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Sunday December 2, 2007 - 20:32:25 GMT
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Market Directions Sunday, December 2, 2007


The Chicago Purchasers Index, general euro fatigue, the need to book profits, the end of the week or end of the year, take your pick of the reasons, but the dollar rocketed higher against all competitors in violent Friday trading. Two stop runs bracketed the London close and provided the fireworks. The first began at 10:00 ET fifteen minutes after the surprisingly strong Chicago Purchasers Index was issued. This index, often seen as a predictor to the nationwide ISM, is one of the most prominent of the forward looking indicators and has a good correlation to the wider ISM data. The Chicago index is amassed by the local office of same organization that gathers the ISM statistics, the Institute for Supply Management.

Economic recessionistas have been expecting a sub fifty reading for Monday’s ISM manufacturing report for some time. Fifty is normally taken as the dividing line between expansion and recession. The Chicago Purchasers Index, when combined with the slight rise in New Home Sales, albeit from a reduced base, may have spurred hope that the worst of the housing collapse is nearing an end, and that recession is not looming. However, dollar shorts had more than enough profits to be concerned about taking to have needed no special encouragement once the Euro started moving down.

The second move, more purely a stop run, triggered near two in the afternoon, and continued with less vehemence until the close of trading. The most recent euro surge against the dollar took off on November 20th in London with an upside stop run that commenced at the same level, 1.4685, where Friday’s slide began, The obverse relationship of resistance and support could not be better illustrated. There was no recovery for the euro which finished at its low for the day versus the US note. The united currency is now resting at the bottom of chart formations that go back to the beginning of August and the start of the credit market crisis.

There is potentially a positive combination of technical and fundamental factors for the dollar this week. This is particularly true if the two primary statistics, the ISM Index, (manufacturing and service), and the Non Farm Payrolls Report, are positive for the US economy.

The Week in Review November 26 - 30

United States

If the September 18th FOMC meeting was one of the most anticipated in recent financial history, the December 11th conclave is not far behind. The markets have long since decided that the Fed will cut rates another 25 basis points with the futures marking that near 100% for the third week in row. Much less certainty is available in the “Beige Book” that the Fed governors will have before them at that Tuesday meeting. As depicted in the last several surveys, “the national economy continued to expand” through Mid November, but at a reduced pace. Seven of the twelve reserve districts reported slower activity. Retails spending was soft, manufacturing mixed, services expansive with moderate inflation and restrained wage demands. This anecdotal survey does not provide statistics for comparison but relies on impressions from executives and others in the specific economic sectors. This survey is little different from recent occasions portraying a slowing economy but without measurements it is difficult to determine the amount of moderation from survey to survey.

Much less certainty is available in the “Beige Book” that the Fed governors will have before them at that Tuesday meeting. Just as depicted in the last several surveys, “the national economy continued to expand” through Mid November, but at a reduced pace. Seven of the twelve reserve districts reported slower activity. Retails spending was soft, manufacturing mixed, services expansive with moderate inflation and restrained wage demands. This anecdotal survey does not provide statistics for comparison but relies on impressions from executives and others in the specific economic sectors. This survey is little different from recent occasions portraying a slowing economy but without measurements it is difficult to determine the amount of moderation from survey to survey.

Donald Kohn, Vice Chairman of the Federal Reserve gave the US equities a huge boost on Wednesday in a speech before the Council on Foreign Relations; by the end of the day’s trading the Dow was 2.6% higher. He assured the audience that the Fed will “act as needed” to support the economy. Flexibility and pragmatism will be the central bank’s guides and not the fear of creating a “moral hazard” by cutting interest rates. Lowering the Fed target reduces funding costs for banks and other institutions while leaving their assets largely untouched, bolstering profitability. If the Fed lowers rates by 25 basis points it would put the Fed Funds target rate at the lowest point since late 2005.


