» Asian Morning Update 24th April 2008

Home Forex Analysis Trading Tools Forum Currency converter

Asian Morning Update 24th April 2008

Inflation, interest rates and red herrings…

European releases overnight:

February                                              Forecast    Actual
Italian Retail Sales                     (MoM)   - 0.1%    +0.3%
Italian Retail Sales                      (YoY)    +0.6%   +2.7%
Euro-zone Industrial New Orders   (MoM)   - 0.4%    +0.6%
Euro-zone Industrial New Orders    (YoY)    +5.7%    +9.9%

April
Euro-zone Manufacturing PMI (P)                 51.6       50.8
Euro-zone Services PMI (P)                         51.4       51.8
Euro-zone Composite PMI (P)                     51.5        51.9

The BOE minutes revealed a sizeable split of opinion between members. Blanchflower voted for a 50bp cut while Besley and Sentence voted for no change. The rest voted for the final outcome – a 25bp cut which was described as a means to “offset, partly but not wholly, the current and prospective downward shift in demand arising from the deterioration in global credit conditions.”

It’s a little removed but does make me wonder when we hear European officials declare that foreign exchange rates should reflect fundamentals just whose fundamentals are being declared. If two members of a central bank have such divergent views it does water down the ECB’s comments…

What a mixed bag of results from Europe yesterday with industrial PMI declining while service PMI turned out better than expected. Following the poor outlook from last week’s German IFO it began to look just a little soggy but then came better retail sales from Italy and much better than expected industrial new orders from the Euro-zone.

The only difference is that the good numbers are two months old now while the bad numbers are from the current month.

States news overnight:

There was really nothing to report from the States yesterday – not even a quote nor a hiccup from any officials. However, the market is once again talking inflation following the Australian number yesterday and how the ECB may hike rates.

Noyer is now complaining that his comments about possibly seeing interest rates rise were misconstrued. Personally I think the subject of interest rates is a red herring at this point in time.

The current inflationary pressure is less a factor of excessive growth and a more systemic problem related to oil prices, the secondary impact on higher food prices and the particular problem of credit which is slapping lenders in the face for their poor risk management and causing them to suddenly become over risk averse.

We’ve already heard from the Fed’s Fisher who questions whether further cuts will actually have any impact. We have seen the ECB – up until August last year consistently hike rates and forecasting a downturn in inflation this year. Now the ECB don’t think inflation will ease until next year.

Has this really been a factor of overly strong growth? Maybe slightly. However, hiking rates has not reigned in inflation. In fact we all know that inflation is still rising.

We have seen the Fed cut rates aggressively. Has it stopped the downturn? Not at all – but then we could argue that it is a bit too early.

The sticking point of all these arguments is that whatever central banks do with interest rates, hike or cut, the current supply shortage in oil is going to result in higher prices. Higher oil prices will spur more cultivation of crops for biochemical fuel.

In other words inflation will rise regardless of central bank action.

Higher prices are already having a clear impact on household spending patterns. Oil and food are sucking the consumers’ purses dry of available money for buying real economy products. It doesn’t matter what interest rates do.

Really, what is the difference between businesses securing funding at 0.5% or 2%? Frankly nothing if consumers aren’t buying their products.

Add to the cocktail the reluctance of lenders to perform that function and the outcome is not very rosy and there really isn’t anything central banks can do about it.

The market may make noise about the new historic highs in the Euro but ignore the fact that the Dollar is performing modestly well against the other European currencies and the Yen. It’s not yet clear whether the Euro has found its high for the year or not – but it really doesn’t look far away.

The market appears to have completely ignored the fact that five German banks have required special funding from the Bundesbank. That isn’t as rosy a picture as the ECB tried to convey. There is going to be a deterioration in the Euro-zone economy and sooner or later the Euro will suffer because of that.

More later once the daily analysis has been done…

The following releases are due from Asia due today:

Japan
February All Industry Activity Index (MoM) - 0.5%
March Corporate Service Price (YoY) +0.7%