It has been a record breaking day in the financial markets with the US dollar falling to an all-time low against the Euro and crude oil futures closing at a record high. Although US Consumer confidence dropped to a 5 year low, that was not the primary catalyst for the dollar's slide. Instead, the downward spiral was triggered by the combination of things including comments from Federal Reserve President Kohn, stops being taken out at the prior high, weaker consumer confidence, stronger Eurozone economic data and concerns about what Ben Bernanke will say at his testimony on monetary policy tomorrow.
Kohn has already warned us that the central bank will do what it takes to fight a recession. With foreclosures rising 90 percent in the month of January from the same period last year, consumer confidence tanking and oil prices hitting new highs, it is absolutely necessary that Ben Bernanke makes growth his top priority. We doubt that the Senate our House panels will allow him to get away with talking about price pressure when most of their constituents probably feel like the US economy is already in a recession. Therefore even though the annualized pace of producer price growth rose was the fastest pace since 1981, the impact on the US dollar was limited because the market quickly realized that right now, stronger inflationary pressures will not stop the Fed from continuing to lower interest rates.
The futures market is still pricing in a 50bp rate cut for the March 18th monetary policy meeting and recent economic data suggests that the US central bank cannot afford to slow down. The price action in the US dollar today clearly indicates that this is what the market expects Bernanke to tell us tomorrow. New home sales and Durable Goods orders are also due for release. Existing home sales were stronger than expected, but new home sales should remain soft and even if it rebounds, it will not help the dollar much because either inventory will rise or prices will fall, or both.
As for durable goods, after increasing 5.2 percent in the month of January due to non-defense aircraft sales, a healthy decline is expected.
UPCOMING KEY ECONOMIC RELEASES
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UPCOMING KEY ECONOMIC RELEASES
Canadian Current Account Balance - Q4
Release Date: February 29/08
Q3 Result: $11.1B (non-annualized)
TD Forecast: -$0.9B
Consensus: -$0.2B
It's time for Canada to say good-bye to its days of twin surpluses, as the Canadian current account is likely to fall into deficit territory in Q4 2007 for the first time since 1999. We're forecasting a current account deficit of $0.9B, non-annualized, with the deterioration in the CA balance coming from a substantial softening in the goods and services balance over the last couple of quarters. From the previously-released international merchandise trade data, we know that the goods balance fell to only $9.2B for the quarter, from $10.5B in Q3. The services balance is also likely to deteriorate further, since the strength of the Canadian dollar during the quarter likley led to an increase in Canadians vacationing in the U.S., adding to the travel deficit. We think that the cumulative appreciation of the Canadian dollar over the last few years may have finally caught up the Canadian exporters, with the weakness in exports likely to persist through 2008, leading to the first annual current account deficit since 1998
U.S. Personal Income and Spending - January
Release Date: February 29/08
December Result: income +0.5%; spending +0.2%; core PCE deflator +0.2% M/M, 2.2% Y/Y
TD Forecast: income +0.2%; spending +0.3%; core PCE deflator +0.3% M/M, 2.2% Y/Y
Consensus: income +0.2%; spending +0.2%; core PCE deflator +0.2% M/M, 2.2% Y/Y
We're expecting to see U.S. income and spending continue to falter in January, with income taking an especially big hit. Since hours worked fell by 2.3% in January and the economy shed 17,000 jobs, the pace of growth in the wages and salary component will likely weaken substantially, leading income growth to soften to only 0.2% M/M. Meanwhile, we expect spending to come in at 0.3%, matching the gain in January retail sales. However, real personal consumption will likely be much weaker. And with the strength that we saw in core CPI in January, we're expecting to see the core PCE deflator increase by 0.3% on a monthly basis, with the Y/Y measure unchanged at 2.2%.
