Articles from January 2011

US bounce back continues with one eye on Egypt

The deteriorating situation in Egypt was the over riding consideration on Friday and remains so again today. US bounce back continues with one eye on EgyptRisk took a battering, with equities falling sharply on Friday afternoon in the US and bourses in the Far East slipping by the same magnitude this morning.

The Dollar has had a reasonable couple of sessions which began with the strong US GDP number.

Markets were looking for a rise of 3.3-3.4% in US growth and the actual number was reported at +3.2%, slightly less but still well up on the +2.6% from the previous quarter.

The make up of the figure also heartened the market and the overall sentiment became Dollar positive.

The trend was cemented by an official statement from the Peoples Bank of China yesterday during which they again expressed concern over inflation and excessive bank lending, warning that the Central Bank may need to tighten reserve requirements again to curb rapid capital inflows.

Data so far this morning has proven to be on the weak side with both Japanese industrial production and German retail sales underperforming expectations.

Most interest this week will be generated by the ECB monthly monetary policy meeting on Thursday.

There has been an increase in chat from policy makers recently concerning the implications that higher commodity prices are having on the Eurozone inflation rate.

This is encouraging players to expect some sort of indication within the ECB communiqué of a tightening of monetary policy – possibly as early as at the March meeting.

This seems a little premature given the precarious state of the majority of Eurozone member nations BUT the inflation target of 2% is slowly being left behind.

We saw the CPI figure for the Eurozone come in at 2.4%, up from 2.2% previously. This is worrying for a Central Bank still very much operating along the tight monetary policies of the old Bundesbank.

Differing interest rate expectations focus of money market attention

After a short rally at the beginning of the year the Greenback has come under increased downward pressure following widening interest rate differentials against many other currencies. Differing interest rate expectations focus of money market attentionThe stand out difference in view between the hawkish ECB and the somewhat dovish US stance highlighted in the latest FOMC statement has provided a catalyst to differing outlooks from either side of the pond.

Uncle Sam seems on tract to complete the full $600 billion of QE by the middle of the year in contrast to the ECB looks to be planning the market for a reduction in its liquidity operations.

Although there could be more movement EUR over the short term as a result of the move in interest rate differentials as well as improved feeling in the direction of the eurozone periphery, the potential rise for EUR/USD is looking more and more restricted.

Even European officials are starting to display an air of caution, with the ECB’s Nowotny claiming that markets are too enthusiastic over a possible improvement of the European Financial Stability Facility (EFSF) bailout fund.

Without a doubt, it is very likely that the euphoria recedes quickly once it becomes apparent that enlarging the bailout fund is by no means a panacea to the region’s ailments.

In other news, Moody’s are musing over the current AAA sovereign rating of the United States.

Following the Congressional Budget Office’s latest assessment of the 2011 outlook within which they put this year’s deficit at $ 1.48 trillion, the sovereign rating has again come under scrutiny.

Moody’s said that the probability of assigning a negative outlook to the current AAA in the coming couple of years is rising and although the risk to the rating itself was small, it is rising and will continued to do so during the next few years.

Bank of England split on interest rates

Wednesday saw both the Federal Reserve and Bank of England reveal details of interest rated decisions from recent meetings.Bank of England split on interest ratesThe Bank of England minutes, taken with Governor Mervyn King’s speech the night before, were interesting because it revealed much more about the dove/hawk divide within the MPC than the Fed release.

Three members voted against the proposition of holding rates – Andrew Sentance was joined by Martin Weale in voting for a rate increase with Adam Posen again the most dovish, voting for an extension to the QE program.

Merv spoke on Tuesday evening, outlining the banks view that we are in the midst of the largest squeeze on real incomes since the 1920’s, and that inflation is likely to stay above target for most of this year.

Just as we thought things were getting better!

Growing uncertainty over the UK economy is keeping Sterling in check against the Euro and Dollar and this is unlikely to change until we find out if the last quarter was just a blip on the continuing road to recovery or something much worse.

In the Feds case, the meeting was also yesterday, and again the Fed reassured the markets of the continuing economic recovery.

Again the Fed expressed concern over the labour market but the key point the markets will take from an otherwise as expected release is the continued lack of dissenters on the FOMC.

We will get the hard data supporting the Feds’ stance on Friday, when US 4th quarter GDP figures are released.

Although parts of America also suffered a prolonged cold snap in December, we are not expecting this to be used as an excuse for a disappointing number!

