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Monday February 11, 2008 - 13:03:29 GMT
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The Market Hears What it Wants to Hear -- Market Directions Monday February 11, 2008


After weeks of unremitting bad news from the United States economy and an exceptional response from the Federal Reserve, all of which failed to harm the dollar, a few discrete hints from the European Central Bank that the continental scene is not perfect and the euro falls out of bed. As we have noted before, when traders have made up their minds they will find the information to support their view and then act upon it.

The new ECB policy was welcomed by European politicians. Christine Lagarde the French Finance Minister noted, “The change in the language of the ECB marks a more valid assessment of the situation”. Michael Glos the German Economics Minister said that the apparent neutral shift of the bank was “appropriate”. The market assumption that the ECB would have to move to a neutral rate stance has proven true.

However, the euro is not going to break out of the range it has held against the dollar since November until the second leg of the assumption, that the ECB will actually reduce rates, comes closer to reality.

In the United States the current poor economic state has lost emphasis for the currency market. Even if first quarter GDP is negative it will not harm the dollar. Attention is shifting to the economic situation in second and third quarters when the recovery is expected to take hold. But until there is a sign of returning growth a substantial rise in the dollar is unlikely. The euro climb has been blunted by the decline in European economic activity, but that is not enough for the dollar recoup its losses. The expectation is that the Eurozone will slow considerably and that the US will begin to show signs of recovery. Either development will suffice to boost the dollar, but traders will not extend the recent move higher in the usd without supporting evidence. The baseline forecast for the two largest economic zones has the changed with the potential advantage to the dollar. But it remains potential. The world’s two main currencies will continue to move in a narrow range against each other until the new assumption gathers proof.

Central Banks

European Central Bank

No change in the refi rate, but a major change in bias. The ECB’s own words express it best. “Downside risks to growth have increased”. Where have we heard that assertion before? Or Mr. Trichet's words, “4.00% allows price stability”. Interesting. We have been hearing exactly the opposite of that for the past several months as ECB governor after governor has warned of inflation and that the bank would, if necessary, raise rates to contain inflation. The market heard what it wanted and expected to hear from the ECB and promptly sold the euro for more than two figures. Despite all of their recent rhetoric the vote to hold rates was unanimous, with “no call for an increase or a decrease of rates”. There is no doubt the softer language of the statement and the press conference was approved unanimously also. It seems the hawks have flown the roost.

Bank of England

The Monetary Policy Committee cut the repo rate by 25 basis points to 5.25%. “Prospects for growth abroad have deteriorated and disruptions to global markets have continued,’ said the accompanying statement. The governors also cited tightening credit conditions and that “CPI at 2.1% in December was close to the 2.00% target”. The move had been expected by a large majority of surveyed economists, but the bank worked to keep the lid on expectations for future reductions. The statement noted that food and energy prices will boost inflation in coming months but will fade later in the year.

Reserve Bank of Australia

Citing strong consumer demand and significant inflationary pressures the central bank raised the cash rate 0.25% to 7.00% as expected. The accompanying statement maintained a preemptive anti inflation tone, but with global growth set to slow and other central banks cutting rates or on hold, future increases are under doubt.


The Bank of Japan and the ruling Liberal Democratic Party officials both downplayed the possibility of Japanese rate cuts despite the gathering rate reduction mood in other industrial world central banks, said sources quoted by Market News International..

The Week in Review February 4 - 8

United States

Last week’s Non Farm Payrolls shed jobs and the unemployment rate, recording information from the same month, also fell 0.1%. Can the economy be losing jobs and reducing the unemployment rate at the same time? One explanation for this seeming incongruity lies in the separate sampling and reporting measures of the two surveys. The NFP survey samples 160,000 business and government entities, one third of the available total. Revisions are common for two reasons: first because only 56% of the survey participants have normally responded by the date when first edition of the survey is issued, and second because jobs created by newly formed companies are not extrapolated from actual survey responses but only estimated. As updated information reaches the Federal Bureau of Labor Statistics the new figures are incorporated into the revised second and third versions of the NFP. The unemployment rate surveys a much smaller percentage of households, 60,000 out of an estimated 110 million, but the survey completion rate is over 90% so the accuracy of the initial data is much greater.