Release Date: February 29/08
Q3 Result: $11.1B (non-annualized)
TD Forecast: -$0.9B
Consensus: -$0.2B
It's time for Canada to say good-bye to its days of twin surpluses, as the Canadian current account is likely to fall into deficit territory in Q4 2007 for the first time since 1999. We're forecasting a current account deficit of $0.9B, non-annualized, with the deterioration in the CA balance coming from a substantial softening in the goods and services balance over the last couple of quarters. From the previously-released international merchandise trade data, we know that the goods balance fell to only $9.2B for the quarter, from $10.5B in Q3. The services balance is also likely to deteriorate further, since the strength of the Canadian dollar during the quarter likley led to an increase in Canadians vacationing in the U.S., adding to the travel deficit. We think that the cumulative appreciation of the Canadian dollar over the last few years may have finally caught up the Canadian exporters, with the weakness in exports likely to persist through 2008, leading to the first annual current account deficit since 1998
U.S. Personal Income and Spending - January
Release Date: February 29/08
December Result: income +0.5%; spending +0.2%; core PCE deflator +0.2% M/M, 2.2% Y/Y
TD Forecast: income +0.2%; spending +0.3%; core PCE deflator +0.3% M/M, 2.2% Y/Y
Consensus: income +0.2%; spending +0.2%; core PCE deflator +0.2% M/M, 2.2% Y/Y
We're expecting to see U.S. income and spending continue to falter in January, with income taking an especially big hit. Since hours worked fell by 2.3% in January and the economy shed 17,000 jobs, the pace of growth in the wages and salary component will likely weaken substantially, leading income growth to soften to only 0.2% M/M. Meanwhile, we expect spending to come in at 0.3%, matching the gain in January retail sales. However, real personal consumption will likely be much weaker. And with the strength that we saw in core CPI in January, we're expecting to see the core PCE deflator increase by 0.3% on a monthly basis, with the Y/Y measure unchanged at 2.2%.
Euroland: Panic Effect Out of PMI
Labels:
effect of PMI,
euroland
Overview:
Flash PMI surprised to the upside with the composite PMI rising to 52.7 in February from 51.8. The rebound was driven by a stronger service PMI whereas manufacturing PMI fell in line with expectations. The number confirms that the very sharp drop in service PMI we saw last month was partly a sentiment effect as the survey was conducted during the time of the financial turmoil that led the Fed to cut 75bp - see Research Global: A stalling service sector . The level for service PMI is still quite low though confirming that the weakness is also related to weak consumer spending. The composite PMI points to GDP growth of 1.25%. This number means that the ECB will continue to be sidelined for now - especially given the bad news we have received on the inflation front with higher energy and food prices and the wage deals in Germany coming in high.
Details:
The service PMI rose from 50.6 to 52.3. Manufacturing PMI fell, in line with expectations, from 52.8 to 52.3. As the charts below show, the service PMI is still at a relatively much weaker level than manufacturing PMI, which has been going mostly sideways in the last few months. However, interestingly, the service sector has very often been the most leading indicator and this points to further weakness in manufacturing PMI in the coming months. The weak industrial surveys in the US also confirm that the industrial sector in general is weakening at the moment and, as in 2001, we think Euroland will follow gradually with some lag.
Outlook and assessment:
We expect composite PMI to grind lower in the coming months but it will probably take some time before it reaches levels where the ECB will act on it and cut rates. Even though the composite PMI is in the "cut zone" already, it will take more weakness for the ECB to cut because of the high inflation risks. Hence we do not see the ECB cutting before June. The market is already pricing in the cuts we see coming so we are fairly neutral on the euro bond market here. Two factors will be important: How weak will growth be (both in the US and Euroland) and how much will inflation and wages continue to disappoint?