Money and forex markets stunned by GDP fall

The Pound was dealt a severe blow yesterday as the UK economy surprisingly contracted in the fourth quarter of 2010 as the harshest winter in a century hit retail and service sectors. Money and forex markets stunned by GDP fallAs Wise Money posted yesterday UK economy goes into deep freeze UK GDP fell by 0.5% in Q4, having increased for the last 4 quarters, according to the Office for National Statistics yesterday morning.

The ONS said that growth would have been “flattish” in the fourth quarter without the impact of the weather and that weather-related disruptions accounted for “most” of the 0.5% decline.

This view has been echoed by the words from Mervyn King last night who played bad cop / bad cop all on his own.

There were no soothing words at all with expectations that rising consumer inflation would remain a problem but that wages in real terms would fall – he warned the UK to expect living standards to fall with the likelihood that things would not improve much for the rest of 2011.

The single European currency continues to rally against the US Dollar, with the pair trading at two-month highs.

The Greenback suffered as President Obama called for a freeze on non-security discretionary spending during his State of the Union speech last night, suggesting a part spending freeze that would save $400 billion from the budget over the next decade and additional cuts of $78 billion in defence.

There was a minor reaction in markets to the speech, previously that day a report indicated that US consumers began the year with much more confidence in the economy than expected, seeing a recovery gaining steam and expecting more jobs will be created.

The Conference Board said its consumer confidence index, which had slipped in December, rose in January to 60.6, its highest level since May.

In contrast US Housing data also released showed a mini double-dip in home prices with residential real estate prices dropping fastest in November.

According to the S&P/Case-Shiller index, home values in 20 cities fell 1.6 percent from November the prior year, the biggest 12-month decrease since December 2009.

UK economy goes into deep freeze

The short term outlook for Sterling looks decidedly dodgy after 4th Quarter UK GDP was released at -0.5%, a contraction! UK economy gridlocks into deep freezeAnalysts were penciling in forecasts of +0.3% – +0.4%, but fears are grew that we might see it reported weaker than those especially given comments from the Business Secretary, Vince Cable this morning.

He was reported as saying that there is reasonable consensus that Q4 was a ‘pretty bad quarter’ for the UK economy.

Now, this could’ve been the Government trying to anchor expectations or it could’ve been the old Tory trick of getting the market to expect horrible news only to be pleasantly surprised when it wasn’t so bad even though the actual number was still weak.

The ONS has said that the bad weather was the likely contributor to most or all of the quarterly fall and that without the harsh conditions, GDP would likely have been flat. Sterling has crashed on the back of the number falling over 1% against the board.

Overnight there was little of surprise. Japan left their rates unchanged and India raised theirs by 0.25% to a 2-year high – both decisions as expected.

The only ripple on a very calm pond was the Australian CPI number, reported far lower than anticipated thus deferring the next move in Aussie rates for several RBA meetings to come and causing the Dollar to weaken sharply in Asian markets.

This had the effect of dragging the Kiwi Dollar with it.

Euro continues to climb up the forex money markets

The euro has started the week on the front foot, pushing through 1.35 in the EURUSD pair and below 1.18 versus Sterling. Euro continues to climb up the forex money marketsThe recent rally was sparked by tougher than expected comments on rising inflation by ECB President Jean Claude Trichet and compounded by short sellers buying back positions.

It has probably still got some room to run on the upside given the current divergence between the EURUSD and EUR two year swap rate, but our longer term outlook is still Euro negative.

The resignation of the Irish Prime Minister as head of his party and withdrawal of the Green party from the ruling majority has not as yet dealt a fatal blow to the finance bill.

Which will probably now mean a much earlier than expected general election.

Portugal has re-elected its President for a second term according to reports, hopefully bringing short term stability and calming the market enough for the EFSF reforms to be passed before they inevitably also need to find alternative sources of funding.

Wednesday’s release of the Bank of England minutes is the Sterling highlight of the week.

The reason being is that changes in voting preferences of the MPC may begin to diverge given the current inflation rate and the growing need to send a signal to the markets and the contain inflation expectations.

The Pound is facing key levels against the USD, we will need to see if we can break through the 1.60 level, and a move towards a more hawkish tone from the MPC may the catalyst to do this.

UK GDP for the 4th quarter is also release this week (Tuesday) with a rise of 0.5% QoQ and a YoY figure of 2.6% expected.

A dull Friday afternoon- and it’s not just the weather

Consolidation hit the money markets today with little influence from economic data. A dull Friday afternoon- and it's not just the weatherWe received more dialogue from European officials concerning their Emergency Funding Facility, but really only going over old material so there is no material effect on rates.

