Background Dollar flows into and out of mutual funds is a modern-day indicator, one based on sentiment but still useful to the wise investor. The Investment Company Institute (ICI) is the most reliable source of mutual fund trends, publishing a monthly report covering domestic and international stock funds, bond funds and even money markets. The ICI is a non-profit organization whose members are the majority of investment companies registered with the Securities and Exchange Commission (SEC). The organization has reported before Congress and presents free information for investors and economists by sampling more than 8,000 mutual funds, closed-end funds, exchange-traded funds (ETFs) and unit investment trusts (UITs).
The Federal Reserve also issues money market figures in its Money Supply Report, and TrimTabs offers daily and weekly data to investors through its website.
Most often, mutual fund flows are presented as the net of all inflows and outflows measured over the period; if total dollars going in is the same as dollars being sold out, total flows over the period will be $0. In the monthly ICI report, new sales, redemptions and exchanges are netted out to show a "net new cash flow" figure, which can be positive or negative for a given period. Average cash levels at stock funds are also shown in the report
What it Means for Investors Stocks and bonds respond to changes in demand like any other investment, and knowing what the prevailing investing trends are can help investors to decide whether the present time is a good one to invest in one asset class or another. While mutual fund flows alone do not determine investor sentiment (institutional money and individual shareholders are excluded in the ICI report), they do represent the way most investors participate in the markets - mutual fund assets in the United States alone stood at more than $10 trillion at the end of 2006.
That said, strong flows into stock mutual funds does not guarantee good times ahead for equity investors. Some economists even see fund flows as a "false positive", or contrarian indicator, with the logic being that most people commit more money to the stock market when it has already run up, and has received a lot of positive press and mainstream coverage. A recent and powerful example can be seen in the last few months of the stock market peak back in early 2000. Stock market flows were at record levels those first few months; soon after, the stock market began a steady march downward, with major indexes dropping more than 50% in the next year.
If the market is coming out of a recession or other weak period, seeing fund flows grow in stock funds can be a positive indicator, suggesting that investors are increasing their allocations for stocks. When mutual fund managers have more cash coming in, they have to go out and purchase stocks on the open market to keep their portfolio percentages in the right proportions.
Money market fund flows can be read in a similar way, with increasing flows being seen as a sign that stocks may be undervalued, and vice versa. Strengths:
Valuable source of investor sentiment
Information available for other countries; ICI even provides a "worldwide" figure
Valuable for seeing fund manager sentiment through average cash levels (considered a defensive asset class)
Weaknesses:
Can be interpreted in different ways (such as a contrarian indicator)
Does not show total market ownership - only mutual funds
Difficult to separate secular trends in fund ownership from market timing situations month to month
The Closing Line Fund flows may be seen as esoteric, but smart investors should consider adding this to their arsenal of indicators to know and study, understanding that stock and bond markets have supply and demand patterns that may be distinct from economic activity.
Background The money supply is just that: the amount of money floating around the economy and available for spending. Different numerical aggregates show different subsets of money based on their liquidity, starting with M0 (the most liquid), which is just the dollar value of physical cash and coin, and M1, which includes all of M0 as well as checking accounts, traveler's checks and demand deposits. The M2 aggregate includes the dollar value of all of M1 in addition to savings accounts, time deposits of less than $100,000 (such as certificates of deposit), and money market funds held by investors.
The Federal Reserve publishes data on the levels of M1 and M2 weekly, and has been collecting data on the money supply since the 1950s. In the less financially complicated world that existed then, the supply of money showed a very strong correlation to how much money was spent, and it was therefore studied fervently by economists for clues to economic growth.
Legislation passed in 1978 mandated the Federal Reserve to set annual targets for money supply growth. At the time, there was a still a high correlation between money supply growth and overall economic growth, as measured by gross domestic product (GDP). Over time, that close relationship started to break down due to changes in banking accounts, the proliferation of financing companies, and more widespread investment among consumers (stock and bond investments are not captured in M1 and M2 aggregates). When the legislation expired in 2000, the Fed announced that it would no longer set targets for growth of the money supply as a matter of policy, although it remains an important indicator for predicting inflation and spending patterns among consumers. In the words of the Fed, "…the FOMC [Federal Open Market Committee] believes that the behavior of money and credit will continue to have value for gauging economic and financial conditions."
The M2 aggregate is a large component of the Conference Board's U.S. Leading Index (which contains 10 indicators), making up more than 30% of the index.
What it Means for Investors The Federal Reserve has a measure of control over the money supply aggregates, which differentiates this indicator from most others. Through open market operations such as buying and selling Treasuries and setting the reserve requirements, the Fed does things to alter the money supply through its daily course of business. Setting short-term interest rates to guide the economy remains the core policy directive of the FOMC, but changes to rates such as the fed funds rate do eventually manifest themselves in the money supply, albeit with a time lag.
No single release from the Fed regarding the money supply is going to shock the market; the weekly release schedule alone takes a lot of the surprise factor out mix, so this report will rarely move the markets in the short term. History has shown that the money supply tends to rise faster (accelerate faster) during periods of economic expansion that during contraction periods.
If there is one measure that is looked at more than the rest, it's the M2 figure - cash equivalents in this designation are deemed to be collectively liquid enough to be spent without any real delays or penalty costs. While growth in the money supply does not directly indicate future spending growth as it once did, it does indicate that inflation could be around the corner. This is where knowing both money supply growth and GDP growth becomes very handy - if money supply growth is rapidly outpacing economic growth, there will soon be more money chasing after the same amount of goods. This echoes the dryly famous quote: "Inflation is always and everywhere a monetary phenomenon."
