losses in equity markets and persistently weak economic data have boosted the
dollar and the yen. However, considering that US equities hit new lows â€“ the
Dow Jones fell to almost 7500, and the S&P500 to about 750 â€“ exchange rates
were not affected all that much: this week, EUR-USD fell to a low of 1.2425,
but recovered to around 1.26 again towards the end of the week. The European
currency is thus still in its trading range of the last few weeks. USDJPY dropped
below 94 temporarily, but then rose to over 95 again. Most other major
currencies and emerging market currencies lost slightly more ground.
recent weakness in equity markets was partly due to automobile shares, and in
car makers. The â€śBig Threeâ€ť pleaded for a rescue package, but Congress was not
very forthcoming: first it wants details of how the car industry is intending
to use the public funds requested to achieve long-term stability in the sector.
The matter will therefore be discussed further on 8 December, after
data are gloomy, however. Industrial production rose unexpectedly sharply by 1.3%
in October, but the increase is mainly due to production being resumed after
the hurricane. As the September figures were revised downwards, the October
level shows a decline of 1.7% for
the fourth quarter. Furthermore, the New
York and the Philadelphia Fed
survey data indicate a
sustained downward trend in the manufacturing industry. The signs of weakness
are continuing in
the labour market. The number of initial jobless claims rose again during the
course of the
month, hitting 542,000 â€“ its highest level since 1992. Inflation is continuing
to recede; the core
rate excluding energy and food registered a month-on-month decline for the
first time since1982.
minutes of the FOMC meeting at the end of October show that, despite the
decision to cut interest rates by 50bp to 1.0%, at least some members of the
committee are already considering more aggressive steps to fight deflationary tendencies.
The growth projection for 2009 was revised down to â€“0.2 to 1.1% (Q4 2009
year-on-year). This suggests that the Fed is expecting real GDP to decline up
until the middle of next year. Against this backdrop, further monetary policy loosening
is likely at the two-day December meeting, if not earlier.
are increasing signs that the ECB is set to make significant interest rate cuts
soon too. The central bank will definitely revise its growth and inflation
forecasts down markedly. Several ECB representatives, including Axel Weber,
Lorenzo Bini-Smaghi and Ewald Nowotny, have explicitly pointed out that there
is scope for further interest rate cuts. Expectations of a really big step of
more than 50bp (which we share) have been fuelled by the Swiss National Bankâ€™s
decision. It unexpectedly cut its three-month Libor target range by 100bp to 1%
only. These are almost Japanese conditions; on Friday, the weekly tender was a
are a lot of important economic data on next weekâ€™s agenda. In Europe,
the main focus is likely
to be on the sentiment indicators, particularly the ifo business climate and
the EU Commissionâ€™s confidence indicators. The weak purchasing managersâ€™
indices for the manufacturing sector and also for the service sector give
little grounds for optimism. It will also be interesting to see whether the
labour market situation in Germany
â€“ where unemployment has been declining up to now â€“ has reached a turning
point. A sharp fall in consumer prices is expected, partly because the high
energy and food price increases of November 2007 have dropped out of the
calculations of the year-on-year rate, and partly because of the significant
decline in energy prices at present. In Germany,
the inflation rate could have fallen to 1.4%, and in the eurozone to 2.3%.
data released in the US
will also be weak for the most part: financing constraints and the bleaker
economic outlook are likely to have dampened spending and willingness to spend significantly.
In this environment, personal spending is likely to have fallen in October too,
both in nominal and real terms. This effect will probably be noticeable in
durable goods orders too.
economic data are hardly likely to brighten up the mood in the markets. Amidst
all the doom and gloom, however, there is little chance of further
disappointment. The long Thanksgiving weekend could perhaps give a little
respite. We are therefore expecting EUR-USD to continue its volatile sideways
movement in the coming week.
Rieke +49 69 718-4114
Grabbe / Klaus NĂ¤fken
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