Articles from August 2008



Weak housing data dents the Pound

Locally yesterday we saw 10% wiped off the price of homes, as house prices continue to plummet at their fastest rate for almost 2 decades.

The Nationwide survey found that more than 10% has been wiped off the price of homes since the start of the year, which has seen the steepest decline since 1990. The figures suggest that the credit crunch is still biting hard, with the number of mortgage applications tumbling while inflation sends household spending soaring.

The average property across the country is worth £164,000; £19,000 lower than a year ago. The housing market in the UK is showing little sign of stabilisation and the impact of the broader economy is expected to remain heavy as a result. The market paralysis has been dubbed ‘Brick or Mortis’

On the back of BOE member Blanchflower’s comments we saw cable through 1.83 yesterday. The Bank of England’s dove commented that we need to see a substantial fall in interest rates and probably quickly.

With more from Blanchflower ‘The question is what’s going to happen to prices 18months down the road’ His answer being that inflation is going to ‘plummet like a rock’ in the medium term.

Blanchflower also expects unemployment growth to accelerate and could hit 2 million by Christmas. Is the UK in recession, will we see an increase of large rate cuts to stop the economy heading into a deep and prolonged slump?

With US Q2 GDP continuing the recent trend of firming data out of the US, growth improved year on year by 3.3% during the quarter, well above the 1.9% initial expectation. With a big contribution seen from net exports and less of a drag from inventories. However, the figures in no way suggest the US economy has turned a corner yet.

Interest rate decisions in the upcoming weeks, in Europe in partiular, will likely confirm that other central banks will now seek a more accommodative policy as growth slows, pushing yields further in favour of the US.

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.

Hawkish ECB comments

In comments yesterday from the ECB, Webber from the governing council sounded out a hawkish tone, stating that much discussed rate cuts in the Eurozone are being expected too early.

The ECB has started to concentrate its concerns about operational issues on the collateral system: with comments again from Webber that ‘The collateral that we take must also be traded in the market becasue only then is it priced accurately’ . This may lead to ultimately tightening lending standards, showing unlikely good news for the economic growth in the EMU.

Further comments from the ECB vice-president Papademos also warned that further rate rises may be needed if second round effects materialised in the Eurozone. Remarks from the other ECB members, Bini Smaghi and Bonello, all suggested the central bank is attempting to temper market expectations of rate cuts ahead.

The USD was not helped yesterday by the hawkish comments yesterday from the ECB, raising the prospect of an interesting ECB policy decision next week, this continues the confusion over which path we will see currency rates take.

The broad decline in inflation and inflation expectations has lessened the need for rate hikes but this is evident in all G10 economies. With the US economy arguably in a more advanced stage of economic adjustment and with the Fed having already eased aggresively, the pressure is building on the Eurozone and other G10 economies to seek a more accomodative policy ahead.

The hawkish commentary will be increasingly unjustifiable and we see little scope for the significant yield gains in favour of the Euro.

Crude oil prices continue to edge higher, breaching $119/bbl off the back of feas over the disruptions from Tropical Storm Gustav, which is expected to strengthen into a major hurricane in the Gulf of Mexico.

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.

Central Banks feel the pinch of inflation

The start to a short week in London saw currency markets yesterday take direction from the doom & gloom released in both the Euro-zone and here in the UK with the greenback holding strong.

Yesterday morning saw the German Ifo Business climate at its lowest in three years reporting a figure of 94.8, with Current Conditions coming in at 103.2 and Business Expectations at 87.

These figures supported some economists’ views that the slowdown in economic growth going forward is likely to be more protracted and that cuts in rates are now likely given speculation that a peak in inflationary pressures is now on the horizon.

Tuesday afternoon’s Consumer Confidence figure came out slightly up in the States this month at 56.9, from 51.9 in July. A lower than expected drop in house prices also gave support to the dollar.

The FOMC minutes from the August 5th meeting released last night suggest rates are likely to remain on hold for the meantime. Some Fed officials remain concerned about inflation not easing in 2009 and so the next move could be a rate hike. This of course contrasts strongly with views that the next BoE move will be to cut here in the UK, and so support would seem to remain with the Dollar in the longer term.

