» Asian Morning Update 16th May 2008

Inflation, inflation, inflation.

European overnight news:

Inflation, inflation, inflation. This certainly has taken over as the main theme of the market now that credit fears are on the wane.

From the ECB monthly bulletin: “the risks to outlook for inflation over the medium term remain clearly to the upside.”

From Garganas: Inflation remains the primary concern: “Of course one worry is that, because of the well-known rigidities in our economy, the impact of the economic slowdown on inflation is not as strong as in the United States and not strong enough to bring inflation back below 2% in 2009.”

From Weber: “I expect therefore that euro zone consumer prices will rise by more than 3 percent this year. Even for 2009, it’s by no means certain that average inflation over the year will fall back below our goal of just under 2 percent. This is concerning for me.”

Indeed, it is the primary concern since it has the potential to turn a slowdown into a recession. Yesterday’s Q1 GDP numbers may well have been firm but no one is expecting that performance to be repeated in Q2. Mersch merely offered that “Q2 might be different.”

The real point is that recessions are most commonly caused by consumers’ lack of confidence and consequent reduction in spending and that is just what could happen if inflation continues on the current path.

It’s not a definite conclusion at this point but it would only take a further major price shock for it to become a stronger reality.

States overnight releases:

April                                            Forecast    Actual
U.S. Industrial Production    (MoM)   - 0.3%     - 0.7%

May
U.S. Initial Jobless Claims   (10th)     370K       371K
U.S. Continuing Claims        (3rd)    3035K      3060K
U.S. Empire Manufacturing                   0.0         -3.2
U.S. Philadelphia Fed                      - 19.0       -15.6
U.S. NAHB Housing Market Index      +20.0      +19.0

As mentioned over the past few days, the market has begun to anticipate a U.S. recovery just a trice too early and in the process of bottoming economic releases can continue to be erratic.

And so it seems as yesterday’s data was almost universally negative. Continuing claims continue the relentless rise, industrial production was well below forecasts, the Empire manufacturing data lower than expected and the NAHB housing index dipped back down to +19. Nothing to hang a bullish cap on.

While the credit crisis has eased somewhat the market is still shaky. Bernanke’s comments spelled out the problems quite clearly when talking about banks replenishing their depleted capital.

“They have at least partially replaced the losses with new capital raising, but not entirely,” he said. “They are being rather conservative in making new loans, which has implications for the broader economy. I strongly urge financial institutions to remain proactive in their capital-raising efforts. Doing so not only helps the broader economy but positions firms to take advantage of new profit opportunities as conditions in the financial markets and the economy improve.”

Interestingly, following its earlier pullback in European trading the Dollar recovered later in the day. Some suggest it is because oil dipped back down to $123pb but that seems to be a reason made up to try and explain a small move.

It certainly doesn’t follow the lead of the European GDP/CPI numbers and the range of poor U.S. numbers. It is difficult to establish reasons sometimes which will probably generate comments of “technical trading” which is the biggest misnomer I have ever come across.

More likely the market has little confidence in either buying or selling Dollars and moving into a weekend the best option is to do nothing. There isn’t a great deal on today’s slate with the U.S. housing starts and building permits hardly likely to set the world on fire.

If I am to draw anything out of this then I will look at the technicals – and that doesn’t include what RSI or stochastics are doing. Without having looked at the impact of yesterday’s trading on patterns it does seem more and more likely now that we have seen the Dollar’s top – or very close to and while today may still provide tight ranges the impact should be a lower Dollar next week.

More later once the daily analysis has been done…

The following releases are due from Asia due today:

Japan
Q1 GDP                                 (QoQ)   +0.6%
Q1 GDP                                  (YoY)   +2.5%

March Industrial Production (F) (MoM)   - 3.1%
March Industrial Production (F)  (YoY)   - 0.4%
April Consumer Confidence  
April Machine Tool Orders (F)   (YoY) 

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This entry was posted on Friday, May 16th, 2008 at 1:34 and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.