Friday August 3, 2007 - 21:35:58 GMT
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Market Directions - Sunday, August 5, 2007
Market Directions - Sunday, August 5, 2007
- The ECB makes no move on rates but almost promises a hike in September
- Moderate in all things, the US economy fails to excite trading interest and the Dollar falters at week end
- The Japanese government of Shinzo Abe is defeated in Diet elections and the 'carry trade' stabilizes after falling more than 5% in the past two weeks
The Week in Review July 30 - August 3
Disappointment in the American economy etched into the market at the close of the week as Non Farm Payrolls and Services ISM gave a much weaker than expected portrait of US growth prospects. The recent fall in the Euro against the Dollar, though largely due to technical and Yen cross related volatility issues had coincided with an excellent US GDP number for the second quarter. Traders were caught looking the wrong way on Friday, particularly by the ISM number which had been leading the recovery in US statistical measures. But much should not be made of these two statistics other than as a trigger for an end of the week profit reversal in the Euro. The American economy is not setting up for yet another turnaround. All recent statistics, consumer sentiment, income, ISM numbers, factory orders and purchasers indices point to continuing moderate economic growth, to lowered but still healthy job creation and diminishing inflation. This is hardly a picture to discourage business owners and consumers; traders are perhaps another question. Even the much commented sub-prime mortgage problem, illustrated by the failure of American Home Mortgage, has failed to ramify through the economy. The Federal Reserve should be extremely satisfied with statistical results of the past seven days and indeed the past several months. The PCE inflation rate for July was a miserly +0.1% capping a steady diminution from the +0.3% monthly rate of mid 2006. There will be no change of emphasis or concern at the FOMC meeting on this coming Tuesday. All in all Mr. Bernanke has good reasons to enjoy his summer vacation.
The European Central Bank (ECB) left rates unchanged at 4.0% on Thursday surprising not a soul. But in a hastily called news conference after the announcement Jean Claude Trichet, the president of the ECB, took care to use the term "strong vigilance' in characterizing the bank's attention to inflation. In fact, it almost seemed that Mr. Trichet convened the conference so that he could be quoted uttering the phrase 'strong vigilance'. Since May of 2006 Mr. Trichet has used this term three times and each time rates were raised 0.25% at the next meeting. Was this impromptu news conference held with the press by video link a response to French government criticism of ECB rate policy? Possibly. But without a direct promise, which he cannot provide, Mr. Trichet has once again given the strongest indication possible of ECB intention for September. Interestingly Mr. Trichet dodged a reporter's question as to whether rates are still accommodative and in doing so he noted the need to monitor turbulent financial markets. Is this an indication that a pause after the September increase is being considered? Surely it is too early to speculate but the ECB has proven to be most adept at the long warning and the incremental alert. There will be intense speculation on ECB policy after the September hike. Given past ECB behavior Mr. Trichet and his governors will begin preparing the market almost immediately.
The pending Bank of England (BOE) inflation report due this Wednesday will likely give the bank enough room to delay a rate hike well into the fall. But expectation is still heavily weighted towards a 0.25% increase before the end of the year. At 5.75% the BOE rate is above what is usually considered 'neutral', neither promoting nor restricting economic growth. Deputy Governor John Gieve has called the current policy "on the restrictive side", but the economy has shown surprising resilience, particularly given the succession of rate hikes. Economic growth actually accelerated in the second quarter.
It appears the administration of Nicholas Sarkozy is trying to enlist the aid of the ECB, perhaps involuntarily, in reviving the French economy by strongly pressuring the central bank to reconsider its tight money campaign. The Deputy Minister for European Affairs, Jean Pierre Jouyet, speaking before the Finance Committee of the French National Assembly denied that he had intended to provoke the ECB with his comments last week, "at no time did I ever want to ... influence the members of the ECB", and "nobody in France questions ECB independence". But he then proceeded to do just that in the remainder of his speech. Consider his following points: key currencies in the world are politically managed and European political leaders must be able to discuss this issue with the ECB; the Maastricht treaty calls for dialogue between the monetary and political authorities; he does not believe in "the free reign of markets", when other currencies are clearly managed. "Each side [the ECB and the French Government] recognizes that there is a problem with the undervaluation of a certain number of Asian currencies". He suggested that ECB policy should be made within a "broad framework of policy analysis which includes not only price stability but growth and competitiveness". He also claimed that France's views are slowly "gaining ground" among European Monetary Union (EMU) members. Most European politicians faced with long term structural, competitive and social welfare constraints on their economies would no doubt welcome a looser ECB interest rate policy but apparently only the French are willing to say it quite so forcefully. Mr. Sarkozy knows that he can use all the help he can get in his drive to reform the sclerotic French economy.
