The US Dollar remains stifled between predictions of imminent decline in the American economy and slowly dissipating pro euro trading momentum. The immediate question is whether the still largely technical pressure on the euro will be sufficient to counteract the support for the currency created by the underperforming American economy. US statistics, though in most cases far better than the dire forecasts, have been moderate. But slow economic growth in the United States is the existing market assumption; confirmation of this assumption will not generate new support for US currency and the two currencies ended the week almost exactly where they had begun. It is not enough to be tired of the euro without at least some corresponding affection for the dollar.
Fear of a pending catastrophe in the credit markets is still strong. It could easily be said that this is just fear of the unknown since there have been no new developments for several weeks. Though the American housing sector decline is now 18 months old and has produced few effects in the real economy, these effects are still widely anticipated. They are still the stuff of widespread commentary and concern in the financial media. These opinions, mostly unsubstantiated, are a real and current impediment to the dollarâ€™s recovery. In effect the market is waiting for the dire predictions for the US economy to come true. This realistic fear combined with tradersâ€™ intense dislike of assuming new risk at the end of the year has been sufficient to keep the currency markets waiting and worrying, nervous but unable to move.
The market has focused on the dollar and the US economy rather than the euro and the Eurozone because the US economy is perceived to be in more danger, and because there has been little variation in European statistics of late. Only EMU inflation, at last measure 3.0%, has provided any new information. And that statistic has simply reinforced the current market view that the European Central Bank (ECB) is on indefinite hold for interest rates. Eurozone GDP, consumer and business sentiment and purchasing indices have all been close to market forecasts. European statistics do seem to provide fewer surprises than their American counterparts. Surprises move markets and traders have stopped looking to the European Commission Statistical Office, Eurostat, for their inspiration.
There is no reason to expect a notable deterioration in the US economy in the weeks ahead. Consumer sentiment numbers, which have been the weakest category of US statistics, are not overly reliable in predicting real economic activity. It is quite plausible for consumers to be depressed by high gasoline prices and still spend avidly for the holidays. The costs of gasoline and heating oil have risen fast but for most families they are not a substantial portion of the household budget. Gasoline prices will cut into discretionary spending for some US households but they will not significantly reduce overall consumer spending while jobs remain plentiful and wage growth is strong. Any prediction for a Victorian swoon in the US economy will likely remain unfulfilled. There is still plenty of liquidity in the consumer economy.
As we move further into the year end withdrawal of liquidity, the potential, and also the historic fact of volatility rises. It is not a myth, currency markets are more volatile in December. The recent retracement of the euroâ€™s post August climb against the dollar has not yet reached twenty five percent and profit pressure can only mount as the end of the year approaches. This technical pressure on the euro should escalate as the year wanes.
It was a strangely quiet denouement for a week with a surprise rate cut from the Bank of Canada, a reduction from the Bank of England that was unanticipated by half the market and one status quo result from the European Central Bank.
The Bank of Englandâ€™s and Bank of Canadaâ€™s 0.25% rate cuts added to the expectation that the next ECB move will be a cut, but they do not necessarily increase pressure on the ECB to reduce rates in January. With the EMU economy performing more than adequately in the ECB view and with inflation rising, the sole remaining concern that might spur a rate cut consideration by the ECB is the drag on European exports from a strong euro. But without a collapse in US statistics the euro is unlikely generate any substantial upside momentum on its own in the next three weeks. And within that time there is a good chance that internal market positioning will produce the weakening of the euro that ECB desires. To put it simply the market is still very long euros; there is still a great deal of year end profit sitting on the table.
The governors of the ECB and the Federal Reserve are well aware of the market tendency to overplay any direction and then suddenly change its mind. If there is a reasonable possibility the market is going to work in your favor, why not give it a chance? The central bankers are now playing a waiting game trusting that currency traders own self interest will work to their advantage.
The Week in Review December 3 - 7
The â€œBeige Bookâ€™ that the Federal Reserve governors will have on their conference table this week when they make their rate decision perfectly describes the US economic moment, and itâ€™s â€˜moderate growthâ€™ message was seconded by every statistic released this week except one. In fact, what did not happen statistically this week was far more important than what did. The Institute for Supply Management Manufacturing Index did not fall below the recessionary 50 level; Non Farm Payrolls did not plummet, the three month moving average rose slightly to 103,000 in November from 77,000 in September. Likewise, the unemployment rate was steady at 4.7% and the ISM Services Index did not dip precipitously, it barely dropped at all. Average Hourly Earnings maintained its 3.8% yearly growth rate. Only Unit Labor Costs fell a much greater than expected 2.0%. The University of Michigan Consumer Sentiment Index did reach a cycle low at 74.5, but, as has occurred in the past, this indicator tends to quickly reverse when the headline prices factors like gasoline recede.
