Articles from December 2007

FED cuts home rates to 4.25pc but recession feared

The Federal Reserve duly reduced its Funds Target Rate by 25bp to 4.25% but disappointed both the stock and bond markets by reducing its Discount rate by only the same margin (the discount rate is the rate at which the large American Banks can borrow from the Fed directly as ‘emergency funding’).

Wall St crashed off and the European bourses arrive this morning braced for a similar reaction. The USD on the foreign exchange benefited marginally from the less than hoped for cuts.

The Fed warned that recent economic data indicated a slowdown in the US economy as a result of “the intensification of the housing correction and some softening in business and consumer spending”.

It added: “Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation.” These comments differ markedly from those made by Fed Chairman Bernanke after last month’s interest rate cut when he sounded a relatively upbeat note on the health of the US economy.

Then it was suggested that the greater risks came from inflationary pressures due to higher energy and food prices. But with no sign of recovery in the housing market since then and the banking system still not functioning under normal conditions, analysts believe the Fed has been preparing for a sharp downturn with more interest rate cuts expected and as such were dismayed that the Fed did not move more aggressively at yesterday’s meeting.

One member of the Reserve Board argued for a full 50bp cut but was out-voted by the other 9 members held firm and the lesser cut was voted through.

One interesting development that has been reported this morning is the proposal being muted at the Fed to move away from operating a discount window to provide liquidity to the market and move towards an auction based system.

A discount window is where the Fed says, here is the price that we want to lend at, who wants it? An auction, would be where the Fed says, we want to lend this much, how much do you want to pay for it.

Basically it is a way of guaranteeing a quantity amount of liquidity injection. At the moment the discount window is being very underutilised. So yes, this is a fairly important innovation IF it is implemented……..

Away from the US, we saw better than expected UK trades (still a huge deficit and largely irrelevant to the market) and a weaker than expected German ZEW report which is much more worrying for the European outlook.

Little reaction in the forex markets on these pieces of data and as such the December doldrums do seem to be taking a firm grip on exchange rates. UK unemployment and wage data today at 9.30am is the first chance for some short term action and the perennially appalling US Trade data at 1.30pm is always good for currency gyrations – the market is expecting a shortfall on about $ 57.3 billion with import prices unchanged at +1.8%.

Of the other economies, the Norges Bank are today expected to RAISE Nowegian interest rates by 25bp to 5.25% which is the level that the Central Bank predicted would be the peak for the next 12 months. Recent inflation data however suggests that the tightening cycle is not yet over and that further increases could be necessary should inflationary pressures persist.

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.

Morgan Stanley issues full US recession alert

Morgan Stanley has issued a full recession alert for the US economy, warning of a sharp slowdown in business investment and a “perfect storm” for consumers as the housing slump spreads.

In a report “Recession Coming” released today, the bank’s US team said the credit crunch had started to inflict serious damage on US companies.

“Slipping sales and tightening credit are pushing companies into liquidation mode, especially in motor vehicles,” it said.

“Three-month dollar Libor spreads have jumped by 60 to 80 basis points over the last month. High yield spreads have widened even more significantly. The absolute cost of borrowing is higher than in June.”

“As delinquencies and defaults soar, lenders are tightening credit for commercial, credit card and auto lending, as well as for all mortgage borrowers,” said the report, written by the bank’s chief US economist Dick Berner.

He said the foreclosure rate on residential mortgages had reached a 19-year high of 5.59pc in the third quarter while the glut of unsold properties would lead to a 40pc crash in housing construction.

“We think overall housing starts will run below one million units in each of the next two years — a level not seen in the history of the modern data since 1959,” he said.

Although the US job market has apparently held up well, an average monthly fall of 138,000 in the number of self-employed workers over the last quarter suggests it may now be buckling. “Consumers face what could be a perfect storm,” said Mr Berner.

The partial freeze on subprime mortgage rates announced last week by US treasury secretary Hank Paulson may help cushion the blow for some banks, but it could equally backfire by adding a “risk premium” that drives even more lenders out of the mortgage market.

Like Goldman Sachs, and Lehman Brothers, the bank no longer believes Asia and Europe will come to the rescue as America slows.

It has slashed its 2008 growth forecast for Japan from 1.9pc to 0.9pc, and warned that credit stress will weigh heavily on the eurozone.

Mr Berner said US demand is likely to contract by 1pc each quarter for the first nine months of 2008, but the picture could be far worse if the Federal Reserve fails to slash rates fast enough.