Flash PMI surprised to the upside with the composite PMI rising to 52.7 in February from 51.8. The rebound was driven by a stronger service PMI whereas manufacturing PMI fell in line with expectations. The number confirms that the very sharp drop in service PMI we saw last month was partly a sentiment effect as the survey was conducted during the time of the financial turmoil that led the Fed to cut 75bp - see Research Global: A stalling service sector . The level for service PMI is still quite low though confirming that the weakness is also related to weak consumer spending. The composite PMI points to GDP growth of 1.25%. This number means that the ECB will continue to be sidelined for now - especially given the bad news we have received on the inflation front with higher energy and food prices and the wage deals in Germany coming in high.
Details:
The service PMI rose from 50.6 to 52.3. Manufacturing PMI fell, in line with expectations, from 52.8 to 52.3. As the charts below show, the service PMI is still at a relatively much weaker level than manufacturing PMI, which has been going mostly sideways in the last few months. However, interestingly, the service sector has very often been the most leading indicator and this points to further weakness in manufacturing PMI in the coming months. The weak industrial surveys in the US also confirm that the industrial sector in general is weakening at the moment and, as in 2001, we think Euroland will follow gradually with some lag.
Outlook and assessment:
We expect composite PMI to grind lower in the coming months but it will probably take some time before it reaches levels where the ECB will act on it and cut rates. Even though the composite PMI is in the "cut zone" already, it will take more weakness for the ECB to cut because of the high inflation risks. Hence we do not see the ECB cutting before June. The market is already pricing in the cuts we see coming so we are fairly neutral on the euro bond market here. Two factors will be important: How weak will growth be (both in the US and Euroland) and how much will inflation and wages continue to disappoint?
Financial Concerns Persist
The troubles facing the bond insurers, also called monoliners keep mounting, and further downgrades keep looming on the horizon. Warren Buffett's offer last week to be paid for taking over responsibility for USD 800bn in municipal bonds did little to ease concerns. The primary source of the current stress among monoliners is their exposure to mortgage-backed securities - not their exposure to municipal bonds. Reports that investors have begun to shun Auction Rate Securities, ARS, which constitute around USD 330bn of the USD 2,200bn municipal bond market, is yet another indication that perceived risks of further downgrades among monoliners are on the rise.
Leveraged loans to finance buyouts, LBOs, have been a burden for many banks since last summer. However, the prices of these loans in secondary markets have started to decline. Last week, S&P warned that a growing number of leveraged loans are in danger of breaching covenants or defaulting. Any relief to banks' balance sheets from the LBO front are unlikely in the near term. Against this background of persistent concerns, credit spreads keep widening.
The reports last week on `material weakness´ relating to the valuation of AIG's CDS portfolio highlight that independent auditors will be particularly thorough in their auditing of the 2007 annual reports for financial institutions. In the coming weeks, similar news stories may therefore emerge as the auditing processes for the annual reports progress. In the short term, this may pull down sentiment on financials.
U.S. Recession? Who Would Be Next?
Labels:
Executive Summary,
US recession
Financial markets in most countries have been in turbulence in recent days due, at least in part, to growing concerns about prospects of a U.S. recession and implications thereof for growth in foreign economies. Although our view is that the U.S. economy will narrowly miss recession in 2008, we proceed in this report under the assumption that the U.S. economy will indeed experience a downturn this year. Would the rest of the world follow the United States into recession? If not the entire world, then which countries would be most affected by an American recession?
The most direct way that an American recession would spread to the rest of the world is via the weaker exports to the United States. In that regard, Canada and Mexico stand out as being the most susceptible to an American downturn, especially a severe one. Although the European Union is the least exposed nation to exports to the United States, at least as measured as a percentage of local GDP, Europe does not have much cushion due to its relatively low overall GDP growth rate. Contrary to popular perceptions, the Chinese economy would not collapse if the United States experiences recession. Small open Asian economies, such as Singapore and Taiwan, might feel more of an impact, but these economies are better able to withstand an American downturn than they were during the last cycle. Most Latin economies probably would not fall apart either.
