Articles from April 2008



Euro Inflation takes to the stage

Euro zone inflation took centre stage yesterday as Jean-Claude Trichet spoke at a conference in Vienna. The European Central Bank President made it clear that the governing council must use interest rates to deliver price stability.

Any other considerations, such as growth and employment are secondary. These comments effectively dismiss the recent calls from French and Italian government officials for growth to be taken into account.

Inflation which reached 3.6% last month, the fastest pace in 16 years, has led to the ECB leaving rates unchanged. It appears this may be the same reason for the repo rate remaining at 4% in the near future. In the same speech, Trichet again voiced his concern about the euro’s strength and the impact it has on European exports.

The euro bounced back against the dollar during yesterday’s trading, after three days of declines. Yet another occasion on which Trichet talks tough on inflation, also mentions the detrimental effects of a stronger euro and the market automatically pushes the single currency higher.

There was additional evidence, provided by the Hometrack Ltd survey, that the UK housing market is correcting. The results which were released early yesterday showed the average price of a home declined a further 0.6% in April. This is the biggest month on month drop in over three years for this report.

Oil prices climbed again to reach a record $119.93 a barrel, caused by a strike at a refinery in Scotland and further violence in Nigeria.

Possibly of greater interest is that the EUR/ USD cross rates has had a correlation of 0.96 with the price of oil. Just a bit closer and it’s a perfect hedge.

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.

Wise Money growth v inflation debate continues

There was further evidence on Friday of the difficulty that the Bank of England face over near term base rate decisions.

UK Gross domestic product rose 0.4% in the first quarter, which is the slowest since the start of 2005. Year on year growth came in at 2.5%. Perhaps, support for the MPC members who voted for a reduction that is until UK consumers inflations expectations are taken into account.

A survey also released on Friday set a record high for a second consecutive month when it showed that consumers expect prices to rise by 3.8% in the next 12 months. So it could be that the sharp rise in inflation expectations makes the MPC think twice about lowering rates.

It seems that market participants are increasingly taking the view that the Bank of England may slow the pace of interest rate cuts as indicated by UK government bonds.

The yield on the 2 year gilt pushed to the highest level in four months over concerns for UK inflation and speculation that the worst of the credit crisis is over.

Possible credit market easing has led to the unwinding of safe-haven trades globally as investors move out of bonds and back to stocks. Particularly in Japan where yields on 5 year government bonds rose the most since 1999 after consumer prices soared 1.2% in March from a year earlier.

The Pound had been heading for a weekly drop against the dollar but managed a fight back on Friday as traders took profit on the possibly excessive move of the previous few days.

The UK currency has given up 4% against the dollar over the past six months and may remain under pressure on indications that the Fed may be nearing the end of its monetary easing cycle.

Market sentiment that the Federal Reserve will probably stop cutting interest rates also allowed the dollar to post its biggest weekly gain in a month against the euro.

This was despite US consumer confidence falling to a 26 year low amid fears of record gasoline prices and rising unemployment. The university of Michigan sentiment index decreased to 62.6 in April from 69.5 the previous month.

As we head into the week with the FOMC announcing its decision on the Fed Funds rate on Wednesday, futures contracts now show there to be a 24% chance the target rate will stay at 2.25% up from 2% a week ago.

The majority of the remaining probability is for a 25 basis point reduction.

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 New home sales plummet

Whilst US home builders have slashed average house prices by record amounts we still saw new home sales plunge by 8.5% in the month of March to 17 year lows, according to the Commerce Department who released their estimation yesterday. New home sales are down 36.6% compared with a year ago!

However it wasn’t all doom and gloom for the US with jobless claims falling from 375,000 to 342,000; this being the lowest level for 2 months and coming in better than the predicted 375,000.

Dollar weakness was tempered somewhat by chinks developing in the Eurozone armour. The Euro fell to a one-week low against the dollar on Thursday after a survey showed German corporate sentiment deteriorated by more than expected in April.