It is betting on a quarter point cut this week, with three more cuts by the middle of next year. “We expect the Fed to insure against the worst outcome,” he said.

Morgan Stanley is the first major Wall Street bank to warn that it is may now be too late to stop a recession, though most have shifted to an ultra-cautious stance in recent weeks.

The bank at first treated the August crunch as a “mid-cycle correction”, much like the financial storm after Russia’s default in 1998. But the collapse of the US commercial paper market has now continued for seventeen weeks, suggesting a “fundamental deleveraging of the banking system.”

Mr Berner — known at Morgan Stanley as the “resident bull” — is one of the most closely watched analysts on Wall Street. While he began to turn bearish last April as the credit markets turned nasty, the latest report is written in tones that may is rattle the fast-diminishing band of optimists.

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 sees strong US data

Earlier last week, the chance of a 25 vs. 50bp rate cut was close to fifty-fifty. Now, the odds for a half point cut are less than 25 percent because the payrolls figure was not bad enough to warrant a larger rate cut.

Managing expectations has become a big component of the Fed’s job these days whether they are willing to recognise it or not. If the market is pricing in a quarter point cut and the Fed under delivers by leaving rates unchanged, they risk triggering a sharp re-pricing of the yield curve.

If they over deliver by cutting interest rates 50bp, it could cause many people to wonder whether some bad news has yet to be discovered.

The Federal Reserve’s interest rate decision has the power to shift the trend in the market, but they will probably contain volatility by releasing a more cautious FOMC statement that points out the risks of both growth and inflation.

If the Fed fails to give the markets the clarity that it needs, producer prices, consumer prices and retail sales will. If inflation and spending remains strong, then the recession story gets shelved for the time being and the dollar could see a short term recovery.

The other releases that we are also expecting are pending home sales, the US trade balance, import prices and industrial production.

Is the European Central Bank just talk or will they actually follow through with an interest rate cut?

Unfortunately, this question will not be answered until the next ECB meeting on January 10th at the earliest. With each passing day however we have more reason to believe that the ECB could actually make good on their threats.

On Friday, German industrial production was stronger than expected while the OECD leading indicator for the Eurozone remained unchanged at 98.4. Even the Eurogroup which has previously called for the ECB to step in and stop the Euro from rising now says that the economy is proving resilient in the face of shocks.

In the week ahead, we do not have many important pieces of data other than the German ZEW survey, which has been losing its market moving potential because it has repeatedly called for a slowdown that has yet to unfold. This means that US data will probably dictate the movements in the EURUSD.

Meanwhile aside from the Federal Reserve, the Swiss National Bank also has an interest rate decision. They are widely expected to leave rates unchanged, but there is a risk for a surprise rate hike or at least hawkish commentary from the SNB.


The British Pound recovered for the second day in a row which says a lot because it comes on the heels of the first interest rate cut in two years.

The futures market is still pricing in 50 to 75bp of easing next year and if expectations are correct, then the pound should continue lower. However there are often retracements within a broad downtrend and we expect to see one at the beginning of this week.

Before Tuesday’s FOMC meeting, we are expecting producer prices and the trade balance. The UK trade deficit should improve because the export component of manufacturing PMI accelerated last month.

We already know that inflation is a problem because the latest monetary policy statement talked up the risks to short term inflation. However anything goes after the FOMC meeting because the US rate decision could shift the near term outlook for many currency pairs. On Wednesday we also have UK employment data which we expect to be pound bearish.

Prices at the London open
GBPUSD – 2.0321
GBPEUR – 1.38.73
EURUSD – 1.4649
GBPJPY – 226.64
GBPCHF – 2.2936
GBPAUD – 2.3133
GBPCAD – 2.0390
GBPZAR – 13.6596

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 interest rates down to 5.5 pc, ECB stays on hold at 4pc

The euro made strong gains across the board after hawkish comments from European Central Bank chief Jean-Claude Trichet reinforced the idea that euro zone interest rates are likely to head higher still.

Following the ECB’s decision to hold its key rate at 4.00 %, Trichet said in a press conference the central bank is ready to counter growing inflation risks. He also revealed that the governing council discussed the possibility of a rate hike at its meeting yesterday.

In parallel, the ECB raised its inflation forecasts and downgraded its growth predictions. Despite the prospect of lower growth, price pressure appear to remain the ECB’s primary concern.

Elsewhere, the Pound recovered from losses incurred after the Bank of England cut interest rates.