The British Bankers Association (BBA) reported overnight that mortgage approvals for last month totalled 22,448, only just above last month’s record low of 22,369. Whilst the data was slightly improved on the month, the BBA warned it did not expect to see a recovery any time soon.

We have very little focus on the Economic data front for today with just the US releasing anything of note in the form of Durable Goods Orders for July. Market expectations are for a 0.1% rise in the headline figure and ex-transportation orders to fall 0.4%.

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.

Weak IFO expected….

The Euro fell for a third day against the dollar on speculation the IFO Business Climate report will show today that confidence has slumped in Germany to a three year low.

The currency traded near a three-month low versus most major currencies and towards a six month low against the dollar with concern credit-market losses and slowing exports will stop the European Central Bank from raising interest rates this year.

The US dollar grew stronger on Monday and early Tuesday on the speculation of a weak German IFO survey, but could well decline later today with expectation of Sales of new houses in the U.S. likely to have fallen in July as mortgage lending dried up.

US homes purchases are expected to have dropped 0.9 percent to a 525,000 annual pace. Mounting losses on subprime mortgages have caused banks to withhold credit and boost borrowing costs, hurting demand even as prices are falling and making houses more affordable.

The decrease in sales has signalled the worst real-estate slump in more than quarter of a century.

The Pound fell against the dollar again on Monday, extending a fifth week of declines, the longest continued drop since February 2006. The UK Currency, slipped to its lowest level since July 2006 as effects of last weeks government report showed economic growth stagnated in the second quarter.

The report also added pressure to the Bank of England to set aside concerns about inflation and cut its benchmark interest rate, currently at 5%. With the UK inflation rate at more than twice the 2 percent target, the Bank of England have been reluctant to lower interest rates, and understandably so.

The Australian and New Zealand dollars continued their recent declines as concerns credit-market turmoil will widen prompting investors to sell higher-yielding assets funded in the Japanese currency.

The New Zealand dollar fell to its lowest level in over a week, and the Aussie dollar to a four month low against the most traded currencies on speculation that the nations bank will cut Australian interest rates from the 12-year high of 7%.

Crude oil was little changed after rising yesterday as Tropical storm Gustav formed in the Caribbean Sea, raising concerns it may disrupt production at oil fields in the gulf of Mexico.

Gustav has strengthened to near hurricane force with winds about 70 miles an hour and was moving towards the gulf. Prices also rose after Russian lawmakers voted to recognize the independence of two breakaway Georgian regions, increasing the prospect of further tensions in the area.

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.

Dollar rally stalls

The dollar came off recent near term highs on the back of oil’s jump to a 2 week high.

The higher oil price was prompted by a combination of heightened geopolitical uncertainty stemming from Russia’s decision to halt cooperation with NATO and warning that Saudi Arabia may scale back its recent increase in production.

The once resilient Euro zone economy is succumbing to the downward pressures of a strong Euro, a slowing global economy, high oil and food prices and tight credit conditions.

According to 2007 GDP estimates, the IMF expects the world’s largest economy to grow at only 1.7% in 2008 and 1.2% in 2009 compared to 2.6% in 2007.

The main reason the ECB is not cutting rates already is because inflation is well above a level consistent with price stability and the central bank wants to avoid second-round effects of energy prices in wage and price setting.

Will we see EURUSD back at 1.40? The Euro has been very weak over the past month and this trend is expected to continue.

The Eurodollar has fallen from highs following a shift of interest rate expectations in favour of rate cuts by the ECB and rate hikes by the Fed. The market is predicting the Fed to increase rates by 75bp over the next eight FOMC meetings.

Today, Fed Chairman Ben Bernanke will be scrutinized for hints on future policy moves and any indications of support for Fannie Mae and Freddie Mac.

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.

BoE minutes as expected…retail sales to follow.

Yesterday, the BoE minutes confirmed what the market had been expecting with a 7-1-1 split, the majority sticking with the status quo and keeping rates on hold.

