- ECB shifts bias to neutral, EUR to adjust
- Global outlooks dims as US data softens further
- G7 meeting this weekend unlikely to note FX
- Key economic data and events for next week
ECB shifts bias to neutral, EUR to adjust
For several months now I have been cautioning that ECB Pres. Trichet was blowing smoke when he threatened to keep raising interest rates to fight inflation, even as Eurozone growth was slowing. Trichet finally gave up the game on Thursday and effectively signaled that the ECB policy bias was now neutral. Market analysts, however, were quick to begin forecasting interest rate cuts as soon as April, with between 50-100 bps of easing seen in total for 2008. The Euro weakened across the board and seems likely to continue to soften in the weeks ahead. But I think the bulk of EUR weakness will be seen versus non-USD currencies, especially those with higher interest rates and better growth outlooks, primarily AUD and NZD, and to a lesser extent GBP.
My outlook for the USD is decidedly more mixed. In recent weeks the USD has held up well despite interest rate differentials moving sharply against it and amid heightened signs that the US economy is in/on the brink of a recession. The going wisdom is that aggressive Fed-easing to date, with more likely to come, will result in a shorter and shallower downturn and position the US for an earlier recovery than other countries. Iâ€™d like to embrace that view, but itâ€™s extremely premature to begin speculating on how quickly the US will recover when it hasnâ€™t even hit bottom yet. The data in hand suggests the US slide began to accelerate seriously only in Dec. and Jan. and further indications are that US consumers are moving onto the sidelines, exacerbating the slowdown. Between deteriorating labor conditions (as seen in rising weekly initial and continuing claims and the weak Jan. NFP report) and the slowing growth outlook ( as seen in the cataclysmic plunge in the ISM services index and stagnant consumer spending), my prior outlook for a soft-landing in the US is in serious doubt. However, Iâ€™m not ready to abandon it altogether on the basis of only 1or 2 months worth of data, but a dose of healthy skepticism is certainly justified.
With those concerns in mind, Iâ€™m continuing to expect the USD to trade in the broad range established over the last two months between roughly 1.43-1.49 in EUR/USD rather than mounting a sustained rebound. That said, there are plenty of technical grounds to suggest a longer-term top has been found in EUR/USD (e.g. triple top below 1.50; EUR/USD closing below the Ichimoku cloud; a sell signal in the DMI ), so the risks are for a break to the downside out of the range. Next week could prove pivotal if weâ€™re able to take out the range lows at 1.4300/10 on a weekly closing basis. The upside is limited by Ichimoku cloud resistance between roughly 1.4600-40, though the cloud is extremely thin, indicating resistance there is not especially strong.
Global outlooks dims as US data softens further
Judging by the Jan. ISM services report this past Tuesday, the US is already either in or heading into a recession. The ISM-services report plunged from 54.5 to 41.9, dropping decisively below the 50 breakeven level between expansion and contraction. Worse still, the employment component of the ISM index fell from 51.8 to 43.9, suggesting a sharp deterioration in labor markets, which only weighs further on US consumer sentiment. On top of that, stock markets remain mired in a slump and credit market conditions have recently deteriorated further, limiting the reach of lower interest rates. Futures markets are pricing in additional Fed easing of between 50-75 bps at the next meeting on March 18 and speculation of another inter-meeting rate cut has re-surfaced.
The slowdown in the US is being felt in other major economies. January service-sector PMIâ€™s for the Eurozone also declined, with the Eurozone composite dropping from 52.7 to 51.8, but notably the German, Italian, and Spanish services PMIâ€™s all fell below the 50 boom/bust line, suggesting more pronounced weakness is likely in the months ahead. Japan remains relatively stagnant and also on the verge of another recession, with the most recent Economy Watchers survey of consumer-level businesses dropping to 31.8 from 36.6 and the outlook index falling to 35.8 from 37.0. Also, the IMF recently lowered its outlook for global growth to 4.1%, marking the slowest growth outlook in the past 5 years (a global recession is signaled by global growth of 3% or less, in contrast to traditional recession measures).