Economic fundamentals in many economies, especially in the developing world, have improved over the past decade. Many developing economies are no longer incurring sizeable current account deficits, which makes them less vulnerable to sudden outflow of foreign capital that would sharply weaken growth. Significantly lower inflation rates give foreign central banks more leeway to cut interest rates if growth starts to weaken, and fiscal policy could turn expansionary because fiscal deficits in many countries have largely been reined in. Although most countries have not completely "de-coupled" from the U.S. economy, they are better able to withstand an American downturn than they were previously.
The most direct way that an American recession would spread to the rest of the world is via the weaker exports to the United States. In that regard, Canada and Mexico stand out as being the most susceptible to an American downturn, especially a severe one. Although the European Union is the least exposed nation to exports to the United States, at least as measured as a percentage of local GDP, Europe does not have much cushion due to its relatively low overall GDP growth rate. Contrary to popular perceptions, the Chinese economy would not collapse if the United States experiences recession. Small open Asian economies, such as Singapore and Taiwan, might feel more of an impact, but these economies are better able to withstand an American downturn than they were during the last cycle. Most Latin economies probably would not fall apart either.
Economic fundamentals in many economies, especially in the developing world, have improved over the past decade. Many developing economies are no longer incurring sizeable current account deficits, which makes them less vulnerable to sudden outflow of foreign capital that would sharply weaken growth. Significantly lower inflation rates give foreign central banks more leeway to cut interest rates if growth starts to weaken, and fiscal policy could turn expansionary because fiscal deficits in many countries have largely been reined in. Although most countries have not completely "de-coupled" from the U.S. economy, they are better able to withstand an American downturn than they were previously.
RBA Minutes Prop Aussie
Labels:
AUD Rallies,
news fundamental,
RBA
The Aussie rallied to its highest level since November against the greenback at 0.9236 following the release of the minutes from the Reserve Bank of Australia's February meeting – in which the RBA hiked interest rates by 25-basis points to 7.0%. The minutes reinforced market sentiment for further policy tightening over the coming months and revealed consideration from Board members for a more aggressive 50-basis point hike in February.
The rationale for a more aggressive move was deterioration in the inflation outlook and “the risk of inflation expectations becoming dislodged had increased”. The RBA added that “a significant further rise in the cash rate could be necessary” on the premise that “the current cash rate in real terms arguably was noticeably below what might be expected given the economy's circumstances”.
AUDUSD hovers around the 0.92-figure with interim resistance seen at 0.9240, backed by 0.9270 and 0.93. Subsequent ceilings are seen at 0.9330, followed by 0.9370 and 0.94. On the downside, support begins at 0.9160, backed by 0.9130 and 0.91. Additional floors will emerge at 0.9070, followed by 0.9030 and 0.90.
The rationale for a more aggressive move was deterioration in the inflation outlook and “the risk of inflation expectations becoming dislodged had increased”. The RBA added that “a significant further rise in the cash rate could be necessary” on the premise that “the current cash rate in real terms arguably was noticeably below what might be expected given the economy's circumstances”.
AUDUSD hovers around the 0.92-figure with interim resistance seen at 0.9240, backed by 0.9270 and 0.93. Subsequent ceilings are seen at 0.9330, followed by 0.9370 and 0.94. On the downside, support begins at 0.9160, backed by 0.9130 and 0.91. Additional floors will emerge at 0.9070, followed by 0.9030 and 0.90.
Northern Rock 'Rocks' Sterling
Labels:
news fundamental
The US dollar fell against major currencies on Friday, and posted its worst weekly performance against the Euro in 2008, on the belief that US interest rates will need to be cut further in the coming months to boost economic growth. The Euro strengthened from lows around $1.4630 to touch $1.4705 and was last seen trading at $1.4638 10:00GMT.
Friday's US Industrial Production month on month came out as expected at 0.1%. This flat to mildly positive result in February was helped by gains in utilities. The Empire manufacturing survey fell sharply in February -11.7 from 9.0 in January, relative to expectations for a small fall to 6.5.