The German IFO business climate fell from 104.80 in March to 102.40 this month, which was significantly lower than the market expectation of 104.0pts. This is the weakest level since January 2006 and could well be the turning point of the single currency’s uptrend.

On the UK side retail sales came in down 0.4% for March but were revised up to 4.6% for the year. The British Retail Consortium demonstrated concern that this figure was misleading given that the retail sector are making sounds that they are struggling.

Sterling failed to lift itself out of it’s current trough against the Euro as poor sentiment on Britain’s economy convinced investors the Bank of England is set to cut interest rates further.

This week it remained just above a record low against the Euro as the housing market weakened and consumer spending softened, although we have seen some fight back this morning. There’s hope yet for the British holiday maker in Europe!

Oil prices retreated yesterday but the strike at Grangemouth refinery is still expected to go ahead on Sunday and has triggered panic buying in the north of England. Meanwhile Gold dipped to a three week low of $898.20 a troy ounce from 905.50 on Wednesday.

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.

Oil hits new highs as dollar sinks

Oil carried on its upward trend yesterday almost hitting $120 a barrel supported by supply concerns largely driven by rising demand from China.

In addition, sentiment may have shifted and ignited a rethink towards the backing for biofuels in the US and Europe as rising food prises may mean this solution to the oil supply issue may no longer be commercially viable.

Rice jumped to a record high as World Bank officials stated they were concerned with the mounting pressure in Thailand to restrict shipments. Thailand is the world’s largest exporter of rice and these comments help add fuel to the worsening global food crisis.

The dollar sank to lifetime lows against the Euro breaking through the significant $1.60 level as hawkish comments from the ECB supported the eurozone currency.

According to traders yesterday, strong demand for the Euro came from Asian sovereign institutions. Also ECB council member Yves Mersch made comments that the central bank may well have to revise up its inflation figure on the back of the recent surge in oil and food prices which pushed inflation to a 16 year high of 3.6% in March for the eurozone.

This has caused certain economists to rethink their rate cut stance with a view there may actually be rate increases ahead.

The Euro lost ground against the pound as Tim Beasley a member of the Bank Of England’s (BOE) MPC commented on the recent action to ease liquidity problems in the UK financial system would allow it to focus on controlling inflation.

This also saw the pound rise 0.8% to 1.9955 against the greenback and gained 0.6% to Y205.66 against the Yen.

Elsewhere Bank of Canada (BOC) cut interest rates by 50 basis points to 3 per cent with the Canadian dollar falling 0.5% to C$1.0070.

Although the cut was expected the BOC made changes to their statement stating the expected US slowdown was likely to affect Canadian exports and prompt further rate cuts.

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.

The Pound feels the heat

As expected the Bank of England announced details of the £50billion plan to help stem the credit crisis. The Governor, Mervyn King said that the scheme is aimed to improve liquidity in the Banking system. It should also increase confidence in financial markets, he added.

This will only apply to mortgage related debt and cannot be used to finance new lending. The initial period will be for one year with Bank’s having the option to renew the facility for up to three years.

There were many comments following the announcement, the facts remain that the response from the Money Markets was muted, with the 3 month Libor fixing less than 1 basis point lower however this was the 5th consecutive decline.

The Gilts market saw a correction with yields in 2-3 year tenors down around 3 basis points.

The BBA (British Bankers’ Association) have initiated a panel for discussions on whether a change in the calculation of LIBOR is warranted. The Director of the BBA Libor group is quoted by saying a change may be necessary, however changing the rate radically at this time would not be the best strategy

RBS announced their plans to increase capital, with a £12billion rights issue.

On FX news – following Friday’s gains, the Pound weakened yesterday against the Dollar. Initial moves this morning are extending GBP losses

The Dollar suffered in addition with the further writedowns and bad news from Wall Street.

