» 2008 » April

Better GDP and lower rates … but the market remains unmoved

European releases overnight

March                                            Forecast   Actual
Euro-zone Unemployment Rate           7.1%     7.1%

April
Italian CPI                          (MoM)   +0.3%   +0.5%
Italian CPI                           (YoY)   +3.4%   +3.5%
Euro-zone CPI estimate         (YoY)   +3.4%   +3.3%
Euro-zone Business Climate Indicator    0.69     0.44
Euro-zone Consumer Confidence         -13.0   - 12.0
Euro-zone Economic Confidence            98.9     97.1
Euro-zone Industrial Confidence           - 1.0     - 2.0
Euro-zone Services Confidence             +9.0     +7.0
Swiss KOF Leading Indicator                 1.46      1.20
U.K. GfK Consumer Confidence           - 20.0   - 24.0

European data continues to confirm higher inflation and weaker business & consumer confidence. The April figures appear to highlight a mild acceleration of the softening in confidence and on the assumption that the trend is more likely to persist than reverse, it does provide a potential background of instability.

The weakness compounded with continues inflation does have the potential to cause more damage to the economy than just the credit crisis. It is still early days but it is something to watch out for.

Trichet maintains that the Euro-zone economy is holding up, which in the circumstances is valid. It remains at a vulnerable juncture where minor price shocks could still wreak more damage.

States news overnight:
     
Q1                                               Forecast    Actual
U.S. GDP Annualized           (Q1 A)   +0.4%     +0.6%
U.S. GDP Price Index           (Q1 A)   +3.0%     +3.5%
U.S. Personal Consumption  (Q1 A)   +0.7%    - 1.0%

April
U.S. ADP Employment Change            - 60K       +10k
U.S. Chicago PMI                               48.0        48.3

And so we have the two most critical bits of data out of the way. GDP was slightly better than expected and the Fed cut rates by 0.25% again.

The FOMC statement read:

“Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.
 
Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months.

The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.”

The market had discounted the cut and thus this event has limited impact. The question that remains is whether the Fed will call a pause or halt to the cuts. Some point to the fact that a phrase in the March statement included the phrase “downside risks to growth remain” but was absent in this month’s statement.

In many ways it would have been foolish for the Fed to make any definite statement which could put them in a straightjacket for future decisions. The basic fact is that the economy remains highly vulnerable to new shocks. The Fed will wish to retain the ability to react with appropriate actions if circumstances dictate.

Clearly the fiscal stimulation checks are in the post but it will take some while to make any meaningful impact on the economy. However, recent figures, housing market excepted, have shown tentative signs of a steadying and if this continues the pressure on the economy could decrease.

The Chicago PMI was slightly better than expected. It is nothing to get wildly excited about – it was the first time that the figures have seen 3 consecutive months below 50 since Q2 2003. However, there is still mixed news. Employment is looking weak and domestic demand remains timid and these are key to any recovery.

The headline Q1 GDP was better than expected but it wasn’t all rosy. Consumer spending, which accounts for two-thirds of economic activity, grew at the weakest rate since the second quarter of 2001 and in the light of the weak employment numbers this remains a big issue.

The housing market continues to plumb new depths and isn’t expected to recover until next year. Inventories were also high and accounted for 0.8% of the rise which leaves Q2 on rocky ground.

So in the end all we can say is that it was better than expected but in no way provides sufficient confidence to provide any great confidence in a recovery that is required to avoid two consecutive quarters of negative growth. Almost certainly Q2 will be one of those quarters so it’ll still go down to the line.

The Dollar gained a bit in early trading but suffered following the FOMC decision and we’re probably back to arguing what will happen next.

The market will consequently attach greater importance to tonight’s ISM manufacturing and tomorrow’s non-farm payroll numbers to justify the next directional move. Signs of greater stability from both will be required to stop the market from beating the Dollar bearish drums again.

More later once the daily analysis has been done…

The following releases are due from Asia due today:

Australia
March Building Approvals                 (MoM)    - 0.5%
March Building Approvals                  (YoY) 
April AiG Performance of Manufacturing Index

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With DealBook Mobile, it is possible to engage in currency trading from your cell phone, PDA or BlackBerry. DealBook Mobile includes a variety of charts and options, as well as monitoring and the ability to place forex trading orders.