There is nothing in these American statistics that presages cessation of economic growth let alone a recession. The speculation that the US will suffer a severe drop of economic vitality in the coming quarters remains speculation. It has not yet been proven by economic fact.
The ECB was true to its Bundesbank heritage and retained its 4.0% base rate and its anti- inflation bias. Jean Claude Trichet the bank president, sprinkled concessionary allusions that more tightening might not be necessary throughout his prepared statement and his news conference replies. But he also made clear that the bank had not considered cutting rates. In the US the collapse in the housing market has the Fed worried about an impact on consumer spending and future growth that has not yet occurred. In Europe the central bank does not fear this particular consumer reaction and its response to a potential slowdown is to hold rates steady rather than raise them to forestall inflation. The active tendency in the US is to cut rates to promote growth in Europe it is to prevent inflation.
For the ECB a prolonged rate hold in the face of a looming economic slowdown is almost as useful to its anti inflation reputation, especially when its major trading partners are cutting rates, as a rate hike. By the middle of January the ECB will have demonstrated its inflationary nerve and any further deterioration in European growth could elicit a rate reduction. The rhetorical ground has been prepared by Mr. Trichet and his colleagues, if economic conditions warrant, the ECB will follow suit with the Fed, the BOE and the Bank of Canada.
The Bank of England cut its base rate 0.25% to 5.5% citing slipping economic activity, house price declines, financial market liquidity dangers and a medium term inflation rate likely to hit the 2.0% target as the major reasons. It was the first rate cut in two years and although a majority of economists polled had not predicted the move, the market had priced in a twenty one basis point reduction prior to the announcement.
As with the logic of other central banks the Monetary Policy Committee stressed that economic fundamentals were behind the decision and that the cut was not a response to specific financial markets conditions but to the risks that such conditions engender in the wider economy. The sterling closed on Friday slightly higher against the US Dollar.
The Bank of Canada (BOC) dropped it main interest rate 25 basis points to 4.25%. Low inflation, a strong economy, ongoing credit market concerns and the fall surge in the Canadian Dollar against the US Dollar were the major quoted rationales. Unstated but very much in the immediate background was the alteration in the United States â€“ Canada terms of trade from the unanswered Fed rate cuts. In the aftermath of the unexpected move the Canadian Dollar reached a temporary three month high against the US currency.
Economic Releases December 3 - 7
Monday: ISM survey for was November 50.8, expected 49.8; October 50.9. It was the weakest reading since January. â€˜New Ordersâ€™ were 52.6, Octobers 52.5. â€˜Prices Paidâ€™ were 67.5, October 63.0. â€˜Employmentâ€™ was 47.8, October 52.0. This was the first sub 50 reading for employment this year. Export orders rose. The 67% correlation between the ISM survey and GDP over the past 15 years is a solid vote for a diminished economic output in the last quarter of this year.
Wednesday: revised Non Farm Productivity for the third quarter gained +6.3%, expected +5.7%, preliminary +4.9%. It was the largest quarterly jump since 2003. Until Labor Costs for the third quarter were revised to -2.0% from -0.2%, -1.1% had been predicted. Non Manufacturing ISM for November was 54.1, expected 54.5, October 55.8. â€˜Employmentâ€™ was 50.8, an eight month low, October 51.8. â€˜Prices Paidâ€™ recorded 75.5, October 63.5. â€˜New Ordersâ€™ were 51.1, the weakest since April 2003, October 55.7. Factory Orders for October gained 0.5%, expected 0.0%, October +0.2%.
Friday: Non Farm Payrolls for November added 94,000 jobs, +75,000 had been predicted. The October result was revised up 4,000, September was revised down 52,000. The unemployment rate was steady at 4.7%. Average Hourly Earnings rose 0.5% in November, +3.8% yearly, the same as in October. Considering the strong negatives from the housing sector and the incessant distractions from the financial and credit sectors, it was a positive report. It was characterized as with much US economic new of late, more by the lack of negative news than by arrival of the positive. With this level of job creation there is no reason to expect consumers to desert store this shopping season. The University of Michigan Consumer Sentiment result for December was revised slightly lower to 74.5 from 76.1.
