Articles from June 2008



Wise Money eyes on Europe.

This week the main focus of attention will be data released from Europe. The ECB has a rate decision on Thursday that may challenge the potential market movement of the US non-farm payrolls report.

Due to the shortened week in the US (Independence Day), Non-farm payrolls will actually be released on Thursday instead of Friday and should coincide exactly with Trichet’s post meeting press conference.

A quarter point rate hike has been completely discounted by the market, although certain ECB officials have been at pains to state that this is not a foregone conclusion.

Ahead of the rate decision on Thursday in Europe we have consumer spending and employment numbers from Germany along with Eurozone producer prices.

In Asia trading we have seen Oil prices spurred by brewing Middle East tensions, climbing near Friday’s record high $142.99 a barrel and weighing on Asian stocks, which posted their worst first-half year performance in 16 years.

The US dollar also fell to three week lows against the Euro following the surge in Oil and falling stock prices.

Fears about dwindling oil supply were already heightened when Libya’s most senior oil official said last week he was studying the possibility of cutting output in response to U.S. threats to sue OPEC members.

The British Pound rose to a 2 month high, with housing market indicators, service and manufacturing PMI reports due for release this week and GBP/USD trading above 1.99, there is a strong chance that we may see a retest of 2.0.

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.

King warns against silly over-reaction

During his testimony to the Treasury Select Committee on Thursday, the Bank of England’s Governor Mervyn King guranteed that the MPC will not “€œoverreact” to rising inflation, arguing that there is a chance that slowing growth will bring inflation back under the target of 2%.

The somewhat dovish comments continued with King stating that an attempt to bring rising inflation under control too quickly would, “lead to a deep recession and that would be silly.”

The Governor compared the growing problems in the UK housing market with the inflationary pressures caused by soaring oil prices to emphasise the conundrum currently facing the BOE.

The parliamentary hearing also revealed that the majority of MPC members did consider a rate hike at their June meeting, as mixed messages emerged regarding what the future direction of rates could be.

Although markets still expect the Bank to keep rates on hold in July, the hawkish comments of some MPC members including Kate Barker and Tim Besley regarding the possible negative impacts of inflation on the UK economy, confirmed that a hike was on the agenda in the short to medium term.

Over in the US, the dollar weakened significantly against both the pound and the euro in the aftermath of the Fed’s decision on Wednesday to leave rates on hold at 2%.

Mirroring their counterparts in the BOE, US policy makers appear keen to maintain a degree of flexibility in their decisions depending on how resilient the economy proves to be.

Data released by the Commerce Department on Thursday reported that the US economy expanded at an annual rate of 1% during the first quarter of 2008, above the 0.9% estimate and the 0.6% growth recorded in Q4 2007. The dollar finished the day down 0.6% against the pound.

Sterling dipped against the euro as traders increased the chances that the ECB will raise rates to 4.25% in July. Although President Trichet again reiterated that the market would be bullish to expect a series of hikes, he said that rising inflation in the eurozone did mean a “small increase in interest rates was possible”.

On Wall Street the S&P; 500 slipped almost 3% as fears over further downgrades and writedowns resulted in a sell-off leaving the Dow Jones at its lowest level since September 2006.

In London the recovery in the banking sector proved to be short lived and dragged the FTSE-100 2.6% lower at 5,518. The weakening dollar combined with news from Libya that it may cut production pushed oil above $140 a barrel for the first time yesterday with ICE August Brent closing at $139.83. Opec’s president also warned that prices could reach $150 – $170 over the summer.

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 leave mortgage coalculator home loans rates Unchanged as expected

As predicted the Federal Reserve left the bench mark interest rate unchanged at 2%, ending the fastest series of rate reductions in two decades.

Although downside risks to growth remain, it appears that increasing inflation is becoming a greater concern. It has been said that this is a ‘baby step’ in the direction of raising rates, as the FOMC leave their options open.

ECB President Trichet’s comments during yesterday’s press conference have cemented expectations that a 25bps rate rise in July is almost certain, with investors not ruling out the possibility of two rate increases this year, as inflation pressures have intensified in recent months.

