March Forecast Actual
Swiss UBS Consumption Indicator 2.317 (prior) 2.289
Italian PPI (MoM) +0.5% +0.8%
Italian PPI (YoY) +5.8% +6.3%
April
French Consumer Confidence Indicator - 37.0 - 37.0
Italian Retailers’ Confidence General 110.6 (prior) 106.2
Italian Services Survey 3.0 (prior) 4.0
Bloomberg Italian Retail PMI 36.4 (prior) 31.4
Bloomberg French Retail PMI 53.3 (prior) 46.2
Bloomberg German Retail PMI 51.5 (prior) 44.6
Bloomberg Euro-zone Retail PMI 48.2 (prior) 41.8
U.K. CBI Distributive Trades Report +1.0 - 26.0
European retail PMI’s reveal further pessimism among consumers and the more this lasts the longer the problem will feed upon itself. Indeed, the prospect of a consumer led downturn is probably poses a much stronger risk to global economies outside of the U.S.
The Telegraph newspaper report that comments that the U.K. could be heading for an “avalanche of redundancies” in the coming months as economic reality finally catches up with the jobs market.
It may be that the BOE’s Blanchflower reads the reads the Telegraph too as he rather dramatically commented, “Developments in the UK are starting to look eerily similar to those in the United States six months ago. There has been no decoupling of the two economies: contagion is in the air.”
“We face a real risk that the UK may fall into recession, and aggressive action is required to prevent this from occurring. These risks to the downside have increased since the February Inflation Report.”
On inflation he commented, “There is a real risk that inflation may undershoot the target in the medium term, and take us into letter-writing territory.” However, he clearly feels this is temporary when adding, “The medium term risks to inflation to the downside, arising due to the likely slowing of the economy, outweigh those to the upside.”
I can understand the comments on the fear of recession but quite surprised at those covering inflation. Very clearly central banks worldwide have had the same view. Slowly but surely all are having to eat their words as inflation has become persistent and frankly partially de-linked from the performance of the global economy.
It may just be fanciful political-speak but with OPEC warning that prices to rise as far as $200pb without the group being able to help contain the problem the potential damage to the global economy the impact could be dire. Global stagflation would incur serious consequences.
It rather puts Wellink’s comment “Inflation has to come down first before a rate cut is considered” into a completely different perspective…
When considered along with Deutsche Bank’s first quarterly loss in 5 years due to writing down the value of loans for leveraged buyouts and asset- backed securities by EUR 2.7 billion one must wonder what further damage an oil price shock would impart.
States news overnight:
Forecast Actual
U.S. April Consumer Confidence 62.0 62.3
News from the States was fairly mild compared to that compared with Europe though still couldn’t shake the negativity that has become ingrained into expectations.
Consumer confidence provided an empty bowl in that it wasn’t as bad as feared but still dropped to a 5 year low. The “hard to get jobs” component was the worst since 2004.
Coupled with news from RealityTrac that foreclosure filings had doubled in the first quarter and more than doubled over the past year didn’t really offer any hopes of the bowl being filled. Furthermore RealityTrac offered no optimism in their comment, “We’re more convinced that we haven’t seen the peak of foreclosure activity yet, and the wave probably won’t crest until late third or fourth quarter of 2008.”
It was more a story akin to traders buying at the top of a trend as the group revealed “In most of the states with the highest levels of foreclosure activity, we’re still seeing the fallout from overheated home prices and people overextending themselves with risky loans to try to buy those properties.”
That the S&P/Case-Shiller home price index dropped 2.6% in February didn’t help the situation. Annually the index has declined by 13.6% but February saw this trend actually accelerate. Ironically we may need to wait until house owners sell out anticipating being able to buy in at lower prices for signs that the market has bottomed.
Overall the Dollar made marginal gains once again against mainland Europe while the Pound helped the process with its own weakness. However, Dollar gains weren’t uniform as it lost more strongly against the Yen.