More bad news for the US economy, the ISM services report was wildly below expectation at 41.9, much worse than the December reading and the forecast for January This latest in a string of dismal US economic report sent the equity markets into a tailspin with the Dow off 370.03 by the end of the session. But the dollar traders largely ignored the report, losing only 40 points against the euro. It was a premonition for the balance of the week.


Mr. Trichet’s press conference answers and the text of the official bank statement were not very different than previous editions but the market heard what it was meant to hear. "downside risks to growth have increased” . Over the past several weeks traders have refused to take the euro higher even in the face of economic statistics profoundly damaging to the dollar. The market has shrugged off 1.25% in Fed rate reductions, negative NFP, negative Services ISM and rising unemployment claims. Clearly traders have wanted and waited to sell euros. The rationale, a pending ECB rate cut, is closer to enactment but it is not quite on horizon. It is not priced into the euro level yet. But the direction for the euro is well established traders are waiting for the first excuse.

Economic Releases February 4 - 8

United States

Monday: factory orders rose 2.3% in December slightly under the 2.7% gain predicted but almost double the 1.5% accretion in November.

Tuesday: the ISM Services number for January was shockingly bad, 41.9 on a median forecast of 53.0 and a December figure of 54.4. This was the weakest number on record but that is not quite a bad as it sounds since this series only began in 2001. The low during the 2001 recession was 47.9 and this is the first reading under 50 since 2003. Though this number has garnered more attention of late and represents the service sector which is 70% of the US economy, its predictive power for the future course of the economy is not as good as that of its older cousin the ISM Manufacturing Index. The number was released early at 8:55 am by the Institute for Supply Management rather than the normal 10:00 am because of fears that the number had been leaked. A spokesman for the Institute for Supply Management said there was no reason to doubt the weak January data because there had been no change in the sampling method.

Wednesday: Non Farm Productivity added 1.8% in the fourth quarter, well more than the +0.1% forecast, largely on a decline in hours worked. Productivity in the third quarter lost 0.3% on revision to +6.0%. Unit Labor Costs (ULC) in Q4 moved up 2.1%; the Q3 results slipped to -1.9% from-2.0%. In all of 2007 ULC rose 3.1% and productivity 1.6%. Labor costs have not been the main source of inflation which has been pushed higher by commodity prices, mostly for oil and food, so the moderate increase did not translate into quiet core inflation. ULC rise in 2007


Monday: the increase in Industrial PPI decelerated in December to +0.1% as expected, a marked improvement over September, October and November whose increases were +0.4%, +0.7% and +0.9% respectively. The year to year rate of 4.3% remains high as it incorporates the activity of prior months. Energy prices were subdued in December relative to previous months and prices were led by consumer goods. With CPI running at +3.2% in the latest month the ECB is not likely to gather much ease from these reductions. Novembers results were revised up to +0.9% from +0.8% and to +4.2% from +4.1% in the yearly.

Tuesday: retails sales dropped 0.1% in December leaving them at -2.0% for the year. A gain of 0.2% had been predicted with the yearly loss at -0.8%. The November decline became 0.7% from 0.5% on revision; the elapsed year gained 0.2% to -1.2%. The poor monthly totals led to the worst quarterly result since this data series began in 1995. Fourth quarter sales were 0.97% below those of the third which had risen 0.55% from the second quarter. Final services PMI for January was down to 50.6 well below the flash estimate of 52.0 and Decembers 53.1. It was the slowest result in four and a half years. France was the only major EMU economy above 50 in this survey. The euro fell sharply in response.


Wednesday: VMA Machinery Orders for December doubled the gain in November 14% versus 7%.