Trading has looked to concentrate on testing the technical resistance in Eurodollar at 1.3525. We are sitting just above that level at present but we will need to close higher this afternoon in order to signal a shift higher.

This concentration on buying Eurodollar has caused the Euro to strengthen across the board with both Sterling and Yen falling.

Yesterday’s data from the US was a bit mixed although overall deemed positive for the economy with interpretation of the numbers largely on the side of them bolstering the recovery.

Analysts still consider this to Dollar supportive on the grounds that the currency will be deemed as becoming a growth currency in the months to come.

Wise Money wishes that you have a great weekend.

US dollar’s turn for market’s focus

The Greenback fell to a two month low against the euro yesterday as speculation that the US economic recovery will remain sluggish and mounting speculation that European officials are successfully addressing the region’s debt crisis. US dollar's turn for market's focusThe dollar weakened against 13 of its 16 most-traded counterparts as housing starts declined to the lowest level since October 2009 and before data later today that may show continuing jobless claims increased.

The Chinese Yuan also reached a 17-year high against the Dollar as Chinese President Hu Jintao met with President Barack Obama at the White House.

Meeting yesterday for the eighth time, both leaders emphasised the importance of increased trade and said their two countries can keep building commercial ties while working through differences on currency policy and human rights.

The forex markets took a bit of a back seat during the day whilst attention turned to interest rates in general and monetary policies in particular.

With global central banks starting to look at normalising policies and thus interest rates, traders have edged yields higher almost across the board.

The next step looks likely to be the re-introduction from investors of carry trades and in order to achieve this, a funding currency must be sought.

The obvious choices are the popular Yen and Swiss Franc but there are perverse arguments for using the Dollar or Sterling as well.

Could be interesting once rates start moving higher

BoE and eurozone fiddles whilst Rome burns

Yesterday’s publication of the UK inflation rate made for an interesting day for Sterling.
BoE and eurozone fiddles whilst Rome burnsThe current rate now stands at 3.7%, getting on for double the Bank of England’s official target rate of 2%, surges in the price of fuel, transport and food the headline grabbers of price rises across the board pushing Sterling over the magical 1.60 level for most of the day.

The usual media circus ensued, most of the articles informing anyone who would listen about the bank of England’s incompetence and why they should raise rates immediately.

Once we drill down into the data, we get a slightly less hysteric picture.

Tax rises and the drop in the value of Sterling seem to be much more influential to the current inflation rate but even with these effects stripped out the inflation rate would be above target.

The problem for the BoE is in managing inflation expectations with the rate as it is.

If current inflationary pressures are indeed temporary (which in one sense they are) then they need to be more proactive in forcing this point home and keeping expectations anchored.

For Sterling this should be positive, but probably not as important as market currently thinks.

The meeting Euro zone ministers failed to produce any agreement on an enlargement to the current bail-out fund or any more for further fiscal consolidation.

The spreads on bonds between the periphery nations and Germany once again blew out, with the yield on the Spanish 10 year passing the key 7% level we have discussed before as being the level that signalled the beginning of the end for Ireland and Greece.

The focus will remain on ministers coming to some agreement over the enlargement of the bail-out fund and also if there will be any changes in what the fund is used for, which may include buying Euro Zone debt.

UK inflation exceeds expectations

With the VAT rise and soaring energy prices, Wise Money expected high inflation numbers from the UK. UK inflation exceeds expectationsHowever when they were released today at 9.30am the CPI and RPI figures didn’t disappoint.

CPI came in at 3.7% YoY; ahead of expectations of 3.3% which would have matched last months figure.

RPI was announced at 4.8% YoY with the extra 2.5% VAT adding to the other tax rises meaning the cost of living in the UK is spiraling.

That leads us onto an important question- what can the Bank of England do to get inflation nearer the target of 2%?

Previously, an interest rate rise would calm inflation and restore some stability to the price of goods.

Unfortunately, this approach is now extinct as the rises in commodities and tax are adding more pressure on the economy to grow.

Also, any big rise in the interest is likely to have a huge knock on effect in the housing market.

With many households enjoying almost interest free mortgages for the last 18 months, the country has maintained its standard of living rather than cutting back and paying off the mortgage.

This will come back to haunt the country as when those repayments grow, the cutbacks will begin.

On top of that, those who can barely afford to pay off there house will likely be forced to foreclose.

This will lead to a drop in the house market and prices could drop back to credit crunch lows.