The rather disparate performance probably has more to do with pre FOMC & GDP squaring of positions, possibly seeing more risk on the downside in the Pound.
In general the market has wavered between a 0.25% cut from the Fed and an unchanged policy as the market has begun to reassess both the wilting impact of lowering rates and the fact that monetary policy has limited reach when it comes to confidence. The fact that banks have been able to patch up their balance sheets with funding may have eased some fears and equity markets have not suffered as badly as feared.
More attention is being paid to the next real issues – jobs are under threat and confidence is still waning which threatens the underbelly of the economy. However, this is occurring to a lesser extent globally, but made more vulnerable with oil prices showing no signs of stalling their uptrend and how this will impact on demand from the rest of the world.
And within the entire equation is the uncertainty of just what impact the fiscal stimulation (in the mail) checks will have on an increasingly worried consumer.
Never-the-less, the market will probably now sit quietly and wait for the outcome of both main numbers today. Reaction will depend more on perception of what a positive GDP will mean in terms of the official definition of recession (two successive quarters of negative growth) and whether there will be any assessment of these fears.
As for the FOMC decision, the combination of the recognition of the fact that additional rates cuts would probably be ineffective and a possible unchanged policy may well provide the Dollar with a lift.
It will be temporary since the fears over the economy will not go dissipate into thin air, but a greater acceptance of the status quo may well cause a rethink…
The following releases are due from Asia due today:
Australia
March Private Sector Credit (MoM) +0.8%
March Private Sector Credit (YoY) 15.2%
Japan – March
Unemployment Rate 3.9%
Jobs-to-applicant Ratio 0.97
Household Spending (YoY) +0.5%
Industrial Production (MoM) - 0.8%
Industrial Production (YoY) +2.0%
Vehicle Production (YoY)
Housing Starts (YoY) - 6.7%
Annualized Housing Starts 1.20mn
Construction Orders (YoY)
April Forecast Actual
German Regional CPI (MoM) +0.2% - 0.22% (avg)
German Regional CPI (YoY) +2.8% +2.57% (avg)
Italian Business Confidence 88.5 86.9
Away from the limited releases which were broadly mixed for the Euro, the European Commission has forecast the economic slowdown will stretch into next year. Indeed, they also forecast a growth rate of just 1.5% next year as the broader impact of lower consumer demand and tighter credit restrictions.
ECB members continue with the repetitive rhetoric of sharp swings in Forex rate being a concern (Trichet) emphasizing longer term goal of price stability. They continue to recognize the fact that the world financial system faces real financial crisis (Mersch) but of course it’s all America’s fault. European banks will be able to absorb the resultant losses he claims.
States news overnight:
There were a couple of regional Fed index numbers from Dallas and Chicago Midwest Factories, both sliding further but it was interesting that Dallas saw CAPEX rising by 1.8 to 4.5. In Chicago machinery output was up as was the resource sector output.
Elsewhere S&P warned that the declining conditions in the economy raise the chances of U.S. bank downgrades. They commented, “If this credit cycle becomes more extreme than prior cycles, which promises to be the case for the mortgage sectors, we could lower ratings for at least some of these institutions.”
I have always gone by one of Newton’s law of physics: “Action and reaction are equal and opposite.” Watch the financial markets and you’ll see the same is true. The more excessive a trend moves the more excessive the resultant reversal.
Reference the Japanese economic bubble of the 1980’s. Now reference the globalization bubble. It is difficult to assess just how extreme globalization trend became. We can see the impact of the excesses in the financial markets which has burst with a resounding bang. As for industry the entire picture is less clear because of the wide reach into developing countries.
It did represent a series of swathing changes in global business but just what risks were taken are less clear. Just how much there was reliance on cheap funding, leverage and relatively low inflation is an unknown factor. As we move into higher inflation and higher infrastructure costs including oil prices the impact is far less certain. However, there will be impact.
As for currency levels tomorrow’s FOMC and Q1 GDP will continue to provide an overhang on the market’s desire to open risk. Yesterday was a particularly flat day and today risks the same.
