The dismal state of US economy was highlighted by another bout of disappointing economic reports earlier in the session. The Conference Board's survey of consumer confidence plunged to its lowest level on record at 25 in February, sharply lower than expectations for the survey to ease to 35.0 from a downwardly revised 37.4 reading in January. With burgeoning unemployment and heightened pessimism over the state of the US economy, consumers will likely continue to sharply retrench over the coming quarters and potentially exacerbating the current economic recession. The Case-Shiller home price index continued to reveal rapid deterioration in the housing market as prices in December dropped 2.5% from the previous month, and down by a record 18.5% from a year earlier. Meanwhile, the Richmond Fed manufacturing survey declined by more than anticipated in February at -51 from -49 in January.
Federal Reserve Chairman Bernanke offered a somber assessment of the US economy in his semi-annual Congressional testimony. He acknowledged the current severe recession, but offered hope that if policy makers are successful in stabilizing the financial system there may be a recovery as early as 2010. Nonetheless, Bernanke admits that downside risk outweighs the upside, which is why he deems strong government action to be crucial in stabilizing the economy. He also addressed recent concerns over the prospect of nationalizing banks, saying a majority ownership of banks is not necessary given the very strong supervisory oversight in place.
The US equity bourses rebounded sharply in the Tuesday session amid reassurances from Fed Chairman Bernanke that nationalization of banks would not be needed at this juncture. The S&P 500 bounced by over 3%, while the Nasdaq and Dow Jones were up by 2.9% and 2.4%, respectively.
The greenback was mixed against the majors, rallying sharply against the yen while losing ground versus the euro and sterling. The Japanese yen plunged sharply following steep overnight losses in Tokyo's Nikkei index. Also dragging the yen lower is continued fear that Japan's economic fundamentals will deteriorate rapidly amid slumping approval ratings for Japan's PM Aso. In the near term, we expect the yen to continue to slide against the greenback with our initial target around the 99-level.