The EUR retraced slightly against the US Dollar following comments from the Director of the IMF Michael Deppler, saying that the ECB may need to cut interest rates within 6 months to bolster the economy. Although inflationary pressures remain in the Euro zone, until commodity prices start to drop I doubt that the ECB will action any change soon.

Away from the UK – UBS admitted that a lack of risk control and ambitious plans to grow revenue led it to its huge losses when the global credit crunch struck. So far total write downs are $37billion.

In Addition, further writedowns from the Bank of America, contributed to their posting of Q1 net income down 77% (Y/Y).

Oil continued to trend upwards, closing over the $117 level amid continued concerns on supply restrictions.

On the Economic front, we do not start to get stuck in until tomorrow.

Notable release of the day will be from the US with existing home sales for March.

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 is the focus of Wise Money this week

The lack of Interbank lending is weighing heavily on the price of real money in the market place, as we continue to see disparity between LIBOR rates and BASE rates, with the benchmark 3 month LIBOR fixing at 5.89pct on Friday (against 5.00pct BASE).

The question is how long will this continue and what will the powers that be implement to attempt to bring levels back towards parity? In the current climate investors have the ability to lock in to favourable deposit rates, see levels above.

In home news – The Bank of England is due to announce plans to stimulate lending between banks by effectively taking the under performing assets which are linked to residential mortgages from their balance sheet and swapping them for Gilt edged securities which are effectively backed by the labour Government.

These transactions could carry a haircut of around 20%. There are many associated risks – This will take time to filter through the system and the restoration of confidence will not be immediate, lenders may chose not to pass on reductions in Base rates to home owners while the price of liquidity remains inflated.

Oil prices continue to rise, with record levels posted last week at $117 a barrel. OPEC announced that strengthening demand coupled with the weak US Dollar were pushing prices up. Many now expect oil to go through $120 by the summer.

The stock markets posted small gains last week with the FTSE 100 ending the week up over 200 points higher at 6,056.5

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 still has tough balancing act

The office for National Statistics yesterday reported that CPI, the headline inflation figure, remained unchanged at 2.5% against market expectations of a pick up to 2.6%.

Of course, when the Bank of England cut rates last week, they were privy to this data and whilst it gives them a little respite they have said they expect inflation to rise to around 3% this year.

Indeed with record input price inflation and the strongest factory gate inflation reported in almost 17 years on Monday, Mervyn King will be acutely aware of this pipeline price surge and must be ruing the balancing act he will now be performing.

The slowing economy and falling house prices demand monetary easing whilst the rising prices, caused in the main by energy and food, warrant a tightening in rates.

Food and Energy prices are of course not confined to any one country and the ZEW survey released in Germany yesterday showed expectations at -40.7 (ZEW Indicator).

Market expectations was for a figure of about -30.0. The actual figure represents multi year lows and coming in a time of unprecedented Euro Strength may bring about a change of sentiment for the Euro.

The ZEW comment released with the report said “Economic expectations were affected by the extraordinary high price pressure in Germany this month”. It would appear that the ECB has just as tough a job in maintaining Eurozone growth against a backdrop of inflationary pressures.

Following the weak housing data, drop in UK sales (as reported by the British Retail consortium) and steady CPI figure, Sterling slumped to yet another record low against the Euro as the market saw the Bank of England having room for further rate cuts this year.

The Pound also fell 0.9% against the USD to 1.9610 and dropped 0.4% against the Yen to Y199.15.

The Market today has plenty of data to gets its teeth into with EMU HICP inflation, expected to come in unchanged at 3.5% and for US CPI to fall very slightly to 3.9% year-on-year from 4.0%.

This evening we see the release of the Beige book in the US which is likely to have much of the same rhetoric about slowing economic growth and business activity.

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.

Money markets disregard suggestion of G7 intervention

G7 financial heads warned against global currency volatility at the weekend meeting in Washington, raising thoughts of some form of joint action should the dollar continue to drop.