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Fed rate decision today: has the dollar bottomed out in currency trading?Today, traders and investors are awaiting a key Fed decision. Indeed, the US dollar has been strengthening in forex trading as the decision approaches. Even though the Fed is expected to cut rates, the body is also expected to announce an end to that policy after today.

This is leading some to think that the dollar may have bottomed out in currency trading. Bloomberg reports on the US dollar forex trading forecast:

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Forex trading on the currency marketThe UK pound is down in currency trading on the FX market this morning. Housing prices data has been released, and this is the first time since 1996 that annual house prices are down.

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Currency trading with the euroThe euro is down in forex trading this morning as economic data continues to indicate that a slowdown in the euro zone economy is on its way. This means that ECB officials may have to cut interest rates after all.

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Counting sheep ahead of the FOMC and GDP info

Releases from Europe:
                                                           Forecast    Actual   
April U.K. Nationwide House Prices  (YoY)                - 1.0%
March German Unemployment Change      - 30K         - 7K
March German Unemployment Rate           7.8%       7.9%

Nationwide confirmed the HomeTrack report earlier in the week by reporting that they have seen house prices decline by -1.0% over the past year, the first YoY decline in 12 years. Prices were hit by a combination of higher mortgage rates and tighter lending criteria which have caused a drop in mortgage approvals seen over the past six months.

The supply of unsold properties is rising which also contributes to lower prices. Together with a generally weaker economy and softer consumer confidence the lender is now expecting losses in prices over the rest of the year.

German unemployment failed to decline by as much as expected. It would be possible to interpret that as being a reflection of a slowing but it is only one month and other stats have held up. However, given the IFO and GfK surveys it will raise eyebrows and it will be something to watch over the coming month or two.

If the CEO of Siemens is to be understood then he is obviously expecting a slowdown. In a prepared speech he declared that it was obvious that the global economy will slow down. He commented, “Obviously, opinions differ on the intensity and duration of this slowdown,” and added “We expect the consequences of the crisis in the finance sector to be felt in other sectors in the course of next fiscal year. We already see first signs of greater cautiousness on the part of customers in our standard products business here in Germany.”

The following economic releases are due today:

Q1
U.S. GDP Annualized            (Q1 A)       0.4%
U.S. GDP Price Index            (Q1 A)      3.0%
U.S. Personal Consumption   (Q1 A)    +0.7%

March
Euro-zone Unemployment Rate            7.1%

April
Italian CPI                           (MoM)    +0.3%
Italian CPI                            (YoY)    +3.4%
Euro-zone CPI estimate          (YoY)    +3.4%
Euro-zone Business Climate Indicator      0.69
Euro-zone Consumer Confidence           -13.0
Euro-zone Economic Confidence              98.9
Euro-zone Industrial Confidence             - 1.0
Euro-zone Services Confidence               +9.0
Swiss KOF Leading Indicator                   1.46
U.S. ADP Employment Change               - 60K
U.S. Chicago PMI                                  48.0

And so both BOJ and government will pace their stony corridors awaiting the announcement of the States’ Q1 GDP praying for a number without a negative sign before it. They will also probably be wishing for an unchanged policy that signals the end of the Fed’s series of cuts as the marginal impact of each new 0.25% cut becomes wafer thin.

Even then the impact of higher oil prices is clearly having a deteriorating effect on consumer spending while lower industrial production will at the very least cause a reduction in overtime which has been the only element of wages that have brought any increase in household income.

What will the Fed do? Well, it has been debated to hell and comes down to one of two scenarios: either cut by 0.25% and call it a day or retain an unchanged policy. Frankly, given the impact of any cut in rates is limited there is probably little difference between the two.

That in itself should cause the market to reassess and probably cause the Dollar to gain further in the short to medium term. However, there has been no real reason to buy Dollars so any rally is unlikely to bite too deeply.

As for the GDP – well, it’s probably a tighter call than the FOMC decision and will go down to the wire with what could be a fairly strong knee jerk reaction but which will likely calm down until the FOMC makes its announcement…

Note important support and resistance areas:

         USDJPY        EURUSD       USDCHF       GBPUSD
Res:  104.81-17    1.5691-02    1.0470-10    1.9771-10
Res:  104.19-38    1.5595-20    1.0400-29    1.9700-10

Spt:   103.65-85    1.5497-39    1.0300-25    1.9590-33
Spt:   102.41-66    1.5404-38    1.0194-13    1.9480-95

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