little too late with the damage already done…

The pressure was mounting on the BoE to act after the Fed cut rates on Tuesday by 50bpts and inter-bank rates still remained inflated. These actions came on the day that the August MPC meeting minutes were announced which showed that a unanimous vote kept rates on hold last month.

Many now are forming the opinion that a rate cut next month may be on the cards, and at the very least we have hit the peak of interest rates for the time being.

CPI came in slightly softer than expected at 1.8% this week. Inflation appears under control after two consecutive months of being on target. Also the Fed appears to be shifting its focus from inflationary pressures to the economy at large, easing lending pressures on institutions and home owners.

This begs the question will the BoE follow suit and cut rates next month, something that until recently seemed extremely remote?

Clearly these are uncertain times that have tested the markets, central bankers and their policies. Predicting the next move is not going to be easy. A recent poll by Reuters asked 60 market experts to predict where they expect cable would be in 1 month out to 12 months, the ranges are quite surprising.

The average guess for the 1 month was 2.0110, the minimum 1.9570 and the maximum of 2.0600. The 12 month expectations were even wider in their scope. The mean was 1.9450, the minimum 1.7900 and the maximum 2.1200.

Clearly then even the so called experts can’t agree, illustrating the volatility and unpredictability of the forex markets. Certainty is now the commodity of the day and the desired goal of all risk managers with the employment of more sophisticated solutions.

As a result of Tuesday’s Fed rate cut and yesterdays BoE intervention both Sterling and Dollar weakened, with the Euro making significant gains; hitting record highs against the Dollar and a 18-month high against Sterling. Cable rose back above 2.00 after earlier turbulence.

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 slashes rates to head off slowdown

Stocks surged after the US Federal Reserve moved aggressively to head off the risk of asharp slowdown in the US economy yesterday by cutting interest rates 50 basis points to 4.75 per cent.

The Fed said the rate cut was to “help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets”. It was also intended to “promote moderate growth over time”.

It also cut the discount rate at which the US central bank lends directly to banks by 50bp and held out the possibility of further interest rate cuts to come.

Tightening in credit conditions had the potential to “intensify the housing correction and to restrain economic growth more generally”, the Fed said.

Hinting at possible further easing, the Fed said market dev-elopments had “increased the uncertainty surrounding the economic outlook”.

It would “continue to assess the effects of these and other developments” and “act as needed” to pursue its dual objectives of stable prices and sustainable economic growth.

The S&P; 500 index was up2.14 per cent at 1,508.29, after having been higher by about0.5 per cent in early afternoon trade. The financial sector led the gains.

The dollar set a new record low of $1.3964 against the euro, while interest rate futures continued to price in more rate cuts over the next 12 months, with the three-month rate, seen at 4.28 per cent by September 2008, down from 4.45 per cent early in the day.

Bond yields diverged as the yield on the policy-sensitive two-year note plunged 11bp to3.95 per cent, while the yield on the 30-year bond rose sharply.

The long bond yield rose to4.8 per cent from 4.74 per cent. Gold prices rose to a 26-year high of $733.40 an ounce. Oil also hit a record high in the US.

Core inflation, the Fed observed, had “improved modestly this year” – a significant shift since the previous meeting, when it believed a sustained decline in inflation had not yet been “convincingly demonstrated”. But “some inflation risks remain” and the committee pledged to “continue tomonitor inflation developments carefully”.

This reference is a reminder that, while no policymakers formally dissented from yesterday’s decision, a number of officials remain worried about inflation.

Opting for an aggressive 50bp cut rather than an incremental 25bp reduction reflects the Fed’s reluctance to fall behind at a time when the economic outlook is evolving rapidly.

Officials are anxious to act pre-emptively to reduce the risk of a severe slowdown that could turn into a recession, even though there is little evidence to date that the economy is approaching such a tipping point.

To the extent that they are able to reduce the recession risk, their actions should helpstabilise financial markets, in particular the market formortgage-backed securities.

Some of the most senior officials favoured a 50bp move to create a positive psychological effect on 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.