Trichet told the European Parliament “€˜he did not envisage a series of increases, that being said, we never pre-commit. I said that we could increase rates by a small amount in order to secure a solid anchoring of inflation expectations’.

On the back of Trichet’s comments we saw the Euro strengthen against the Dollar and the pound.

Oil dipped below $134 a barrel on Wednesday after reports showed that US Inventories had unexpectedly increased to 301.8m barrels in the week ended 20 Jun, against a forecasted decline of 1.1m barrels.

A report released by the US Energy Department yesterday has indicated that oil prices will decline to $70 a barrel by 2015 as new production begins in Azerbaijan, Canada, Brazil and Kazakhastan, however, it is predicted that this will be short lived as the price of oil will rise again to $113 a barrel by 2030 as the market remains relatively tight.

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.

Gloomy housing data precedes Fed’s home loans decision

The day before the US Federal Reserve is due to announce its decision on interest rates, figures released on Tuesday by the Conference Board reported that US consumer confidence has fallen to its lowest level in 16 years.

The index slipped to 50.4 in June, down from 57.3 in May and lower than the 56.5 predicted by economists. This was the sixth consecutive monthly fall in consumer confidence and is the result of a combination of factors including the ongoing housing slump, rising unemployment and soaring energy prices.

The crisis in the housing market is seen by many as being at the heart of the US economic problems and so news that the S & P index recorded a standout 15% decline in the prices of homes in 20 of the largest US cities during April, will only add to the shadow hanging over the US economy.

Former Fed Chairman Alan Greenspan argued in a speech yesterday that the US is still on the brink of a recession but that the actions taken by his successor in the first quarter of 2008 had reduced the risk of a “severe recession”.

Whilst the market expects the Fed’s current chairman Ben Bernanke to keep rates on hold today, his apparent support for a rate hike in August or September in order to contain inflation and strengthen the dollar, could be brought into question if further evidence emerges that the US is in the grips of a severe slowdown in growth.

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.

MPC Hawk Argues Slower Growth Will Dampen Inflation

Sterling fell against both the dollar and the euro on Monday subsequent to an interview which appeared in the morning press with Andrew Sentance, a member of the Bank of England’s monetary policy committee.

Sentance argued in the interview that the combination of a weakening housing market, the credit squeeze and higher commodity prices is placing significant pressure on consumers which should slow economic growth and so, “€œHelp to offset the upward pressure we are seeing on inflation.”

Whilst not disputing the risk posed by inflation, the comparatively dovish tone of Sentance’s comments, particularly on the subject of rising pay demands, contrast with those made by Mervyn King and the Chancellor at last week’s Mansion House dinner.

Sentance’s views on slowing growth in the UK economy were supported by a report also released yesterday by Britain’s most used property website, which showed that the average asking price a home dropped 1.2% during May. On the back of these factors, EURGBP reached 0.791 in early trading before eventually closing the day down 1% at 0.789.

The pound was also weak against the dollar, slipping to 1.9586 before mounting a slight recovery to end the day down 0.5% at 1.9644.

Following the release of two reports which illustrated that the eurozone may now also be suffering similar issues to those faced by the US and UK, the euro fell against the dollar closing at 1.551, down 0.6% for the day.

Firstly the German Ifo business survey supported the results of last week’s ZEW index by reporting that business confidence within Germany has fallen this month to the lowest level since 2005.

The index reported that the sharpest decline in confidence took place within the heavy industry and manufacturing sectors and this was reinforced by data from the eurozone’s Manufacturing Purchasers Index, which showed that the strength of the euro combined with high oil prices is taking a considerable toll on manufacturing.

Despite this, markets are still expecting the ECB to raise interest rates to 4.25% next 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.

OPEC to boost Oil output but little impact on prices

A summit held in Jeddah over the weekend which included representatives from all the major oil producing and consuming nations resulted in somewhat of a stalemate, as few of those on the supply side agreed that action was required by producers in order to curb the rising cost of oil.

Although blaming speculators for record prices, Saudi Arabia as head of OPEC has though agreed to increase production by 200,000 barrels per day by the end of July.