University of Michigan consumer confidence fell in February after unexpectedly rising in January. The index fell to 69.6 from 78.4, well below forecasts. The survey proves tighter credit conditions, rising oil prices and the unstable housing market are hitting consumers in the hip pocket.
Sterling has softened as Alistair Darling announced that Northern Rock will be nationalised. 'Stay away from sterling,' Dwyfor Evans, a strategist at State Street Global Markets in Hong Kong, said in an interview with Bloomberg Television. 'The Northern Rock news suggests continued instability in the U.K. financial sector. We're also expecting a slowdown in consumer spending.' The pound reached $1.9640 this morning and has fallen away ever since. Sterling was last seen trading at $1.9509 8:30GMT.
The drip feed of data is expected to be quiet today, as the US financial markets are closed due Presidents day holiday. Although investors are expected to keep one eye on the Northern Rock situation, as shareholders in the UK bank have been impoverished due to nationalisation.
The Reserve Bank of Australia releases its Monetary Policy meeting minutes early tomorrow morning. The hawkish report is expected to support the Aussie's caning of the greenback. The Australian dollar was last seen trading at $0.9115 9:50GMT.
Canadian analysts will focus on a speech delivered by the newly appointed Bank of Canada chairman Mark Carey. His speech titled, 'The Implications of Globalisation for the Economy and Public Policy,' is expected to show his views on short term interest rates. Although the Canadian housing sector is not in dire straight, it will heavily impact monetary policy.
Friday's US Industrial Production month on month came out as expected at 0.1%. This flat to mildly positive result in February was helped by gains in utilities. The Empire manufacturing survey fell sharply in February -11.7 from 9.0 in January, relative to expectations for a small fall to 6.5.
University of Michigan consumer confidence fell in February after unexpectedly rising in January. The index fell to 69.6 from 78.4, well below forecasts. The survey proves tighter credit conditions, rising oil prices and the unstable housing market are hitting consumers in the hip pocket.
Sterling has softened as Alistair Darling announced that Northern Rock will be nationalised. 'Stay away from sterling,' Dwyfor Evans, a strategist at State Street Global Markets in Hong Kong, said in an interview with Bloomberg Television. 'The Northern Rock news suggests continued instability in the U.K. financial sector. We're also expecting a slowdown in consumer spending.' The pound reached $1.9640 this morning and has fallen away ever since. Sterling was last seen trading at $1.9509 8:30GMT.
The drip feed of data is expected to be quiet today, as the US financial markets are closed due Presidents day holiday. Although investors are expected to keep one eye on the Northern Rock situation, as shareholders in the UK bank have been impoverished due to nationalisation.
The Reserve Bank of Australia releases its Monetary Policy meeting minutes early tomorrow morning. The hawkish report is expected to support the Aussie's caning of the greenback. The Australian dollar was last seen trading at $0.9115 9:50GMT.
Canadian analysts will focus on a speech delivered by the newly appointed Bank of Canada chairman Mark Carey. His speech titled, 'The Implications of Globalisation for the Economy and Public Policy,' is expected to show his views on short term interest rates. Although the Canadian housing sector is not in dire straight, it will heavily impact monetary policy.
Dollar Takes a Nosedive After Federal Reserve Lowers Growth Forecast
With the US economy deteriorating, we have been very suspicious of the recent dollar rally. The rebound has been primarily attributed to the hope for a shallow downturn and a swift recovery, but today's comments from Federal Reserve Chairman Ben Bernanke suggests otherwise. In his testimony to Congress, Bernanke warned about the downside risks to growth and despite the recent recovery in consumer spending, he expressed concern that the weakness of the labor market will pressure consumer spending going forward.