The hawk of the MPC, Tim Besley, voted for a hike arguing a pre-emptive rate rise would assist in halting inflationary pressures. David Blanchflower as usual cited downside risks to growth weighed far heavier than the inflation problem.

The rhetoric in the minutes echoed what was said in the inflation report, maintaining that there was greater downside risks to growth, that inflation would remain above the 2 percent target for the majority of the forecast horizon but that it will fall below this target at the 2-year mark.

Staying in the UK, CBI industrial trends came in slightly below market expectations at -13 yesterday and today we look to UK retail sales to give us direction.

Market expectations are for retail sales to decline again for the month of July following other recent weak data releases. The number surprised to the upside in May so it will be interesting to see how our capacity to spend faired last month.

Today in the Euro-zone, PMI surveys will give an indication of how manufacturing and services are fairing. The Market expects numbers to marginally decrease on the month in contradiction to the upbeat numbers released in the ZEW sentiment index on Tuesday.

Recent USD strength seems to have waned following slight rises in gold and oil prices taking other commodities with them. There are concerns too for the large US mortgage institutions and their ability to raise cash which is contributing to the dollars slowing pace.

US labour market weakness is expected to continue today with the release of initial jobless claims reporting around the 43k number with continuing claims expected to show an increase to nearly 3.5m. Later in the afternoon, we’ll see the Philadelphia Fed which has been soft all year but might pick up a little following recent ISM readings around the 50 level.

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.

BoE minutes is the focus today

Wise Money starts with news from the US housing sector with government figures reporting the annual pace of Housing Starts at 965k in July, the lowest annual rate in 17 years.

While this was slightly more than market expectations, building permits were reported down 17.7 percent at 937k and well below forecasts of around 970k. To add to the woes for the US Fed Reserve, persistent inflationary pressures were reported in the form of the PPI figure where US wholesale prices shot up at the fastest year-on-year rate since 1981.

Prices at the factory gate climbed 1.2 percent in July but it was the core producer prices, which exclude food and energy, which had the biggest impact rising 0.7 percent after a 0.2 percent increase in June.

Market expectations here were for a rise of 0.2 percent again and this figure gave little comfort to the US Fed Reserve, which is hoping a slowing economy will stave off inflationary pressures and enable rates to stay on hold.

Recent declines in EURUSD and oil appear to have given comfort to German and Euro-zone economic sentiment. The ZEW survey was better than expected coming in at -55.7 showing market participants are not as negative on the European and German economy as before.

However, the German ZEW Current Situation figure was well below expectations at -9.2 and indicates that sentiment is still to the downside with weaker growth and higher inflation being the main drag.

Here in the UK we will see how the Bank of England’s MPC voted when they met a few weeks back when the minutes are released today (9.30am). Previously the vote was split 7 to hold, 1 to cut rates and 1 in favour of an increase in rates.

As with the Fed in the US, the Bank of England faces the same concerns of persistent inflation and slowing growth but the recent Inflation report contained a dovish tone which will make it likely the bulk of the MPC voted to keep rates on hold.

Other snippets of UK data today come in the form of Public finances and CBI industrial trends but it will be the BoE minutes that the market takes direction from.

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 focus turns to tomorrows UK data

The week began with relatively little data but what was released was typically downbeat.

In the states we saw the release of the National Association of Home Builders (NAHB) housing market index, which held at 16 for the month of August matching market expectations and shows sentiment stuck at a record low.

A reading below 50 indicates US home builders view markets conditions as poor. However, the NAHB said in the report that it expects a recently enacted home buyer tax credit to boost appetite and encourage buyers to jump into the housing market. More housing data comes in the form of US building permits and housing starts this afternoon and the market expects a decrease in numbers here.

German PPI released this morning hit a 27 year high, accelerating to 8.9% in July from 6.7% in June. “As in previous months, energy prices had the biggest influence over the annual rate” the Bundesbank said.