Saudi King Abdullah bin Abdul-Aziz stated that he was concerned about the global economic instability caused by higher prices and reaffirmed that, “€œWe declare our readiness to meet any additional needs.”

Doubts that the summit will have any significant short-term impact on prices due to the continuing attacks on infrastructure in Nigeria and growing tensions between oil companies and the Kremlin were confirmed this morning as crude remained above $136.

The weekend has also emphasised the widening rift amongst OPEC’s members over how the cartel should react to the demands of consuming nations to increase supply.

Several members including Algeria and Qatar have argued against increasing supply because speculators will drive up the price of oil whatever the production levels, whilst only Kuwait has publicly declared it is willing to follow Saudi Arabia’s route if required.

Gordon Brown announced during his speech to the summit that Britain’s energy industry would be opened up to encourage investment from oil producing nations in order to advance alternative energy sources.

Last Friday’s EU meeting in Brussels also witnessed disagreement amongst leaders on a number of issues including the Irish rejection of the Lisbon Treaty and the possible future enlargement of the bloc.

President Sarkozy expressed his belief that the EU could not be expanded to include countries such as Croatia without the treaty being in place. This view was supported by a number of leaders including Angela Merkel, however others such as Silvio Berlusconi argued that enlargement should take place sooner rather than later.

In the markets, Friday capped a miserable week for the FTSE 100 as it ended the week down 88 points at 5620. On Wall Street the Dow fared little better slipping 1.9% by close of trading on the back of growing concerns over possible further downgrades in the financial sector.

In the currency markets Sterling fell against the euro as traders became less confident in a UK rate change and ended the week down 2% at 1.26. Preceding this week’s Fed announcement on interest rates the dollar posted its biggest weekly decrease (3%) against the euro as EURUSD finished at 1.56, whilst cable closed at 1.97.

There are a number of important reports due for release this week including today’s German IFO business survey, which will be closely scrutinised after last week’s ZEW index reported that investor confidence had fallen to its lowest level for almost 16 years.

Tuesday will see the release of data in the US on consumer confidence before Wednesday’s Fed announcement on interest rates. The market is predicting that rates will be kept on hold at 2% on the back of gloomy data still emanating from the housing market.

In relation to the UK, the CBI’s Distributive Trades Survey will be released on Wednesday and will be significant as it is acknowledged that both the BOE and UK government place greater weight on the report as an indicator of short-term trends in the retail sector than last week’s consumer index.

The week ends with the release by the Office of National Statistics of the finalised UK GDP figures for the first quarter of 2008

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.

Unforeseen Rise in UK Retail Sales leads to Sterling rebound

A report released by the Office for National Statistics on Thursday showed a somewhat unexpected 3.5% rise in retail sales volumes during May, the fastest monthly increase on record and in stark contrast to the forecasted 0.1% downturn.

Year-on-year sales were up 5.4% with the growth driven by sales of food, despite soaring food prices and clothing, a sector in which recent declining sales had forced severe discounting amongst retailers.

The British Retail Consortium attributed rising sales on a period of good weather and whilst analysts differed in their explanations, most were in agreement that the figures do show a higher level of resilience in the UK consumer than had previously been expected.

Although it is widely known that the BOE places greater importance on business surveys, the ONS is still significant as it demonstrates that rising food and energy prices and problems in the housing market have yet to fully impact on consumers.

Today’s report could provide further support for the MPC to keep interest rates on hold for the time being and comes on the back of the governor’s increasingly hawkish comments in reference to rising inflation.

It is of course important to recognise that yesterday’s data is just one stat on one month and so must be taken in context.

The reaction in the markets saw U.K government bonds fall whilst sterling appreciated against the euro and the dollar. EURGBP dropped under the 0.79 level while GBPUSD traded higher to sit above 1.97.The dollar strengthened against the Euro and currently trades around the 1.55 level.

London equities initially reacted positively to the retail sales figures however the FTSE still ended the day down 0.84%, reaching its lowest level since March. Despite a report showing a 5,000 fall in the number of individuals filing new claims for unemployment benefits, stocks initially slipped for a third consecutive day on Wall Street.