As a result, the Federal Reserve will be lowering their projections for US growth next week. Back in November, they projected growth to be between 1.8 to 2.5 percent in 2008. To put these numbers into perspective, the market expects the Eurozone to grow by 1.8 percent this year as well. The US central bank stands ready to act in a timely manner' which means that they plan on cutting interest rates further.
Before getting too excited however, Bernanke also stressed that monetary policy works with a lag. He may be telling us that the Fed plans on slowing down because the economy needs time to absorb the recent rate cuts. Easing interest rates too sharply over a short period of time could backfire, by driving up inflation pressures and making it difficult to fight inflation if the economy continues to slow.
Bernanke's comments completely overshadowed the better than expected trade balance. The deficit fell from $63.1 billion to $58.8 billion as the weaker US dollar drives exports to a record high. This confirms the improvements that we have seen in the manufacturing sector.
Tomorrow, we have a very long list of US data due for release including Import Prices, the Empire State Manufacturing Survey, the Treasury International Capital Flow report, Industrial Production and the University of Michigan Consumer Confidence report. Aside from confidence, we expect most of the numbers to be dollar bullish.
As a result, the Federal Reserve will be lowering their projections for US growth next week. Back in November, they projected growth to be between 1.8 to 2.5 percent in 2008. To put these numbers into perspective, the market expects the Eurozone to grow by 1.8 percent this year as well. The US central bank stands ready to act in a timely manner' which means that they plan on cutting interest rates further.
Before getting too excited however, Bernanke also stressed that monetary policy works with a lag. He may be telling us that the Fed plans on slowing down because the economy needs time to absorb the recent rate cuts. Easing interest rates too sharply over a short period of time could backfire, by driving up inflation pressures and making it difficult to fight inflation if the economy continues to slow.
Bernanke's comments completely overshadowed the better than expected trade balance. The deficit fell from $63.1 billion to $58.8 billion as the weaker US dollar drives exports to a record high. This confirms the improvements that we have seen in the manufacturing sector.
Tomorrow, we have a very long list of US data due for release including Import Prices, the Empire State Manufacturing Survey, the Treasury International Capital Flow report, Industrial Production and the University of Michigan Consumer Confidence report. Aside from confidence, we expect most of the numbers to be dollar bullish.
Bank of Japan Not Expected to Raise Interest Rates
Labels:
Bank of Japan,
raise interest rates
The Dow dropped 175 points today, erasing nearly all of yesterday's gains, but carry trades were mixed with some pairs like AUD/JPY and CHF/JPY gaining strength while others like GBP/JPY and USD/JPY selling off.
This price action confirms our belief that the relationship between stocks and carry trades continue to breakdown even though we can still see some evidence of a mild correlation on an intraday basis. Japanese economic data was good with GDP rising from 0.4 to 0.9 percent in the fourth quarter and industrial production accelerating more than expected on an annualized basis.
The Bank of Japan will be making their interest rate decision this evening. They are not expected to raise interest rates and the announcement should be a non-event for the Japanese Yen.
This price action confirms our belief that the relationship between stocks and carry trades continue to breakdown even though we can still see some evidence of a mild correlation on an intraday basis. Japanese economic data was good with GDP rising from 0.4 to 0.9 percent in the fourth quarter and industrial production accelerating more than expected on an annualized basis.
The Bank of Japan will be making their interest rate decision this evening. They are not expected to raise interest rates and the announcement should be a non-event for the Japanese Yen.
(BOE) Inflation Report February 2008
Labels:
BOE,
Inflation Report February 2008
Overview
The disruption to global financial and credit markets continued. Current and expected policy rates fell. Sterling depreciated substantially. In the United Kingdom, output growth moderated to around its long-term historical average rate. Consumer spending growth appeared to soften and the climate for investment deteriorated. International prospects worsened, especially in the United States.
Under the assumption that Bank Rate falls in line with market yields, the Committee's central projection is for output growth to slow markedly this year and then gradually start to recover. The risks to growth are weighted to the downside.
