Articles from May 2008



UK consumer confidence at lowest level since the end of Thatcher

U.K. consumer confidence dropped to the lowest level since Margaret Thatcher was ousted from office in 1990, as people became more pessimistic that the economy will slip into a recession, researchers GfK NOP Ltd have announced.

A gauge of sentiment declined 5 points from April to minus 29, the lowest since November 1990, the same month as Thatcher quit as prime minister.

Federal Reserve Bank of Dallas President Richard Fisher has said he expects the central bank would raise the benchmark U.S. interest rate should the public begin to expect greater gains in consumer prices.

Other Fed Bank Presidents, Gary Stern and Thomas Hoenig, have expressed growing concern this month about rising prices. Fisher, is the only member of the Federal Committee to dissent three times from the decisions to lower overnight bank-lending rate, favouring either no change or a less aggressive reduction.

With that the dollar is heading for a second monthly advance against the euro and the yen as rising stocks and “declining” crude oil prices brightened the outlook for the U.S. economy, the worlds biggest oil importer.

The Euro fell following retail sales in Germany unexpectedly dropped for a second month in April. This lead to speculation the German economy (Europe’s largest economy) is losing momentum as faster inflation erodes consumers’ spending power.

There seems to be increasing expectation that the Bank of England will add to interest rate cuts this year with growing concerns the UK economy is continuing to weaken.

On the currency front this has led to speculation that the U.K. currency will decline to 81 pence per euro in the coming months, the pound traded at 80.98 pence on April 16th, the lowest level since the euro’s inception in 1999.

The Australian and New Zealand dollars fell this week on signs growth is slowing as prices of commodities the two nations export declined.

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.

Inflation and oil the talk of debt consolidation

Inflation and oil continue to be the main focus of the debt consolidation markets.
Yesterday saw the US Dollar gain across the board on the back of oil retreating to as low as $126 at one point. Also supporting the USD was better than expected durable goods orders which declined less then forecasted revealing a surprisingly robust data given the current conditions while weak French consumer confidence weighed on the EUR.

The move in oil has since reversed however with Crude back through $130 a barrel on the back of Nigerian supply concerns.

Moving on to inflation which appears to be the main concern in the markets and whether economies can avoid the nasty Stagflation monster.

The USD has received a boost from comments made by Fed members yesterday. Fisher started last night with stating inflation is the bigger risk to the economy and a concern to all FOMC members.

Other members are also speaking today and it is expected they will reiterate the message of price stability ie controlling inflation. This change in stance, focussing on inflation, from the Fed’s initial response to the credit crisis of pumping liquidity into the market and cutting rates has seen the 10yr US Treasury yield rise back above 4% for the first time this year.

Also commenting on inflation was Trichet saying that the job of the central banks is to preserve medium term price stability and keep inflation expectations well anchored. No chance of a rate cut in the Eurozone soon!

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 asks if an ECB rate cut is wishful thinking

Prominent fears of stagflation (inflation and stagnation) appeared to contribute to the Sterling weakness against the US Dollar yesterday.

Not helping the GB Pound was the release of a Hometrack survey showing a fall in house prices in England and Wales for the eighth month running and a 40% year-on-year drop in April’s mortgage approvals.

Across the pond the US Dollar experienced a lift following a report showing stronger than expected US new home sales data and a retreat in oil prices. This phase did not last long however as the EUR took the lead once again.

The US Dollar fell compared to the Yen and CHF following the FBI saying that a video will be posted soon urging Islamic militants to attack the West via biological, chemical and nuclear weapons.

Oil is the key at the moment for the greenback as they seem to move inversely in recent times. If we see a fall in oil prices inflation worries will quieten down and make investors believe the worst is over.

Recent data released in Europe gave reason for concern over the health and stability of its economy. The EUR suffered following a slump in French business confidence to a 2.5 year low and an unforeseen decrease in Germany’s consumer morale for the month of June.