Investors focused on worse than expected manufacturing data as the Philadelphia Fed general economic index dropped to -17.1 representing a clear decline. However persistent anxieties over financial stocks were overtaken as a drop in oil prices pushed the Dow Jones 0.28% higher on the day.

In Europe political leaders attended an EU summit on Thursday aiming at tackling the crisis caused by the Irish electorate’s rejection of the Lisbon Treaty.

Speaking before the summit, the German Chancellor Angela Merkel argued that although extra-concessions should not be made to Ireland, the Irish government should be given time to consider its next move. Merkel stated clearly that, “€œA two-speed Europe is not the way forward.”

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.

Changes at the Bank of England but inflation concerns remain

The release on Wednesday of the minutes from the Bank of England’s Monetary Policy Committee meeting on June 5th showed a predictable 8 -1 vote in favour of keeping interest rates on hold at 5%.

David Blanchflower was again the only committee member to vote for a quarter-point cut, arguing that evidence of slowing growth “more than outweighed” concerns over short-term inflation.

Although both rate cuts and hikes were discussed, the minutes show that anxieties over slowing economic growth are now being matched if not over-taken at the top of the agenda by the threat of rising inflation.

Even before the release of CPI data on Tuesday, inflation had clearly been a growing concern amongst some members of the MPC, as shown by the statement that, “Most members concluded that developments this month had meant that the risks to inflation in the medium term had moved further to the upside.”

Significantly some committee members were willing to consider an immediate rate increase in order to keep rising inflation in check, but decided against a hike because it wasn’t required urgently. Indeed it is worth noting that at 5%; the UK still has the highest benchmark rate in the Group of Seven industrialized nations.

At the Mansion House dinner in the City last night, both Mervyn King and the Alistair Darling used their speeches to highlight the difference between external inflationary pressures such as oil prices, which the UK has little control over, in comparison to the greater risk posed by inflationary wage rises which the Chancellor stated, “Would undermine rather than raise people’s living standards”.

The message from both Darling and King was very much that consumers would have to take the medicine now in order to prevent current difficulties from causing long term damage to the UK’s economic stability.

In a clear indication that the BOE is now seriously considering a rate hike, King used his speech to stress that, “There should be not doubt that the MPC is prepared to take whatever action is needed to return inflation to the 2% target and to keep expectations of inflation in the medium term anchored to the target.” Last night’s dinner also included an announcement by the Chancellor detailing a significant shake-up at the central bank.

The changes include the setting-up of a financial stability committee in a move which could be viewed as undermining King’s position on the same night that one of the governor’s close allies, Sir John Gieve, announced that he is due to step down from his role as deputy governor.

Markets appear to have turned pessimistic on the pound’s future, with some analysts believing that the longer inflationary pressures prevent the BoE from cutting rates, the deeper the UK’s economic downturn will be. Equally, any rate hike could be one blow too many for an ailing economy.

On the currency markets Sterling dipped initially but the continuing weakness of the dollar was evident as EURUSD moved up through 1.55 on Wednesday with the shift continuing during overnight trading. GBPUSD followed a similar pattern to push and stay above 1.96 this morning.

In the equity markets the FTSE dipped by 1.79% as the recovery in the financial sector proved to be short lived with concerns remaining over further write downs. Over on Wall Street the Dow Jones ended the day down 1.08% amid continuing apprehension over any oil dependent company, whilst mirroring London, the financial sector also took a hit.

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 reaches another record high day before CPI released

Inflation in the Eurozone during May was 3.7% according to figures released by the EU’s official statistical office yesterday, up from 3.3% in April.

These levels of inflation have not been witnessed since the Eurozone was created in January 1999 and will add weight to the calls for a rate increase by the ECB as early as next month.

Soaring commodity prices combined with mounting wage pressures are creating a situation in which it looks increasingly likely that the ECB will place the combating of inflation above the need to maintain economic growth.

Despite an announcement by Saudi Arabia that it plans to boost oil production to its highest level in 25 years, oil prices jumped on Monday to a fresh record high of $140 a barrel whilst the dollar fell against sterling and the euro.