CPI inflation was close to the 2% target in December. Pay growth was steady. But some measures of inflation expectations rose. In the central projection, higher energy, food and import prices push inflation up sharply in the near term.
Inflation then drops back to a little above the 2% target in the medium term, as the temporary boost from higher energy prices disappears and capacity pressures moderate. The risks to inflation are balanced.
The combination of slow growth and above-target inflation poses substantial challenges for policy.
NB : detail this article click here
The disruption to global financial and credit markets continued. Current and expected policy rates fell. Sterling depreciated substantially. In the United Kingdom, output growth moderated to around its long-term historical average rate. Consumer spending growth appeared to soften and the climate for investment deteriorated. International prospects worsened, especially in the United States.
Under the assumption that Bank Rate falls in line with market yields, the Committee's central projection is for output growth to slow markedly this year and then gradually start to recover. The risks to growth are weighted to the downside.
CPI inflation was close to the 2% target in December. Pay growth was steady. But some measures of inflation expectations rose. In the central projection, higher energy, food and import prices push inflation up sharply in the near term.
Inflation then drops back to a little above the 2% target in the medium term, as the temporary boost from higher energy prices disappears and capacity pressures moderate. The risks to inflation are balanced.
The combination of slow growth and above-target inflation poses substantial challenges for policy.
NB : detail this article click here
When Will the ECB Cut Rates?
Labels:
ECB cut rates
Although the Federal Reserve has cut rates by 225 basis points since September, the European Central Bank (ECB) has kept its main policy rate unchanged at 4.00% since last tightening policy in June.
Although the fallout from the subprime mortgage debacle is dimming the outlook for growth and leading to volatility in most financial markets, ECB policymakers have maintained that the primary risk to the Euro-zone outlook is inflation rather than sub-par growth.
As Exhibit 1 makes clear, CPI inflation indeed has shot up over the past few months.
Unlike the Federal Reserve, which has a “dual mandate” of stable prices and low unemployment, the ECB has one primary objective: price stability. Although the ECB does not really define what “price stability” means, it is generally believed that policymakers want to keep the overall rate of CPI inflation around 2% per annum.
Although the core rate of CPI inflation is near the ECB's implicit target, policymakers have expressed concern that the sharp rise in inflation recently could put upward pressure on the core rate of inflation due to wage increases.
Up until this month's policy meeting, the ECB had an implicit “bias” to tighten policy further to insure that inflationary expectations do not become entrenched.
However, recent data showing that growth is slowing quickly appear to have caused a rethink in Frankfurt. As shown in Exhibit 2, the purchasing managers' indices for the manufacturing and service sector both remain above 50, which marks the demarcation line between expansion and contraction.
However, the service sector PMI has dropped precipitously since last summer, and currently stands at a level last seen in 2003. Although the indices do not indicate that the Euro-zone is currently in recession, they do suggest that growth has slowed sharply.
Indeed, ECB President Trichet acknowledged in this press conference following the policy meeting on February 7 that “incoming data have confirmed that the risks surrounding the outlook for economic activity lie on the downside.” Apparently, the idea of a rate hike was not discussed at the policy meeting, like it has been at previous meetings.
Although the fallout from the subprime mortgage debacle is dimming the outlook for growth and leading to volatility in most financial markets, ECB policymakers have maintained that the primary risk to the Euro-zone outlook is inflation rather than sub-par growth.
As Exhibit 1 makes clear, CPI inflation indeed has shot up over the past few months.
Unlike the Federal Reserve, which has a “dual mandate” of stable prices and low unemployment, the ECB has one primary objective: price stability. Although the ECB does not really define what “price stability” means, it is generally believed that policymakers want to keep the overall rate of CPI inflation around 2% per annum.
Although the core rate of CPI inflation is near the ECB's implicit target, policymakers have expressed concern that the sharp rise in inflation recently could put upward pressure on the core rate of inflation due to wage increases.