Investors are looking for action from the ECB and a change from its neutral perspective to dovish. However ECB members themselves declare this as “wishful thinking” and a different approach to its monetary policy is yet to be seen. Looking at the global economy market participants feel that the US has seen the worst of it and that Europe is only at the start of its economic slowdown.

The FED has adopted a very dovish tone since fears of a recession first appeared and tried to counter-act with rate cuts totalling 3.25 percentage points since September however with inflation now beginning to be the main focus the market will be looking for the Fed’s next move to be an increase in 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.

Soros – We face the most serious recession of our lifetime

George Soros, the phenomenally successful billionaire hedge fund manager, has said that “we face the most serious recession of our lifetime”.

In short, he made his feeling perfectly clear, by saying that the United States and Britain are facing a recession of a scale greater than the early – 1990s and greater even than the 1970s.

He pointed towards the 1970s dislocations when commenting that current market conditions are worse because of the implications of the house price decline, which there wasn’t in the 1970s.

Soros, who warned of the dire consequences facing the American economy years ago, when the housing bubble was still inflating, said about the UK “House prices have risen over the years and are further away from sustainable levels than in practically any other country, in terms of house indebtedness and the relationship incomes. The slump may be more gentle that the US, but it will be more drawn out”.

The dollar inched back towards one-month lows against a basket of currencies today, as oil prices were near record highs and the deteriorating U.S. economy.

Activity is expected to pick up today as investors return from long weekends in both the United States and Britain, with the market looking to oil prices and stocks for clues on the dollar’s near-term direction.

Expectations of the US dollars longer term direction in particular against the euro, is that we see could it rise towards the end of the year, as Federal Reserve is done with interest-rate reductions and may raise borrowing costs next year.

The U.S. currency on April 22 reached a record low of $1.6019 per euro as the Fed decreased its benchmark rate seven times since September to 2 per-cent to spur economic growth. The dollar has plunged almost 44 percent against the euro since the start of 2002.

The Australian and New Zealand dollars rose on speculation the extra yields offered by the nations’ bonds attracted investors. The Australian dollar traded near the highest level in 25 years, whilst the New Zealand dollar climbed for an eighth day, in its longest rally in 14 month.

Crude oil rose above $133 a barrel as a militant attack in Nigeria disrupted supplies and on speculation fuel subsidies in Asian countries will continue to spur demand.

Gold was little changed after gaining in the past two days as higher crude oil prices and the dollar’s weakness against the euro bolstered demand for the precious metal as a hedge against inflation.

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.

Decline in UK Retail activity not as bad as forecast

Yesterday’s retail sales from the UK showed a fall again from last month’s figures as faster inflation, lack of credit and the slump in the housing sector all taking their toll.

Sales were down 0.2% from March. Economists had forecast a 0.5% drop. Year on year the sales were still up 4.2% driven mainly by the continuing popularity of software; as the gamers amongst us will know titles such as Grand Theft Auto pushed these figures higher with huge sales volumes.

It’s not all fun and games though following this continuing negative trend in spending. Bank of England Governor Mervin King hinted that the UK is edging ever closer to recession as confidence continues to fall.

Over the water the US jobless claims fell 9,000 to 365,000, from a revised 374,000 the prior week. Forecasts were for significantly more than this which demonstrates that employers are keeping up their promises to their key workers regardless of the slowing economy.

Eurozone industrial orders fell at twice the rate expected from forecasts in March. The main reasons were high oil prices, Euro gains and the ever negative US economy. The orders fell 1.0% from February (the first decline in three months), after increasing a revised 0.2 percent the previous month.

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.

Minutes and Oil highlight Fed dilemma

Congratulations to Manchester United and commiserations to Chelsea after a superb European Cup Final in Moscow last night as the Reds invade Red Square.

Another ‘close call’ at the Federal Reserve who released the minutes of their April 30th meeting yesterday.

