US Data Weakness Clears Way for Fed Surprise
Yen soars across the board (2 1/2 year highs vs USD) as weak US data deepen losses in equity futures and further reduce risk appetite. The combination of weaker than expected US retail sales, weak PPI and dismal subcomponents in the NY Fed’s Empire manufacturing survey clears the way for an inter-meeting Fed rate cut of 50 bps, to be followed by 25-bps later this month. US retail sales and ex autos fell by 0.4%, worse than expectations of -0.1%, while the NY Fed Empire Manufacturing Index slips to 9.03 in January from 9.80. The Index’s employment component drops to 2.44 from 5.00 while the 6-month outlook plunges to 19.44 from 34.59.
Broad dollar weakness persists as markets allow for the possibility of a rate cut as much as 75-bps, either in the form of a 50-bps move this week and 25-bps at the January 30 FOMC meeting, or a full 75-bp easing in January 30. The performance of this week’s data (retail sales, industrial production and Philly Fed) should determine the timing and magnitude of the Fed moves. Thursday’s Congressional testimony by Chairman Bernanke should also add clarity. Separately, Bernanke agreed yesterday about the need for an economic stimulus package, which is expected to be introduced at the President’s State of the Union Speech next week. Meanwhile, former Chairman Greenspan’s latest recession commentary states that “the US is likely to in recession or soon to be”.
One way to highlight the deteriorating fundamentals and technicals in US equity indices is the lack of follow through by Asian and European equity markets in the aftermath of broad gains in US equity indices. Such dissonance underlines the lack of strength in risk appetite, which is a key positive for the Japanese currency.
Yen Biggest Winner Despite BoJ Downgrade
The Japanese yen comes off as the strongest winner among major currencies despite the Bank of Japan’s downgrade of its assessment for the regional economies, which was the first since April 2005. The opposing yen dynamics between weakening economic growth and risk-driven yen gains continue to be skewed by the latter factor as global investor confidence is dragged lower by the latest writedowns from US banks and weak economic dynamics in Europe.
We continue to warn against the possibility of an inter-meeting Fed cut, which would be a short-term positive for global markets and short-term negative for yen pairs, whereby AUDJPY, NZDJPY and EURJPY are to be the biggest losers.
Preliminary support stands at 106.20, while key foundation stands at 105.80. Intermittent gains remain capped at 108.20. An intermeeting cut has the potential to lift the pair by 100-130 points.
Euro Shrugs ZEW, Exploits USD Damage
Euro continues to show strength mainly at the expense of the weak USD and GBP despite weak data from Germany. German investor sentiment took a turn to the worse when the ZEW economic expectations index fell to a 14-year low of -41.6 in January from -37.2 in December. The current conditions indicator hit a 14-month low at 56.6 from 63.5. Meanwhile, German GDP growth estimates for 2007 have been downgraded to 2.5% from 2.9% from 2.9%.
Euro knives through the 1.49 figure, eyeing 1.4930 but the widening growth disparity inside the Eurozone and reduced risk appetite overseas will continue to provide resistance at 1.4960. Caution must be paid at renewed euro longs as we expect losses to reach down to $1.4860, followed by 1.4820.
Sterling Gains on Back of Weak Greenback
UK inflation remained unchanged at 2.1% in December, while core CPI also unchanged at 1.4%, strengthening the argument for interest rate cuts this year. With the latest reports on manufacturing and housing moving from bad to worse, today’s inflation figures signals the green light for further selling in the currency. We continue to deem intermittent sterling gains on the back of disappointing US data as an opportunity for the shorts in cable (GBPUSD). Friday’s release of UK December retail sales will also be instrumental in further determining the case for further rate cuts.
Cable’s gains seen facing resistance at 1.9760, at which point we expect renewed losses especially in the case of selling in equities, Cable eyes support at 1.9640, followed by 1.9580.
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Analysis by Ashraf Laidi of CMC Markets
the Baltic dry index has now lost 20% since highs in November... Asian shipping mobs are suffering.i.e COSCO in China has done 15% over the past two days, and I hear Oslo is getting pulled down as dry bulk charter rates continue declining... on serious worries of a global slowdown cutting deeply into demand... HK and Singers shipping getting done also.. no amount of spin and rhetoric can explain it away.. it is just a possible leading indicator on where the big economies are heading.. (and it's not on a slow boat to China).
Cheers
..........Kauri
The S&P has dropped 30 odd points and that beats the Dows 224 by about 120 odd points in comparison .
So where's the plunge team on a coffee break , so much for Fed policy papers .
.
Talk that a Japanese bank group.. Mitsubishi-UFJ.. is getting set for 50 Bln yen loss...
Also unfounded, so-far, whispers that the Fed is in an emergency meeting now!!
Cheers
..........Kauri
Hope you're right Kauri!! No one's whispered to me:
ECB warns crashing dollar may stop Fed cuts
By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 12:09am GMT 16/01/2008
Rumours of an emergency rate cut over coming days by the US Federal Reserve have swept the global markets, setting off a fresh plunge in the dollar.
Gold surged to an all-time high of $914 an ounce in New York on bets that the authorities will flood the global system with further liquidity to stave off a mounting debt crisis.
ECB council member Lorenzo Bini-Smaghi
Bini-Smaghi is the first central banker to question the Fed's room to cut
Ashraf Laidi, a currency expert at CMC Markets, said futures contracts were starting to price in a serious likelihood of a half point cut before the next scheduled meeting at the end of January.
"With US equity indices testing their August lows and current macro-economic dynamics knocking at the door of recession, we place the probability of a 50 basis point inter-meeting rate cut as high as 70pc to occur as early as next week."
Lorenzo Bini-Smaghi, a member of the European Central Bank's executive council, warned that the tumbling dollar may now start to foreclose the option of US rate cuts and force the Fed to keep monetary policy tighter than it would like.
"I would not be so sure about the movements of the Fed. There is a serious problem with the dollar in America. We will see what margins they have for further rate cuts," he told Italy's La Repubblica newspaper.
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It is the first time that a top central banker has openly aired concerns that dollar weakness could constrain US economic policy.
Until now Washington has largely been able to ignore the currency, treating the slide as a headache for the rest of the world.
The euro briefly touched $1.49 today, just shy of its all-time high.
A leaked client note by HSBC added fresh fuel to the rate excitement, suggesting that Fed may now have to slash a full percentage point by month's end to fend off a serious downturn.
The bank's highly-rated New York economist, Ian Morris, said a new tone of urgency had been struck by top US officials over recent days, raising the possibility of two sets of cuts this month.
Fed chair Ben Bernanke prepared the way for drastic cuts with a speech on Thursday saying the authorities were "exceptionally alert" to the risks as the housing slump triggers the first wave of jobs losses. US unemployment jumped from 4.7pc to 5pc in December, the sharpest jump in a quarter century.
US Treasury Secretary Hank Paulson said the administration is rushing to craft a fiscal stimulus package to boost spending. "Time is of the essence," he said.
HSBC said the Fed had now raised expectations so far that it risks setting off fresh "financial stresses" if it fails to deliver a serious shot in the arm.
"If the Fed were to cut inter-meeting, we think it would by 50 basis points, followed by another 50 basis points on the 30th," it said. The bank said this is a possibility, not a hard forecast.
The PPT needs pollyanna dip buyers to be efective, but even the pollyannas are now soiling themselves.
Their job now is to ensure an orderly selloff without panic.
Re ECB comments I posted... somewhere:
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/01/14/bcnfedcut114.xml
The sky is falling. Could all lemmings please report to their brokers to part with their shares.
thank you.
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