In Germany we see the release of the ZEW survey, which is expected to follow sentiment of fading economic growth in Europe. There is reason to believe pressure will remain on the single currency and for the USD to remain strong, with support for the greenback coming from falling gold and oil prices.

Here in the UK, there isn’t much to focus on in terms of data until tomorrow. Bank of England MPC member Besley writes in the Sun (that well respected financial paper) that it is “not easy in the current economic climate” to keep UK inflation at its 2% target. He added it will fall to 2% next year if inflationary wage increases do not take place.

Elsewhere the Bank of Japan kept rates on hold last night at 0.5% but downgraded its assessment of the economy for the second month running citing the risk that weakness in the US economy may trigger recession in Japan.

It remains pretty pessimistic in its view, seeing weakening export growth and domestic demand weighing on economic weakness.

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 maintains strength

US Dollar strength continued on Friday, helped by a rise in the University of Michigan US Consumer Confidence survey.

The index improved for the second consecutive month to 61.7 from 61.2 in July, although slightly behind expectations of 62.0. The key driver behind the improvement in consumer confidence was the recent reduction in oil prices which was reflected in 1 year inflation expectations falling from 5.1% to 4.8%.

However with job losses in the US mounting, credit conditions remaining tight, and food and energy prices still relatively high, the index gauging sentiment on current economic conditions declined to 69.3 from 73.1.

This suggests that the average US consumer is not necessarily ready to head to the shops again just because oil prices are receding, and as a result, significant downside risks to growth remain.

This is reflected in overnight index swaps prices which moved sharply on Friday to price in 38bps worth of hikes by the Federal Reserve over the next 12 months, down from 71bps on Thursday.

In the US this week’s focus will be on US producer prices for July and housing data out today and tomorrow. This evening the US National Association of Home Builders Index is released, expectations are for the Index to remain at a record low of 16 for August.

This will tie in with similar tones from housing start data out tomorrow with forecasts of a decline from 1.07m to 960,000 home starts in June.

There is a significant week ahead for GBP on the data front including the release of BoE minutes, UK Retail Sales and further second quarter GDP data. The markets will watch to see if there has been a change in three way split from the BoE previous meeting particularly given the negative tone on growth in last weeks inflation report.

This negative sentiment is expected to be reflected the in retail sales data as UK consumers continue to tighten their belts.

The overall market sentiment was not helped by talk over the weekend that the British Chamber of Commerce will be releasing a bearish quarterly economic forecast this week, predicting a recession and calling for the Bank of England to cut rates aggressively in the months ahead.

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.

Dollar rally continues

Data released yesterday showed the Eurozone was moving closer to a recession after the economy contracted for the first time since the Euros launch almost a decade ago.

Gross domestic product fell 0.2% in the second quarter of 2008 after increasing 0.7% in the first. The year on year growth rate slowed for a third straight quarter to 1.5%. Technically a recession is when an economy shrinks for two consecutive quarters.

After European Central Bank President Jean- Claude Trichet last week said growth will be “particularly weak” through the third quarter, many economists now believe the Euro is on the verge of a recession.

Euro inflation data was also released yesterday at 4%; less than the 4.1% estimated earlier but still twice the ECB’s 2% target. Food price increases accelerated to 6.7% in July, while energy-price inflation soared to 17.1%.

The central bank last month raised its target rate to 4.25%, a seven-year high, to curb high inflation levels. Even with the weaker growth levels announced, financial markets are only pricing in a slim chance of a reversal of the recent rate hike.

U.S. consumer prices jumped to a 17 year high in July, reducing the scope of the Federal Reserve to lower interest rates as economic growth slows. The index rose 0.82% month on month in July, ahead of market forecasts of a 0.4% monthly increase.

The annual rate of consumer price inflation is now 5.6% year on year, up from 5.0% in June and significantly higher than the market expectation for a rise to 5.1%.

The recent dramatic retreat in energy prices and an increasingly sluggish global economy are likely to put downward pressure on headline inflation rates in coming months. The markets therefore concentrated on the weak Euro growth story taking the Euro to its lowest level in six months against the USD, below $1.48.

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.