Their task in controlling the US economy is not an enviable one. The decision to cut rates at that meeting was certainly not unanimous with members highlighting ongoing inflationary concerns.

Yesterday’s latest surge in oil prices hardly helps their cause. Oil surged past the $133 mark fuelled by fears of a global shortage. Policymakers at the Fed are going to find it increasingly hard to weigh up the dual mandate of controlling inflation by hiking interest rates and encouraging spending and growth by cutting them. The minutes showed that the Fed’s easing bias is drawing to a close with a more neutral stance to come.

The Bank of England’s Money Policy Committee faces the same dilemma. The minutes of this month’s meeting showed the 9-strong team voting 8-1 in favour of keeping rates on hold. Blanchflower was the predictable dissenter voting for a cut.

They also showed that there was a general reluctance to cut rates at the moment so as not to be seen specifically targeting growth which could in turn have spooked the market about future implications for inflation.

Many analysts are now targeting November for the next rate cut.

Expect sentiment on this to shift as economic data drips through in the coming months.

The Euro was the winner on the currency markets again which was not only benefiting from uncertainty surrounding future Dollar and Sterling yields but had independent support from the IFO Institute’s business climate index which rose to 103.5 in May from 102.4 in April.

The survey signalled that the German economy was showing strong resilience to the US slowdown. The single currency hit one-month highs against Sterling and the Dollar.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

US Dollar falls against euros

The dollar fell to $1.5678 yesterday, the most in a month against the Euro as the price of oil rose above $129 for the first time and speculation increased that the European Central Bank will keep interest rates high.

The rise in the Euro was in spite of a weaker than expected ZEW economic expectation figure out of Germany. Economists expected a gain to minus 37 from minus 40.7 in April; however the gauge declined to minus 41.6.

The Euro is also being buoyed by the continued hawkish nature of the European Central Bank and gained after the head of the ZEW centre and adviser to the German government Wolfgang Franz said “European policy makers may raise interest rates as soon as the financial crisis ends”.

Wolfgang, one of the five advisers to the German government told reporters “I would recommend that the ECB keep rates constant until there is clear evidence the financial crisis is over, then the ECB might need to raise rates to take care of inflation”. Euro focus today will be on the IFO release for Germany.

Most attention today will be focused on the minutes from the FOMC and BoE. There is market speculation that the minutes from the April 30th FOMC meeting will suggest that the Fed is finished with its most aggressive easing campaign in decades after the 25bps cut down to 2.00%.

However there is still thought to be a considerable difference of opinion between policy makers and the minutes are eagerly anticipated as they ought to provide some sense of whether most members are more worried about the outlook for growth rather than inflation.

Minutes from the BoE meeting on May 8th are released today at 9.30. After late speculation that the bank would opt for another cut after a string of weak data released prior to the meeting, rates were left on hold at 5.00%.
The main focus today will be on the voting split between the members and the discussions that led to the unchanged decision. This should provide an indication of sentiment for the future and what we can expect in the short term.

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 balances growth versus inflation

With both the US and UK economies under inflationary pressure, Central Bankers are faced with the task of stimulating growth without yielding to high inflation.

Last weeks UK CPI data damped all sprits for a rate cut next month, coming out well above expectation at 3%. Governor King has openly acknowledged the “nice” decade is over and that in the coming months he will be forced to write an open letter to Alistair Darling, when CPI breaches the 3% barrier.

In normal market conditions news that rate cuts were unlikely would have gone on to strength sterling, however, it is a sign of current market sentiment that Sterling remained under pressure and underlines the BoE’s limited powers in manipulating the market to its ideal of low inflation and consistent growth.

The market is going to pay greater interest than usual to this month’s BoE Minutes, with analysts predicting just arch dove Blanchflower being the only member to have voted for a 25bpts cut.

If one or more joined Blanchflower in voting for a cut then expectation for a cut in the coming months will swell.

We will also be steered on Wednesday to the course in which the Fed will be looking to follow after last months cut of 25bpts. At the time the Fed announced that it was going to be the last cut for several months.