The People's Bank of China (PBOC) raised bank reserve requirements by 50 basis points to 12% effective August 15th. Since April 2006 the PBOC has boosted the requirement 4.5% in nine increments, though this is the first hike since May 18th.
Trade and currency legislation aimed primarily at China, began its tortuous path through the American Congress. This legislation is a very useful counterpoise to the Bush' administration's negotiated approach, the legislative stick to the executive branch carrot.
Henry Paulson, the American Treasury Secretary, said that though the appreciation of the Chinese Yuan had increased over the past six months, "I don't believe it is fast enough. Faster appreciation will help the Chinese control their own economy. ...They [the Chinese government] could use traditional monetary policy to dampen overheating and hasten the development of the economy to higher valued products". Mr. Paulson will find ready audiences for these views in Beijing. The Communist rulers of China do not doubt the efficacy of capitalist financial thought, only the speed of its introduction to Chinese markets.
The ruling Liberal Democratic Party of Prime Minister Shinzo Abe suffered a major defeat, as predicted, in elections for the upper house of the Japanese Diet. Mr. Abe will not resign, as would have happened if the election had been for the lower house which elects the Prime Minister. But his ability to continue the economic reforms of his predecessor Junichiro Koizumi has been severely diminished. Will this defeat embolden the Bank of Japan to raise rates sooner rather than later, or will the ensuing political paralysis delay the normalization of interest rates even longer? Our bets are on the latter result.
Despite the Reserve Bank of New Zealand's (RBNZ) 0.25% rate hike on July 26th to 8.75% the New Zealand Dollar (Kiwi) has fallen over 5.5 % from its July 23rd peak of 0.8091. It touched bottom at 0.7531 on August 1st. 'Buy the rumor and sell the fact' and the need to convert paper trading gains into profits both work as explanations, but the catalyst was plainly the RBNZ's strong hint that the it may be reaching the end of the tightening cycle. The run down in the Kiwi included the largest four day drop in the currency against the Usd since 2001.
Economic Releases July 30 - August 3
Tuesday: S&P Case Schiller Home Price Index registered 218.37 in May, lower than the April reading of 218.93 and raised fears that the housing market decline is reaccelerating. The Chicago Purchasers Index for July reported at 53.4, substantially less than the June result of 60.2. The Conference Board Consumer Confidence number for July at 112.6 exhibited the highest reading in over 6 years, 105.0 had been expected; the June reading was 103.9. The 'Jobs Plentiful 'category scored 30.5% well above the reading in June of 27.6% and the 'Jobs Hard to Get' reading fell to 18.4%, well off the equivalent June number of 27.6%. This jobs component is crucial to the overall buoyancy of consumer sentiment. Inflation expectations fell to 5.1% from 5.4%. Construction Spending dropped in June 0.3% on expectations for a gain of 0.2%; the May number was revised slightly higher to 1.1% from 0.9%.
Wednesday: The Institute for Supply Management (ISM) Manufacturing Index slid to 53.8 in July, less than the forecast of 55.5 and well below the June reading of 56.0. The employment index fell as well to 50.2 from 51.1; 'New Orders' were down also at 57.5 vs. 60.3. Nonetheless, Norbert Ore the Chair of the Institute for Supply Management Business Survey said that he thought "manufacturing [was] in fundamentally good shape. The June number had been the highest reading in more than a year and the July result remains above the average for the first quarter indicating moderate growth in the manufacturing sector. "Following a strong 2nd quarter, the manufacturing sector moderated somewhat this past month [July]...but continuing strength in new orders and production indicate that 3rd quarter performance should still be quite good", he said in a prepared statement issued with the figures.
Thursday: Factory Orders for June were up 0.6%, less than anticipated but a good recovery on the May decline of 0.5%.