In contrast to the evident global slowdown, commodities continue to hold onto recent strength, but I think this is mostly a function of commodities trading as the last asset class untainted by disruptive market developments. I expect ongoing global slowing to eventually see commodity prices unwind further. In particular, Iâ€™m focusing on lower oil prices to further restrain EUR and support the USD.
G7 meeting this weekend unlikely to note FX
The G7 is meeting in Tokyo on Saturday and slowing global growth will top the agenda. The communiquÃ© is expected late Saturday afternoon Tokyo-time/early morning NY time. European G7 sources have indicated that the currency section of the statement will be unchanged from the last statement in October 2007. US officials apparently rejected even discussing currency issues such as the weakness of the USD or strength of the EUR. For those who have been wondering whether the current US administration secretly favors a weaker USD, I think we have a verdict. The lack of US willingness to even broach the topic of allowing the USD to strengthen is another reason Iâ€™m not expecting the USD to strengthen appreciably anytime soon. US exports are the last remaining source of optimism in the US economy, and administration officials are not going to let a little USD weakness get in the way of supporting the US economy.
The US was intent on pressing for fiscal stimulus from other members, but that overture looks to have been rejected by European members as philosophically unacceptable, while Japan is unable to provide any meaningful stimulus due to staggering debt levels. Only the UK appears likely to enact some form of spending stimulus, which will be made known when the new budget is released. As a result of these differences, this G7 meeting is unlikely to provoke any surprises and will likely be noted more for what wasnâ€™t accomplished.
Key economic data and events for next week
US data next week begins on Tuesday with the Feb. IBD/TIPP economic optimism index in the morning and weekly ABC consumer sentiment in the afternoon (ABC sentiment dropped to 15-year lows of -33 this past week). On Wednesday, weâ€™ll get another update on the state of the US consumer with Jan. advance retail sales, which are expected to fall -0.3% on the headline basis. Thursday sees the Dec. trade balance and weekly jobless claims. Friday sees Jan. import price indexes, Feb. Empire manufacturing, Dec. TIC data, Jan. industrial production and preliminary Univ. of Michigan consumer sentiment. Fed speakers will be highlighted by testimony on Thursday from Fed Chairman Bernanke, alongside Tsy. Sec. Paulson and SEC chairman Cox, before the Senate Banking Committee. Separately on Thursday, Chicago Fed Pres. Evans (2008 non-voter) will offer his current economic outlook.
Eurozone finance ministers will be holding a regular monthly meeting beginning on Monday evening and continuing on Tuesday. They may be more vocal in this venue about limiting EUR strength, having been rebuffed by the US at the G7, so be prepared for negative EUR comments. Eurozone data begins on Tuesday with the German and Eurozone Feb. ZEW survey of business sentiment, which is expected to show further declines. Wednesday sees Jan. German wholesale prices and Dec. Eurozone industrial production. Thursday will see 4Q GDP advance estimates for France, Germany, and the Eurozone as a whole. Friday sees the Dec. Eurozone trade balance and French 4Q employment reports.
Japanese data begins on Wednesday morning in Tokyo with January domestic corporate goods price index and Dec. current account and trade balance, followed by Jan. consumer confidence in the afternoon. Thursday morning sees preliminary 4Q GDP estimates, followed by final Dec. industrial production in the afternoon. The BOJ will begin meeting on Thursday and announce their expected steady decision on Friday afternoon.
UK data is heavy with inflation reports next week, so be prepared for some fireworks as the inflation outlook is seen as key to future rate moves. Monday morning begins with Jan. PPI, Dec. trade balance, and Dec. DCLG house prices. Tuesday sees the Jan. BRC retail sales monitor at midnight GMT, followed by Jan. CPI/RPI later in the morning. Wednesday midnight sees the Jan. RICS house price balance, followed by January employment data in the morning. The highlight on Wednesday will be the release of the Bank of Englandâ€™s quarterly inflation report, which will be critical to judging the extent and timing of further BOE rate cuts.
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