Thursday September 2, 2004 - 10:31:59 GMT
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US OPEN MARKET POINTS 09-02-04
Published By: Boris Schlossberg, Fundamental Analyst
What if Oil Doesn’t Go Down?
Reuters reports today that BOJ Governor Fukui showed concern over the impact of oil prices on the economy, saying that a rise in oil prices could hurt corporate profits and consumer spending. Up to now the market has been oblivious to oil’s near vertical rise, assuming much like Chairman Greenspan that the effects will be temporary. However, with yesterday’s $2 rise in crude to $44/bbl many analysts now wonder just how long will high prices last and what impact will they have.
If oil prices remain above $40/bbl for longer than one quarter they will almost certainly cause a worldwide economic slowdown. Yesterday, we noted how this slowdown was already becoming evident in the economic reports, as almost every data point in the month of August reported below expectation. Tonight’s tepid German unemployment results serve as yet another piece of evidence that the oil spike is taking its toll on world’s economies. More disturbing still, is an essay by ContraryInvestor.com that argues that the Fed will be forced to raise rates irrespective of the NFP figures if oil prices do not recede. The authors point out that over the past 40 years every spike in oil led to an increase in fed funds rate to offset inflationary pressures. This time however, the Fed risks sending the economy into a recession, as the double whammy of rising rates and high oil severely depresses business and consumer demand.
Meanwhile, the euro is rallying tonight despite poor eco data because traders are anticipating a weak NFP number. According to IFR. dealing desks are full of rumors that the NFP will print less than the expected 150K and given the sub-par ISM number yesterday this seems like a reasonable conclusion to us. Ironically enough, if the NFP numbers are soft oil could be the culprit, as many businesses may have delayed hiring in the face of slowing demand and rising input costs. As the effects of high oil costs seep through the world economies, the market may begin to reassess the implications of this phenomenon which only a few weeks ago was assumed to be a minor and temporary snag.
Just as we go to press the Monster.com index of online employment demand reports a reading of 145 – its highest historical value ever. The EUR/USD is selling off on the news as dealers begin to question their assumptions of weak NFP number and as the day progresses the pair may weaken further if more market players change their point of view.
FX Spot Overnight
- EUR trades almost to 2200 on speculation that NFP will be soft
- JPY heads back towards109 handle off EUR/JPY cross selling
- GBP firms of support 7915 and rallies to 7960 on good PMI data
- CHF finds strength from geo-political events and breaks the 2600 handle
11:45GMT – (7:45 AM EST) EUR ECB Rate Announcement (August) Expected at 2%, Previous 2%
12:30GMT – (8:30 AM EST) USD Non-Farm Productivity Q2 Expected at 2.80%, Previous 2.90%
12:30GMT – (8:30 AM EST) USD Unit Labors Costs Q2 Expected at 2.00%, Previous 1.90%
12:30GMT – (8:30 AM EST) USD Initial Jobless Claims (Aug 28) Expected at 340K, Previous 331K
14:00GMT – (10:00 AM EST) USD Factory Orders (July) Expected at 1.00%, Previous 0.70%
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