The ECB has no incentive, other than the strong Euro, to take action at this coming Thursday’s meeting. Inflation was half again as much as the target rate in November, 3.0% against the 2.0% guideline. And while growth may be slowing, at 2.5% it borders on the robust by European standards. If ECB policy must choose between reigniting growth in the future or damping inflation, there is little doubt which the central bank will elect. To underscore the ECB point of view, many members of the governing council do not yet see the strong Euro as a problem. Nout Wellink council member and head of the Dutch central bank suggested the Euro level is not an “immediate concern” for European exports but that a further rise in the Euro would be “worrying”. For any central bank credibility is the key to influence and rhetorical credibility is determined by past actions. No ECB comments about Euro levels will have any effect on the market unless they are seen as a precursor to action.

Lorenzo Bini Smaghi, ECB executive board member took a different tack but played the favorite central bank card, currency rates should reflect economic fundamentals. “ The US economy is undervalued [by what is] reflected in the exchange rate”. “The market must understand that these [exchange rate levels] do not reflect fundamentals”. No doubt it would make all bankers lives infinitely easier if the currency markets were logical creatures. They are not. There is almost something wistful in the constant parental chiding of the foreign exchange markets by the world’s central bankers.

Economic Releases November 26 - 30

United States

Tuesday: Consumer Board Consumer Confidence for November sank to 87.5 well below the median prediction of 92.0. October had been 95.6. Confidence numbers are generally related to consumption two months post, putting the Christmas shopping performance in some doubt. Surprisingly enough, given the unrelenting negative economic media coverage, present conditions are still rated relatively strong. It is the expectations of a recession that have taken a recent jump higher. The Case Shiller Home Price Index of twenty comparative US markets in September tumbled to 195.62, a 0.9% drop from August. It is now down 4.9% on year ago prices and at a two year low. Durable Goods Orders fell in October for the third consecutive month coming in at -0.4% on forecasts for a rise of 0.8%. September’s reading was -1.7%, Augusts’ -5.3%. Soft civilian aircraft orders and slow auto sales were blamed for the decline. Boeing added 56 new orders in the month against 132 in September. The last three consecutive monthly negative readings were in the winter of 2003-2004. Existing Home Sales slipped 1.2% in October to 4.97 million units slightly under the 5.00 million expected. September was revised lower by 10,000 to 5.03 million. It is the lowest monthly statistic since the series began in 1999. However, the overall concealed initial stability in the sale of single family homes, which were unchanged from September at 4.37 million units. The entire October drop was in condos and co ops. The market supply of unsold homes rose to 10.8 months. Single family hose prices are now off 6.3% this year, the worst performance since this data began in 1969.

Thursday: the preliminary GDP (1st revision, second release) added 1.0% to register 4.9% growth in the third quarter. The adjustment was widely expected and had no effect on the Dollar. It is, nevertheless the best quarterly expansion for the American economy since the 3rd quarter of 2003. New Home Sales rose 1.7% to 728,000 in October but the gain was only because the September number was revised down to 716,000. It had been 770,000. Sales are off 24% from a year ago with the median price lower by 13%, to $217,800 from $250,000.

Friday: Personal Income rose 0.2% in October, half the forecast. Over the past three months real disposable income has risen at a 2.1% annual rate, down from 2.7% earlier in the year. Personal Expenditure gained 0.2% also below the expected +0.3%. Core PCE inflation was up 1.9% year on year. The Chicago Purchasers Index was much stronger than expected at 52.9 in November, 50.5 had been anticipated; October was 49.7.


Tuesday: EMU money supply (M3) growth resumed its upward spiral in October adding 12.3% over a year ago after dipping to 11.3% in September; 11.5% had been forecast. The three months moving average moved up to a record 11.7%. It was the tenth straight month of double digit money supply growth.

Friday: flash HICP for November was 3.0% year on year , 0.2% higher than forecast and sure to keep the ECB on the inflation defense. This is the third month in a row inflation has been above the 2.0% target.


Tuesday: IFO Survey of business sentiment exhibited an unexpected small rise to 104.2 in November, 103.3 had been forecast. October was 103.9. The measure for current assessment was 110.4, median expectation had been 109.1; October was 109.6. Business expectations remain muted at 98.3, better than the forecast of 97.8 but below the October 98.6 reading. The Harmonized Index of Consumer prices (HICP) preliminary number for November were much higher than predicted, +0.5% for the month, +3.3% for the elapsed year, +0.1% and +2.9% had been forecast; October was +0.2% and +2.7%. The more than doubling of the monthly rate of inflation seems to justify ECB concerns. CPI was also four times prediction, +0.4% against +0.1%, and twice the October result +0.2%. The year on year results were: November +3.0%, forecast + 2.6%, October +2.4%.