The UK currency dropped to a 10-week low against the dollar and sank against the euro after the BoE lowered the cost of borrowing to 5.50 % from 5.75 %. It said the UK economy has begun to slow and inflation should be tempered by flagging demand.

Analysts said rates may have to fall as low as 4.00 % to avoid a brutal economic slowdown.

The Pound weakened steadily against the euro but gradually recovered from its steep fall against the dollar, helped somewhat by poor US jobs data. First-time claims for unemployment insurance rose to their highest in more than two years in the four weeks to Dec 1, with 338,000 new claims filed.

The data add to an increasing bulk of evidence that the US economy is heading for a sharp slowdown, and will fuel expectations for more rate cuts from the Federal Reserve in the months to come.

The Fed announces its next decision on borrowing costs on Tuesday and todays non-farm payrolls report for November will again be crucial for the market’s expectations ahead of the meeting.

Wednesdays estimate from the ADP payrolls firm was for a rise of 189,000 in the November payrolls. This is more than twice the 65,000 increase analysts had forecast for the official non-farm payrolls figure today, although analysts point out the data is notoriously volatile.
Prices at the London open
GBPUSD – 2.0235
GBPEUR – 1.3856
EURUSD – 1.4599
GBPJPY – 225.11
GBPCHF – 2.2918
GBPAUD – 2.3075
GBPCAD – 2.0438
GBPZAR – 13.6011

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.

Ex MPC duo urge Bank to cut rates

Two of the most respected former Monetary Policy Committee members have urged the Bank of England (BoE) to cut borrowing costs tomorrow.

Willem Buiter and Sushil Wadhwani have warned that unless the Bank reduces rates by at least a quarter percentage point it risks leaving the economy even weaker over the coming months.

However, Prof Buiter said he expected the Bank to leave rates unchanged, accusing it of being “wimpish”. Dr Wadhwani said that by waiting too long the Bank was in danger of returning to the “bad old days” of backward-looking monetary policy.

The double-warning intensifies the dilemma facing the nine MPC members in their two-day meeting, which begins today.

The majority of City economists expect the Bank to leave rates on hold at 5.75pc, despite having indicated in last month’s Inflation Report that it is poised to cut rates by at least half a percentage point over the next year.

Since then, the credit crunch has returned to haunt the City’s money markets, pushing up the London Interbank Offered Rate to new peaks.

Three-month Libor rose to just under 6.65pc yesterday, closing in on highs reached in the first wave of credit market chaos in August.

Prof Buiter, now of the London School of Economics, said: “If I was predicting 50 basis points of cuts [as the Bank did in the Inflation Report] I would have done it already. I never understood all this waiting around for better information. You make the forecast and you act. Otherwise it seems kind of wimpish.

“This financial kerfuffle has been going on since August. What are we going to learn from [waiting] another month? You don’t want to be running behind the curve.”

His concerns were echoed by Dr Wadhwani, who now runs an eponymous hedge fund.

“Our view on the committee was that you always want to be pre-emptive [with rate decisions] because you end up doing less than you would otherwise have to,” he said. “You don’t hold back and wait for the data to weaken – that’s how monetary policy was conducted in the bad old days.

“I have been surprised they haven’t cut already. I think they should really be getting on with it.”

To add to the pressure faced by the Bank, its Canadian counterpart surprised markets yesterday with a surprise cut in its borrowing rate.

All attention will now be focused on today’s services survey from the Chartered Institute of Purchasing and Supply. If it is weak, it could push the MPC into making a cut, said Prof Buiter.

He added that households and young businesses would be the main victims of the squeeze, as banks pass on higher borrowing costs to them.

“Any start-up is gong to be clobbered by this, but most existing businesses are pretty flush at the moment,” he said. “I doubt what’s going on with 3-month libor affects all businesses. For new businesses it will be a very rough time – as it will for households.”

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.

Stronger data helps currency converters

The dollar was steady after a key survey on US manufacturing activity came in slightly above forecasts, while the Pound rose to a 19-day high against the euro as strong UK data dented the chances of a Bank of England interest rate cut this week. The ISM manufacturing index dipped to 50.8 from 50.9 but analysts had expected a bigger drop to 50.4.

While new orders and production improved slightly, several of the components were weak in November. However, some in the market had feared a reading below 50, which would have indicated a contraction in activity.

There was limited reason for optimism in the report, particularly given a sharp fall in the employment component, which does not bode well for Friday’s key US jobs report and may add weight to the chances that the Federal Reserve will cut interest rates again.