Friday: Non Farm Payrolls for July underperformed at 92,000 jobs with a 0.1% rise in the unemployment rate to 4.6%. Predictions had been for 125,000 new jobs and a static unemployment rate at 4.5%. The private sector created 120,000 jobs for the month but, quite unusually, all government payrolls fell by 28,000. Government payrolls can be expected to resume growth in the coming months. State and local governments are flush with tax revenues and the federal deficit is falling much faster than had been predicted last year. The combination of steady private sector job creation and recovering government employment should keep the NFP numbers on a steady keel in the coming months.
Tuesday: the annualized Harmonized Index of Consumer Prices (HICP) for July rose 1.8%. It is the eleventh month in a row with this statistic below the ECB 2.0% target. Even so the ECB is very unlikely to forego at least one more 0.25% rate increase. Mr. Trichet, the bank president, has stated that the bank's concern is for the medium term inflation rate, not the monthly figure, and that the bank's planners still expect a rise in inflation later in the year. But with almost a full year of successful inflation figures one can wonder what the ECB defines as 'medium term'? The European Monetary Union (EMU) unemployment rate fell to 6.9% in June; the May rate was revised to 6.9% as well from 7.0%. There are 10 million people out of work in the EMU. As a comparison the unemployment rate in the United States is 4.6% and in Japan it is 3.7%. With EMU growth thought to be near potential and perhaps beginning to subside, French criticism of ECB policy becomes far more serious and credible.
Tuesday: the FSO (Federal Statistical Office) Retail Sales for June (annualized) at +0.7% was less than half the expected rise of 1.5%. The May number was revised lower to -2.5% from -1.8%. This weakness in consumer sales has cast some doubt on the generally buoyant consumer confidence statistics, and has undermined the hope of a self supporting economic recovery in the European Union. Past recoveries have been heavily dependant on exports. Germany has recently regained the title of the world's greatest exporting country by value of overseas sales.
Wednesday: CIPS Manufacturing PMI for July was at 55.7 considerably stronger than expected; June was 54.7. New Orders were sharply higher as well reflecting the strength in the UK economy, somewhat surprising at this point in the BOE tightening cycle.
Monday: Industrial Output for June gained 1.2%, surpassing the forecast of + 1.0%. It is the first rise in four months. The May result was revised slightly ahead to -0.3% from -0.4%.
Tuesday: the unemployment rate fell one tenth of a percent to 3.7%. It was a new post 1998 low.
Non statistical releases
The Week Ahead August 6 - August 10
Tuesday: preliminary Non-farm Productivity for the 2nd quarter at 8:30 am. An increase of 2.1% is forecast. The first quarter rate was +1.0%. Preliminary Unit Labor Costs for the 2nd quarter at 8:30 am, +1.6% is predicted, the first quarter was +1.8%. FOMC policy meeting, no change in rates or bias is expected.
Summer vacation: no important statistical releases
Monday: 10:00 Total Manufacturing Orders for June (seasonally adjusted, monthly and annualized) at 10:00 GMT, -0.8% is predicted for the monthly result and +10.1 yearly. The May numbers were +3.2% and +11.1% respectively.
Tuesday: Industrial Output (seasonally adjusted) for June at 10:00 GMT, +0.5% is forecast for the month and +5.1% for the year. The May figures were +1.9% and +4.6%.
Monday: Manufacturing Output for June at 8:30 GMT. In May output rose 0.2% monthly and 1.0% yearly. Industrial Production for June at 8:30 GMT. The May numbers were +0.1% month on month and +0.8% year on year. British Retail Consortium (BRC) Retail Sales for July at 23:01 GMT. In June the like for like reading rose 2.2%
Wednesday: The Bank of England quarterly inflation report by the Governor of the BOE Mervyn King at 9:30 GMT.
Friday: release time undetermined, PPI for July, year to date and year on year. The June results were +2.5% and +2.8% respectively.
Monday: Preliminary Leading Index for June at 5:00 GMT, May was 18.2. Coincident Index for June at 5:00 GMT, May was 45.0
Wednesday: Machinery Orders for June at 23:50 GMT Tuesday. May rose 5.9%.
Friday: Revised Industrial Output for July at 4:30 GMT, the preliminary issue was down 0.3%. Consumer Confidence for July at 5:00 GMT, May reported at 45.0.
Chief Market Analyst
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