Monday: Purchasing Managers Index (PMI) for November was adjusted slightly higher to 52.8 from the â€˜flashâ€™ (preliminary) version at 52.6.
Wednesday: Retail Trade (Sales) for October lost 0.7%, the lowest total since May, September +0.3%.
Tuesday: Services PMI for November registered 53.1, October 55.1. Manufacturing orders for September were revised to -1.6% from -2.5%, October +4.0%.
Friday: industrial production for October fell 0.3%, gaining 5.9% on the elapsed year, +0.5% and +5.9% had been predicted. It was the first fall in production in three months. September was revised to -0.1% from -0.3%.
Monday: Manufacturing PMI for November was 54.4, October revised to 52.8 from 52.9. Orders gained in aircraft and shipbuilding.
Wednesday: Nationwide Consumer Confidence for November scored 86, October 98. It was the largest month to month fall since this series began in May 2003. Manufacturing output for October gained 0.3%, +0.3% year on year. September was -0.6%, -0.1% year on year. Industrial Production for October rose 0.4%, +1.0% yearly, September -0.4%, -0.2% yearly.
The Week Ahead December 10 â€“ 14
Monday: NAR Pending Home Sales for October at 10:00 ET; September 85.7.
Tuesday: FOMC Rate Announcement at 2:15 ET.
Wednesday: International Trade Balance for October at 8:30 ET; September -$56.5 billion.
Thursday: Retail Sales for November at 8:30 ET; expected +0.6%, October +0.2%. Retail Sales ex Food and Autos for November at 8:30 ET; expected +0.6%, October +0.2%. PPI for November at 8:30 ET; expected +1.4%, October +0.1%. Core PPI for November at 8:30 ET; expected 0.0%, October +0.2%.
Friday: CPI for November at 8:30 ET; expected +0.6%, October +0.3%. Core CPI for November at 8:30 ET; expected +0.2%, October +0.2%. Industrial Production for November at 9:15 ET; expected +0.2%, October -0.5%. Capacity Utilization for November at 9:15 ET; expected 81.8%, October 81.7%.
Tuesday: ZEW EMU for December at 10:00 GMT; expectations November -30.0, current conditions November 60.2.
Wednesday: Industrial production for October at 10:00 GMT; expected +0.1% m/m, +3.6% y/y, September -0.7% m/m, +3.5% y/y.
Friday: Final HICP for November at 10:00 GMT; expected +0.5% m/m, +3.0% y/y, October +0.5% m/m, +3.0% y/y.
Tuesday : ZEW Survey for December at 10:00 GMT; â€˜economic expectationsâ€™, expected -35.0, November -32.5; â€˜current conditionsâ€™, expected 66.0, November 70.0.
Friday: Final CPI for November at 7:00 GMT; expected +0.4% m/m, +3.0% y/y, preliminary +0.4% m/m, +3.0% y/y. Final HICP for November at 7:00 GMT; expected +0.5% m/m, + 3.3%, preliminary +0.5% m/m, +3.3% y/y.
Monday: DCLG House Price Index for October at 9:30 GMT; September +10.8% y/y.
Wednesday: ILO Unemployment Rate for October at 9:30 GMT; September 5.4%. Average earnings including bonus at 9:30 GMT; September +3.7%.
Thursday: RICS House Price Survey % prices balance for November; October -22.2%. CBI Industrial Trends Survey for December at 11:00 GMT; November 8.
Monday: Machinery Orders for October at 23:50 GMT (prior day); September -7.6%.
Tuesday: Consumer Confidence for November at 5:00 GMT; October 42.8.
Friday: Quarterly Tankan Business Sentiment Survey at 23:50 GMT (prior day).
Monday: PPI for November (issue time unreleased); October +3.2% ytd, +2.8% y/y.
Tuesday: CPI for November (issue time unreleased); October +6.5% ytd, + 4.4% y/y.
Wednesday: Retails Sales for November (issue time unreleased); October +18.1% ytd, +16.1% y/y.
Chief Market Analyst
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