Up until this month's policy meeting, the ECB had an implicit “bias” to tighten policy further to insure that inflationary expectations do not become entrenched.
However, recent data showing that growth is slowing quickly appear to have caused a rethink in Frankfurt. As shown in Exhibit 2, the purchasing managers' indices for the manufacturing and service sector both remain above 50, which marks the demarcation line between expansion and contraction.
However, the service sector PMI has dropped precipitously since last summer, and currently stands at a level last seen in 2003. Although the indices do not indicate that the Euro-zone is currently in recession, they do suggest that growth has slowed sharply.
Indeed, ECB President Trichet acknowledged in this press conference following the policy meeting on February 7 that “incoming data have confirmed that the risks surrounding the outlook for economic activity lie on the downside.” Apparently, the idea of a rate hike was not discussed at the policy meeting, like it has been at previous meetings.
US Dollar Gives Back Gains on Quiet Trading Day
Labels:
news fundamental
Oil prices surged to hit $93.49 a barrel today as Valero Energy Corp, the biggest refinery in the US, was forced to shutdown its Delaware power plant as harsh weather conditions inflicted a power failure. Turmoil in the energy sector lingered as Exxon Mobile Corp continued to battle with Petroleos de Venezuela over the seizure of its multi-billion dollar oil production project and won a court case to freeze $12B of oil assets. President Chavez retaliated against the ruling, and threatened to cut US oil exports as the country is ready to lead an economic war against the US. Gold prices also soared higher today as rising inflation took hold of investors, and increased the demand of gold in order to hedge against inflation. Gold rose just under $6 as it hit an even $928 an ounce, while platinum climbed to a record high as production was lowered by Anglo Platinum Ltd, the world’s largest producer.
Investor sentiment in the US continues to show resilience as an intraday reversal helped the DJIA to post positive gains in today’s session amid AIG’s scandal concerning the valuation of its derivatives. The DJIA advanced a total of 57.88 points to reach 12,240.01, with AIG, Citigroup, and JP Morgan Chase coming out as the leading losers, while GM topped the big 30 as its shares climbed 5 percent. The broader S&P500 also rose a modest 7.84 points to reach 1339.13, with Yahoo shares climbing 2.5 percent as the board rejected Microsoft’s $44.6B bid, and stated that the bid “substantially undervalues” the internet titan.
US Treasuries followed the volatile trading session in the securities market as yields were dragged down during the morning, but prevailed throughout the afternoon as 10-Year yield inched up to 3.62 percent, while the 2-Year yield rose to 1.91 percent. The US economic calendar remained bare until tomorrow’s release of the ABC Consumer Confidence Index, but Wednesday and Thursday will be the days of focus as Retail Sales, Initial Jobless Claims, and the Trade Balance figures are expected to show minor improvements in the slowing economy.
Investor sentiment in the US continues to show resilience as an intraday reversal helped the DJIA to post positive gains in today’s session amid AIG’s scandal concerning the valuation of its derivatives. The DJIA advanced a total of 57.88 points to reach 12,240.01, with AIG, Citigroup, and JP Morgan Chase coming out as the leading losers, while GM topped the big 30 as its shares climbed 5 percent. The broader S&P500 also rose a modest 7.84 points to reach 1339.13, with Yahoo shares climbing 2.5 percent as the board rejected Microsoft’s $44.6B bid, and stated that the bid “substantially undervalues” the internet titan.
US Treasuries followed the volatile trading session in the securities market as yields were dragged down during the morning, but prevailed throughout the afternoon as 10-Year yield inched up to 3.62 percent, while the 2-Year yield rose to 1.91 percent. The US economic calendar remained bare until tomorrow’s release of the ABC Consumer Confidence Index, but Wednesday and Thursday will be the days of focus as Retail Sales, Initial Jobless Claims, and the Trade Balance figures are expected to show minor improvements in the slowing economy.
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