Deterioration in employment at this stage could solidify the case for further US rate cuts. Despite the recent short-covering exercise, further dollar weakness remains the overwhelming likelihood by the end of this week.

Meanwhile, the pound rose to a 19-day high against the euro, which dipped below the 0.71 mark after yesterday morning’s stronger-than-expected UK manufacturing PMI survey dented the chances that the Bank of England will cut interest rates on Thursday.

The CIPS PMI index of manufacturing activity accelerated sharply to 54.4 in November from 52.8 in October, well above analysts’ expectations for a slight moderation to 52.5. The MPC is scheduled to make its monthly interest rate decision on Thursday. Though the vote is expected to be tight, the majority in the market are forecasting they will leave rates on hold.

Interest rate decisions will provide the focus of the week, with a decision by the Bank of Canada scheduled for todayand from the European Central Bank on Thursday.

Meanwhile, investors will also be monitoring Wednesday’s US ISM survey on the services sector as well as Friday’s crucial non-farm payrolls report for November.
Prices at the London open
GBPUSD – 2.0630
GBPEUR – 1.4078
EURUSD – 1.4659
GBPJPY – 227.38
GBPCHF – 2.3280
GBPAUD – 2.3603
GBPCAD – 2.0720
GBPZAR – 14.0176

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 currency strengthens on forex risk taking

The dollar ended the week on a good run, helped by some recovery in overall risk appetites, which saw the euro dropping below the 1.47 usd for the first time in 10 days.

Rises in equity prices, with Wall Street well inside positive territory, helped boost the dollar alongside month end book squaring activities, even though the afternoon’s US data was at best mixed. For one, US personal income and spending data rose more slowly than expected, suggesting that consumer spending may cool off quickly.

At the same time, however, there was more evidence of rising inflationary pressures, with the personal consumption expenditure (PCE) index growing to its highest level this year due to rises in food and energy costs

US rate cuts are expected to keep the economy from slipping into a recession and are seen by some as a positive for the dollar just now. As risk aversion begins to dissipate, the yen and Swiss franc are coming under pressure with the reemergence of carry trades.

Speaking on Friday, Federal Reserve chairman Ben Bernanke signalled more openness to cutting rates again on December 11, although he stressed this would be dependent on upcoming data.

Fed policymakers will need to be exceptionally alert and flexible given the risks to consumer spending and the economy, Bernanke said in a speech overnight. Among Fridays other US data, the Chicago purchasing managers’ index was stronger than expected, rising to 52.9 in November from 49.7 in October while US construction spending was weaker than predicted.

Separately, month end book squaring also went in favour of the greenback, especially as this is the financial year end for US investment banks

In Europe, the boost for the euro from strong inflation numbers faded slightly as the trading day wore on. The single currency rose after stronger-than-expected inflation figures continued to suggest that the European Central Bank will leave interest rates on hold for the foreseeable future.

The provisional estimate for the euro zone harmonised index of consumer prices showed inflation rose to an annual 3.0 % in November, up from 2.6 % in October and above forecasts for 2.9 %.

With the headline rate likely to head even higher over the coming months, the ECB will remain in a state of high alert for signs of a wider pick-up in price pressures. This was confirmed by ECB president Jean-Claude Trichet, as he reiterated that the central bank’s prime concern is to tackle price stability.

Higher inflation will leave the ECB facing a dilemma, giving them little chance to cut interest rates to counteract a slowing economy. The risks to the economy were highlighted on Friday by woeful German retail sales figures, which revealed an unexpected slump in sales of 3.3 % in real terms during October.

Currency trading remains subdued and rangebound, however, with the euro making up little ground against the dollar after the US currency gained from a pick-up in risk appetite.

The Pound also lost ground to the dollar after a weaker-than-expected UK consumer confidence survey. Gfk/NOP said its monthly consumer confidence index fell to -10 from -8 in October, below analysts’ expectations for -9 and the lowest reading since March 2003.

From the vantage of this particular survey, it would appear that the UK consumer is succumbing to the unfavourable headwinds emanating from both the financial and housing markets. The Bank of England’s Monetary Policy Committee meets this week and analysts see some chance that they will opt to cut interest rates, though worries over inflationary pressures may well encourage them to hold off until early next year.

Prices at the London open
GBPUSD – 2.0621
GBPEUR – 1.4033
EURUSD – 1.4690
GBPJPY – 228.19
GBPCHF – 2.3212
GBPAUD – 2.3379
GBPCAD – 2.0580
GBPZAR – 13.9803

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.