If there is any potential move then it seems more likely for the Dollar to drift back lower as Friday’s long positions are squared ahead of the results. The high degree of uncertainty over whether the U.S. will actually register negative growth and just what the Fed will do and subsequently say regarding the future course of interest rates is big enough to cause most to prefer to sit and watch TV than play around with positions in a thinner than normal market.
However, perhaps “inaction and reaction are equal and opposite” with the resultant risk that the end of the week will see a much stronger reaction…
The following releases are due from Asia due today:
Australian HIA New Home Sales (MoM)
Q1 NAB Business Confidence
April
German ZEW Survey: Econ Sentiment - 30.0 - 44.8
German ZEW Survey: Current Situation +32.8 +33.2
Euro-zone ZEW Survey: Econ Sentiment - 33.0 - 40.7
The ZEW reported that “extraordinary high price pressure” has caused German sentiment to sharply deteriorate over the past month. While the current situation reading remains quite firm it seems as if long term implications of the credit crisis’ impact on consumers has brought a sense of reality about future levels of business activity.
Indeed, the economic outlook index plummeting to -40.7 is consistent with levels seen in 1992-1993 when the economy was in recession.
With the price of crude oil reaching new heights at $112.48 yesterday the clear signal is that consumers will have less to spend on other goods.
While this doesn’t mean that Germany or the Euro-zone will sink into recession, the combination of reduced availability of capital and the stricter controls on lending cannot impose anything but a drag on the economy.
However, one major shock to the European banking system could prove to be the nail in the coffin. If this comes from anywhere, then it’ll be the collapse of a high profile LBO.
And this piles more pressure onto the ECB which yesterday would have looked on as France announced higher inflation than expected. The record high in crude oil provoked a flurry of comments from ECB officials repeating that interest rates cannot be lowered and that anchoring inflation expectations is of the essence.
The Fed was saying that a year ago as well…
Alumnia and Juncker are still plugging the point that the Euro is overvalued. The IMF think the Dollar is undervalued. Perhaps the ECB will be buying Dollars from the IMF then…
States overnight releases:
March Forecast Actual
U.S. PPI (MoM) +0.7% +1.1%
U.S. PPI (YoY) +6.1% +6.9%
U.S. PPI ex food & energy (MoM) +0.2% +0.2%
U.S. PPI ex food & energy (YoY) +2.7% +2.7%
April
U.S. Empire Manufacturing - 18.0 +0.63
U.S. NAHB Housing Market Index +20.0 +20.0
And over in the States the New York Empire Fed index shocked everyone by turning a -18.0 value into +0.63 over April…
It’s a bit difficult to see from where the gains came. Employment was down, CAPEX was down (to the lowest level since 2003) and future shipments were down. New orders were up, price paid up, and shipments were up.
However, it was a good number and may well help the Dollar in the short run considering the German ZEW but more evidence of this nature is going to be need to cause the market to change their negative view.
The NAHB index remained steady but as they pointed out “With the traditional home-buying season now well under way, we have not seen the bump in sales activity that we normally would this time of year.”
With tougher lending criteria and the general reluctance to increase repayments there is little to provide any relief to the current situation. Many are hanging their hats onto the mortgage relief plan and the fiscal stimulus package but with consumers’ fears at high levels the risk still remains lower.
So with a combination of poor European numbers and modestly positive U.S. ones the Dollar has recovered and this should last a further day or two.
It doesn’t look as if it is going to be a sharp move and while there is still a little upside potential in Asian/early European trading this should be followed by consolidation before the next leg higher.
There following releases are due from Asia due today:
Australian February Westpac Leading Index (MoM)
Japan March Machine Tool Orders (F) (YoY) +2.9%
203,22. GBP/JPY currency pair is in a consolidation after the last bullish movement. GBP/JPY is in a range between 202,30 and 205,05. The volatility is low. Bollinger bands are flat. Oscillators are neutral. The price should continue to move in 202,30 / 205,00 range.