EURUSD was driven up through 1.54 and then 1.55 overnight with cable also pushed higher but was unable to beat the 1.97 upside barrier.

This continued rise in the price of oil was clearly one of the main topics of discussion at last weekend’s G8 summit.

Despite the split between the finance ministers as to the cause of the record prices, all were in agreement that the inflationary effect of rising commodity prices were making the job of policy makers a lot more complicated.

Hank Paulson, the US Treasury secretary attempted to again talk up the dollar and argued that the high oil price, “€œbrings the risk that the slowdown in our economy is going to be prolonged.” As mentioned yesterday, the markets are predicting an increase of 75 basis points in rates by year end, however the Fed yesterday warned that although there is a good chance rates will be increased, the markets may have got carried away as to how many hikes there will be.

Inflation will remain at the top of the agenda today with the release at 9:30am of the CPI index in the UK. If market expectations for a 3.2% y-o-y rise are correct, this will require an open letter from Mervyn King explaining why inflation has risen above 3%.

The pressure is very much on the BOE to prove it can still maintain some level of control over inflation despite what is happening in the commodity markets. The sentiment in the market is that we are reaching a point where the BOE must decide whether to sacrifice economic growth in order to prevent inflation becoming a runaway train.

However with the UK economy predicted to grow just 1.3% next year, King’s words will be closely scrutinised by both the market and consumers.

Equities in both London and New York were down on Monday as the further surge in oil prices dented confidence. The FTSE ended the day down 0.14% on the first day of trading following the Chancellor’s announcement that new rules were needed to ensure the ‘short selling’ of shares was properly regulated.

Wall Street stocks dipped into the red as oil dependent companies and airline stocks took a hit dragging the Dow Jones down 0.3%.

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 Remains Top of Central Banks Agenda.

On Friday morning it was announced that inflation in Germany has accelerated more than initially reported back in May, caused mainly by the price of oil.

The Federal Statistics Office reported that consumer prices increased by 3.1% year-on-year, a 10 basis point increase from an estimate made on May 28th. This could offer further support for the ECB to raise rates sooner rather than later. Later on Friday afternoon the trend of higher inflation continued over in the US.

It was reported that the consumer price index had increased by 0.6% during May, which is the biggest monthly increase since November.

Prices climbed 4.2% in May year-on-year, leading many investors to believe that the Fed will start to raise rates as soon as August. The markets have now priced a total increase of 75 basis points by year end.

Both the ECB and BOE are clearly focused on controlling inflation caused by higher commodity prices. In a somewhat unusual move the bank released the transcript of a speech made by the Executive Director Paul Tucker back on April 28th in which he indicated that policy makers must weigh up the significant inflationary risks from the commodity-price shock against the need to ‘mop-up’ after the credit crisis.

In relation to rate expectations in the Euro zone, ECB board member Jose Gonzalez-Paramo added an element of doubt by commenting that, “€œThere is a possibility, not certainty, of a rate increase at our next meeting.”

The announcement late last Friday afternoon that 53.4% of voters had voted against the Lisbon treaty will have significant ramifications throughout Europe.

At a two-day summit starting in Brussels this coming Thursday the EU’s leaders will seek to outline a plan aimed at averting a full-on crisis, but many including the Irish PM have expressed a belief that on this occasion there is no quick fix.

The Irish vote against the Lisbon treat and slightly less hawkish comments from Gonzalez were the main forces behind the Euro’s move lower on Friday. The single currency continued to weaken against the dollar as it traded down to test the 1.53 level but was unable to break below.

This also dragged GBPUSD down to briefly threaten 1.94. The weaker Euro allowed sterling to push back with EURGBP trading through 0.79.

Tuesday will see the release of the UK’s Consumer Price Index. If market expectations for a 3.2% y-o-y rise are correct, this will require an open letter from Mervyn King explaining why inflation has risen above 3%.

The minutes from the Bank’s meeting earlier this month will be released on Wednesday at 9:30 am. These will be closely scrutinised by market participants for in indication as to the future path of UK interest rates.

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