Thursday: the nationwide unemployment rate dropped one tenth of a percent to 8.6%. in November; the October rate was revised to 8.6% from 8.7% as well.

United Kingdom

Monday: house prices as recorded by the Hometrack Survey dropped in November by 0.2%, edging the yearly rate down to 3.6% from 4.4% in October. Nationwide house prices fell as well in November by 0.8%, leaving the year on year rate at 6.4%. It was the steepest drop in this survey since June of 1995. October’s results were +1.1% m/m and +9.7% y/y.


Monday: Retails Sales in October were 0.8% higher than the same month in 2006, that was double the September result of +0.4%.

The Week Ahead December 3 - 7

United States

Monday: ISM Index for November at 10:00 ET; expected 49.8; October 50.9, new orders 52.5, prices paid 63.0, employment 52.0, export index 57.0, import index 47.5.

Wednesday: ADP National Employment Report for November at8:15 ET; October 106,000. Non Farm productivity (revised)for Q3 at 8:30 ET; preliminary +4.9%. Unit Labor Costs (revised) for Q3 at 8:30 ET; preliminary -0.2% ISM Non Manufacturing Index for November at 8:30 ET; October 55.8, new orders 55.7, prices paid 63.5, employment 51.8, export orders 56.0. Factory Orders for October at 10:00 ET; September +0.2%.

Thursday: Jobless Claims for the week ending December 1st; prior week +23,000 to 352,000.

Friday: Non Farm payrolls for November at 8:30 ET; expected +70,000, October166,000. Manufacturing payrolls for November at 8:30 ET; October -21,000. Unemployment Rate for November at 8:30 Et; expected 4.8%, October 4.7%. Average Hourly Earnings for November at 8:30 ET; October +3.8% y/y. University of Michigan Consumer Sentiment for November at 10:00 ET; October 76.1.


Monday: Manufacturing PMI for November at 9:00 GMT; preliminary 52.6. Unemployment rate for October at 10:00 GMT; September 7.3%.

Tuesday: Industrial PPI for October at 10:00 GMT; September +0.4% m/m, +2.7% y/y.

Wednesday: Services PMI for November at 9:00 GMT: preliminary 53.7. Retail Trade (Sales) for October at 10:00 GMT; September +0.3% m/m, +1.6% y/y.

Thursday: ECB rate announcement, current rate 4.0%


Wednesday: Total manufacturing Orders for October at 11:00 GMT; September -2.5% m/m, +4.5% y/y.

Friday: Labor Costs for the third quarter at 7:00 GMT; Second quarter +0.7% q/q, +0.9% y/y. Industrial output for October at 11:00 GMT +0.3% m/m, +6.1% y/y. Manufacturing sector output for October at 11:00 GMT; September +0.1% m/m, +6.9% y/y.

United Kingdom

Monday: CIPS Manufacturing PMI for November at 9:30 GMT; October 52.9.

Tuesday: British Retail Consortium (BRC) Retail Sales for November at 00:01 GMT; October +1.0%. CIPS Construction PMI for November at 9:30 GMT; October 57.4.

Wednesday: Nationwide Consumer Confidence for November at 00:01 GMT; October 98. CIPS Services PMI for November at 9:30 GMT; October 53.1

Thursday: Manufacturing Output for October at 9:30 GMT; September -0.6% m/m, -0.1% y/y. Industrial Production for October at 9:30 GMT; September -0.4% m/m, -0.2% y/y.

Bank of England rate announcement at 12:00 GMT; current rate 5.75%.


Thursday: Preliminary leading Index for October at 5:00 GMT; September 0.0. coincident Index for October at 5:00 GMT; September 60.0

Friday: July-September revised GDP at 23:50 GMT (prior day); preliminary +0.6%.


No statistical releases.

Joseph Trevisani
FX Solutions
Chief Market Analyst

[email protected]

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