Wednesday August 18, 2004 - 20:30:30 GMT
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Softer Eurozone Consumer Price Inflation Report
DailyFX Fundamentals 08-18-04
By Kathy Lien, Chief Strategist of www.dailyfx.com
Hurricane Charley Could Take A Further Toll On US Economy
Softer Eurozone Consumer Price Inflation Report
Bank of England August Minutes Confirm Dovish View
The euro continues to roll over in quiet trading. Today’s CPI report from the Eurozone gives the European Central Bank an even less compelling reason to raise rates. Consumer prices decreased 0.2 percent mom in July, slowing the annualized pace of growth down to 2.3 percent from 2.4 percent. The biggest culprit was discounts on summer clothing, which fell 6 percent on a monthly basis. Although GDP in France and Germany has improved, the flash estimate of second quarter growth in the Eurozone as a whole indicates deterioration. With unemployment at 9 percent, and softer inflation pressures, it will be some time before the ECB will be able to tighten monetary policy. The downside risks to global growth and with it, Eurozone growth has increased significantly in recent months. According to today’s report, consumer prices in Germany increased 0.4 percent on a monthly basis, bringing annualized growth up to 2.0 percent. Tomorrow’s PPI report is expected to show a similar improvement.
Disappointing US economic data and evidence of slowing growth is an issue that we have mentioned repeatedly over the past few weeks. Adding to the concern that the weakness will be with us for some time are the recent developments in Florida. Hurricane Charley has taken a significant toll on Florida’s economy. None of the Hurricane’s negative effects have yet to be reflected in the US economic reports that we have seen to date. Since the Hurricane hit at a time when crude oil prices continued to register new highs, we expect the August economic reports to be particularly dismal. More specifically, we expect deterioration in retail sales as well as in labor market indicators such as jobless claims and payrolls. The Hurricane will not only cost insurance companies approximately 7 billion dollars, it will also hurt companies that may have uninsured inventory or equipment and sales in general. Tomorrow’s Philadelphia Fed Factory Survey should provide no respite for the greenback. If you recall, the Empire State Manufacturing survey released on Monday was exceptionally weak. Forecasts are still optimistic; we would not be surprised to see the survey dip into the 20s. More specifically, in the Philadelphia region, new orders and employment are expected to retrace after their sharp gains in July.
The British pound extended its slide against the US dollar for the third consecutive trading day. The much-awaited minutes from the Bank of England’s August monetary policy meeting confirmed the central bank’s newly adopted dovish outlook on rates. Some traders had speculated that certain members of the BoE would vote in favor of raising rates by 50bp, but the central bank did not. Instead, the members voted 9 to 0 to raise rates by 25bp and even considered the possibility of leaving rates unchanged. The central bank is clearly being more thrifty with rate hikes. In the minutes, they highlighted five major downside risks to inflation and only two upside risks. The downside risks include a correction in house prices, weaker demand as a result of higher oil prices, and lower inflation expectations, while the upside risks include a tighter labor market. Tomorrow’s retail sales report should confirm increasing evidence that the country’s stellar growth may finally be slowing. After the sharp surge in June, the market is expecting retail sales to retrace. Separate reports from the British Retail Consortium and the Confederation of British industry have already reported weaker sales volume and store receipts for the month of July. Poor weather, a drop in confidence and reduction in clothing sales should all contribute to the losses. According to the BRC, shops ended promotions for the European soccer championships in July. The latest string of interest rate hikes could also damper spending by increasing the cost of borrowing.
The yen soared against the dollar for the sixth consecutive trading day despite continued strength in the price of oil. A recent think tank survey confirmed our belief that it is too early to call an end to Japan’s stellar growth based upon last week’s weak Q2 GDP report. The think tanks surveyed expect GDP growth to increase to 3.5 percent this fiscal year, which is an upward revision from the previous forecasts. Although yen fundamentals favor continued gains, the recent run up in oil should limit the slide in USDJPY. Tomorrow’s machinery orders report should reflect improved growth, as corporate profits remain healthy.
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