However, in Asian market trade early this morning, the idea of such intervention was largely dismissed. The big Dollar made initial gains following the rhetoric from the Group of Seven discussions, causing a drop in oil prices back below the $110 a barrel level.

Locally, today’s UK primary producer’s (PPI) data due out at 9.30 this morning is expected show further pressure on producer costs in the UK’s manufacturing sector.

Input producer prices rose 19.4 percent year-on-year in February, and are predicted to ease only somewhat to 19.0 percent in March. Although demand is weakening slightly, companies are feeling the strain to pass on these higher costs in their pricing for goods leaving the factory.

Also out later today, we have the US Retail sales figure for last month ; this is always a significant measure of consumer prosperity and confidence across the pond. Tomorrow’s UK CPI data for March is vitally important this week; again under the watchful eyes of global investors, we could see further pressure on a beleaguered Sterling in currency trade.

For the remainder of the week, we have plethora of economic data.CPI is the flavour of the week with the US and the Eurozone March CPI numbers following the UK with releases on Wednesday.

Also on hump day we have March’s UK employment figures, along with US housing starts for last month. With investors still searching for some certainty from market fundamentals from the States, this week may not be the one that starts showing them such love

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 Sterling lows on credit crunch fears

Sterling was hit hard yesterday after data revealed house prices fell sharply in March. Prices slumped 2.5% which is the biggest decline since the 1992 house price crash.

Talk of an interest rate cut tomorrow is also weighing on the pound. GBP/USD slipped from above 1.9900 to around 1.9650 while GBP/EUR hit fresh all time lows at 1.2500 this morning and with EUR/USD still robust there could be more to come.

On a trade weighted basis Sterling is at its lowest level in 11 years.

The market has priced in a 25bp rate cut but inflationary pressures still remain and anything more aggressive to curb the falling houses price would add further inflationary pressure.

Meanwhile the USD eased against the EUR after the minutes from the previous Fed meeting revealed a prolonged and severe economic downturn can not be ruled out.

The Fed appears it will take any necessary steps to minimise the impact of the financial and housing turmoil even if inflation continued to push higher.

The move in EUR/USD was restricted however as there is rising concerns the US economic slump will have global impact. This already appears to be happening in the UK given the housing data but any impact on the Euro zone has not yet surfaced.

Meanwhile in Japan the central bank downgraded its growth outlook with exports expected to be hit severely by the slumping US economy. The Bank of Japan also swore in a new governor, Masaaki Shirakawa, ending a political deadlock which began when Fukui retired last month.

Today sees the release of UK industrial production which is expected to be 0.2% for the month. Euro GDP is expected to be 0.4% mom / 2.2% but the main focus will still be tomorrow’s ECB and BOE rate announcements along with US Initial jobless claims.

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.

When is a recession a recession?

On Friday US employers cut payrolls for the third time in a row resulting in a decline of 80,000 jobs.

Industries which showed the highest losses were construction and manufacturing sectors. The report was showing a great weakness in the labour market confirming fears that the US economy is in recession.

The slashing of 80,000 jobs did not come as a surprise however was worse than expected (60,000) and has accelerated expectations of more aggressive rate cuts by the Federal Reserve. The Fed releases its minutes on Tuesday night which should give an indication of future monetary policy decisions.

On Thursday the ECB will come together for their monthly meeting and the resulting rate announcement is likely to be no change. The market does not expect the ECB to show any signs of a rate move and is very likely to remain hawkish.

Whilst the expectation of rates is to remain on hold the accompanying press conference following the meeting may shed some light on the future direction of the ECB.

On the same day BoE will announce the new benchmark rate, the market seems somewhat divided on whether they will cut rates by 25 points or leave rates unchanged until the May meeting. Last week’s PMI surveys suggested that MPC members are to vote for a 25bp cut however a May rate cut looks more likely.

Reasons being the UK economy remains fairly solid however inflation is expected to move higher and is of some concern.

The Bank of Japan is expected to keep rates unchanged at 0.50% this Tuesday.

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.