United Kingdom

Monday: CIPS construction PMI for January was 53.9, less than December’s 56.0 reading and the weakest since September 2006, but still characterized by the accompanying statement as “remaining] at a level indicative of a solid increase in activity”.

Tuesday: CIPS Services PMI Business Activity Index rose slightly in January to 52.5, ahead of the forecast of 52.0 and 0.1% higher than December. While this reads moderately strong at present the ‘future gauge’ section of the Index sank to 65.4, the lowest since October 2001. Services comprise 75% of the United Kingdom economy.

Wednesday: Nationwide Consumer Confidence in January fell to a record low of 81, 4 below the December result but the timeline on this series only extends to May 2004.

The Week Ahead February 11 - 15

United States

Tuesday: IBD/TIPP Economic Optimism Index for January at 14:00 ET; December 43.2.

Wednesday: retail sales for January at 8:30 ET; expected -0.1%, December -0.4%. Retail sales ex food and auto for January at 8:30 ET; expected +0.2%, December +0.4%.

Thursday: jobless claims for the week of February 9th at 8:30 ET; expected 340,000, prior week -22,000 to 356,000. International Trade Balance for December at 8:30 ET; expected -$61.5 billion, November -$63.1 billion.

Friday: Treasury International Capital System (TICS) for December (net long term securities transactions) at 9:00 ET; November +$90.9 billion. Industrial production for January at 9:15 ET; expected +0.2%, December 0.0%. Capacity utilization for January at 9:15 ET; expected 81.4%, December 81.4%. University of Michigan Consumer Sentiment (preliminary) for February at 10:00 ET; expected 76.0, January 78.4.


Tuesday: ZEW Survey for February at 10:00 GMT; ‘economic expectations’ January -41.7, ‘current conditions’ January 47.8.

Wednesday: industrial production for December at 10:00 GMT; expected +0.6% m/m, +2.4% y/y, November -0.5% m/m, +2.7% y/y.

Thursday: flash estimate fourth quarter GDP (1st issue) at 10:00 GMT; expected +0.3% q/q, +2.2% y/y, third quarter +0.8% q/q, +2.7% y/y.

Friday: preliminary trade balance for December (seasonally adjusted) at 10:00 GMT; November +€2.7 billion.


Tuesday: ZEW Survey for February at 10:00 GMT; ‘economic expectations’ expected -45.0, ‘current conditions’ expected 50.0, January ‘economic expectations’ -41.6, ‘current conditions’ 56.6.

Wednesday: wholesale prices for January at 7:00 GMT; December -0.5% m/m, +5.1% y/y.

Thursday: flash estimate fourth quarter GDP (seasonally adjusted) at 7:00 GMT; expected +0.3% q/q, third quarter +0.7% q/q, +2.4% y/y (not seasonally adjusted).

United Kingdom

Monday: DCLG House Price Index for December at 9:30 GMT; November +9.5% y/y.

Tuesday: BRC Retail Sales (like for like) for January at 00:01 GMT; December +0.3% y/y. CPI for January at 9:30 GMT; December +0.6% m/m, +1.4% y/y. Core CPI for January at 9:30 GMT; December +1.4%.

Wednesday: RICS House Price Survey for January at 00:01 GMT; December -49.1. ILO Unemployment Rate for December at 9:30 GMT; February 5.3%. Average earnings including bonus for December at 9:30 GMT; November (three month moving average y/y) +4.0%. Bank of England Quarterly Inflation Report.


Wednesday: consumer confidence for January at 5:00 GMT; December 38.0.

Thursday: preliminary 4th quarter GDP at 23:50 GMT (prior day); 3rd quarter +0.6% q/q, +2.6% annualized. Revised industrial output for December at 23:50 GMT (prior day); preliminary +1.4%.


Wednesday – Friday: money supply for January; December +16.72 ytd, y/y. New loans for January (yuan billion per month); December 48.5 billion, +3630.0 billion ytd.

Joseph Trevisani
FX Solutions
Chief Market Analyst

[email protected]

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