However, traditionally the US consumer has an almighty influence on the US economy, with analysts paying particular attention to any data that suggests that the US consumer is slowing their spending.

On Friday University of Michigan Sentiment Index showed that Consumer Confidence was at a 28 year low. This compounded already gloomy US sentiment with inflationary expectation seen at 12 year highs.

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 eyes turn to next week

A fairly quite day in terms of data, with the only things of real note coming from the US. First out we have the US Housing starts out at 1:30 BST, which the market will be looking to any positive signs for future housing sales.

US University of Michigan Confidence report out at 3:00 BST. A further decline is expected to around 61 from 82.6 in April.

Barclays issued their update/trading statement with a write down of £1.7billion of assets, along with an increase of new mortgage lending.

The market will be looking to see if they take the decision to conduct a rights issue to shore up their balance sheet or if they would look to private investors, Finance Director Chris Lucas quoted ‘We’re not going to rule in or rule out any options at this stage’.

Three weeks ago we saw the Bank of England announce a package of £50billion to help free up lending in the UK market, but reports in today’s Financial Times are stating that this is looking to increase closer to £90billion!

Looking ahead we have a fairly busy week starting with the German ZEW Survey out on Tuesday, then a bit closer to home we have the all important Bank of England minutes published at 9:30 BST on Wednesday which will make for interesting reading.

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- between a rock and a hard place.

Today we have the release of the Quarterly Inflation Report accompanied by the post release Question & Answer session.

In a normal market the combined effects of downward pressure on consumption, tumbling consumer confidence, high street sales falling 1.5% year on year, multi million Pound write-downs from the residential property sector, a softening of the holiday booking industry and the threat from the recently nationalised Northern Rock that the labour Government will not get “our” money back for a lot longer would suggest that any inflationary pressures would be subsiding.

Unfortunately that is not the case because inflation is rearing its ugly head. The strong output prices earlier in the week had set the stall and yesterday’s CPI number came in at a shocking 3%.

Mervyn & the team must be getting very worried that they will have to write another letter to the Chancellor explaining why inflation is running above 3%.

We would hope that the Bank of England is looking at the bigger picture and the slowing economic environment will drag the inflationary threat lower over time which in turn means there is still the potential for lower interest rates with a Bank Rate of 4.50% still targeted in this cycle.

There was a proliferation of comment from 5 Fed members last night, including the Chairman Ben Bernanke. All followed the same theme of inflation concerns and the need for a stable Dollar, but each with their own nuances.

The most important of these additional comments in my view came from Fisher who stated that the Fed and the ECB were working together to ensure long-term confidence in the Dollar. The implications are that we have seen the top in EUR/USD for the foreseeable future at least (it topped out at just above 1.60 immediately following the last G7 meeting – the significance of which looks more important with each passing session).

The Foreign Exchange markets were reasonably quiet yesterday given the importance of the data and cable traded in a narrow 50 bp range for most of the day with even the much higher than expected UK CPI figure failing to drive it lower.

The Dollar’s strength overnight has succeeded in pushing cable down to the 1.94 level but a look at Sterling’s performance against other majors underlines the fact that this latest volatility is Dollar based.

The Inflation report at 10.30 followed by the German IFO at 11.00 will be the catalysts that mould the rates early on (a BoE stance as anticipated and a weak IFO could see Euro/GBP lower) and the US CPI data at 1.30 this afternoon will likely be the precursor to further Fed comment and a stronger Dollar later.

We also see UK claimant count rate/ jobless claims/ average earnings/ unemployment rate released. These should provide further evidence of the UK economic slowdown and as such be the Rock to inflation’s Hard Place that the MPC finds itself between.

Ensuring that inflation remains a thorn in everyone’s side, the oil price continued its inexorable rise reaching a new high above $127 per barrel following rumours of production being reduced. This after the IEA had cut their estimates of global oil demand for the rest of 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.