Changes in the money supply are usually quoted in the media on an annualized percentage basis, which helps to smooth out short-term statistical "blips" that can occur week to week.
Strengths:
A timely and consistent indicator, released weekly and with a long operating history
It is often misunderstood by investors, creating opportunities for those who who know how to use it.
There is a lot of existing research on the relationship between money supply and GDP growth as well as inflation.
Weaknesses:
Rarely a mover of the markets in the short term
Limited breakdowns available in the weekly release; the quarterly Flow of Funds report provides a broader view
Lack of economic consensus on how to best compare money supply levels to inflationary outlook and future spending patterns
The Closing Line The evaluation of money supply figures has become a progressive story, one that savvy investors will take into consideration when contemplating future levels of economic growth as well as inflation.
investopedia.com
NY Empire and Philadelphia Fed index (Nov): still at record-low recession levels
Industrial production (Oct): slight increase but downward trend remains intact
PPI and CPI (Oct): sharp declines due to correction in energy prices
Leading indicators (Oct): accelerating downward trend
The New York Empire manufacturing index, which was first released in July 2001, fell to an all-time low of -24.6 in November. Given the deterioration in domestic demand and the global economy and the continued plunge in US small business optimism, a rebound appears unlikely; it could instead decline further to -28.0 in November. The Philadelphia Fed index plummeted even more in October, by about 40 points to -37.5. This is the lowest it has been since January 2001. We expect it to have stabilized around this level in November. Thus the two indices might converge somewhat.
Industrial production fell sharply by 2.8% mom in September, but this was mainly due to the Gulf coast hurricanes, and the Boeing strike also dampened output. Thus industrial production might have recovered somewhat in October, but only by about 0.2% mom at the most, given that the downward trend in leading indicators is still intact. Moreover, the ISM manufacturing index fell to a recession level of 38.9, aggregate working hours declined further, and utility output is likely to have decreased too. The capacity utilization rate could have remained more or less unchanged at 76.5%, about 4 points below its long-term average.
Falling energy prices will have had a major impact on October inflation data. We already know that import prices fell by 4.7% mom. As average gasoline prices went down by 18% mom, we expect producer prices to have dropped by 2% mom in October, and consumer prices might also have declined by about 1% mom. The annual rates are falling rapidly, and CPI could be below 2% yoy at the end of Q1/2009. Due to weak domestic demand, core price levels ex food and energy are only likely to have increased moderately in October, by 0.1% mom respectively.
Housing starts declined by 6.3% mom to 817k in September, after having gone down by 8.1% and 12.9% in the previous months. Given that building permits are at an even lower level and homes for sale at a record-high level, housing starts have not yet bottomed out, and we forecast that they will have fallen to 775k in October. Building permits might also have fallen to 775k, from an upwardly revised 805k.
Initial jobless claims jumped by 32k to 516k in the week ending November, the highest level since September 2001 in the aftermath of the terrorist attacks. We expect jobless claims to remain above 500k in the near future, and they might only have fallen slightly to 510k in the week ending 15 November.
Leading indicators increased by 0.3% mom in September, mainly driven by real M2 and a temporary rebound in consumer expectations. However, we expect leading indicators to have fallen by up to 0.8% mom in October. The biggest negative contribution will have been made by stock prices, although an increase in real M2 and the steepening of the yield curve could have more than compensated for this. But consumer expectations, supplier deliveries, aggregate manufacturing working hours, building permits, orders and jobless claims will all have contributed negatively. The annual rate could fall back to -3.3 %, and the annualised 6-month rate might actually drop from -2.5% to -4.1%. BHF-BANK http://www.bhf-bank.com This report has been prepared by BHF-BANK Aktiengesellschaft on behalf of itself and its affiliated companies (together "BHFBANK Group") solely for the information of its clients. The information and opinions in this document are based on sources believed to be reliable and acting in good faith, but no representation or warranty, express or implied, is made by any member of the BHF-BANK Group as to their accuracy, completeness or correctness. Opinions and recommendations are given in good faith but without legal responsibility and are subject to change without notice. The information does not constitute advice or personal recommendation, for which the duty of suitability would be owed, but may facilitate your own investment decision. Moreover, you should seek your own advice as to the suitability of an investment matter mentioned herein. Investors are reminded that the price of securities and the income from them can go down as well as up and that the past performance of an investment or a market is not necessarily indicative for future results. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete, and this document is not, and should not be construed as, an offer to sell or solicitation of any offer to buy the securities mentioned in it. BHF-BANK Group and its officers and employees may have a long or short position or engage in transactions in any of the securities mentioned in this document, or in any related securities. This publication must not be distributed in the United States.
This week had a relatively light schedule of economic reports but nearly every report confirmed more weakness in the underlying economy. The highlight (should that be lowlight?) of the week was the release of retail sales data that showed a 2.8 percent drop in overall retail sales in October (see graph at right). Although the sharp drop in gasoline prices in October contributed to the falling value of retail sales, it was not the entire story. Spending on autos and parts tumbled 5.5 percent, and most other categories of retail spending posted losses as well. Our forecast calls for real consumer spending to plunge more than three percent in the fourth quarter, which would follow the 3.1 percent decline in the third quarter, and the retail sales data for October give us little hope that the actual outturn will be stronger than we project.
Most major retailers have reduced their expectations for the holiday shopping season. Our own forecast calls for a slight decline in holiday sales, ranging somewhere between -0.5 percent and -2.0 percent (year-over-year changes) Hiring will be down this holiday season and discounts will likely be far more aggressive than in years past.
Speaking of hiring (or lack thereof), weekly first-time unemployment claims surged by 32,000 to 516,000 in early November (see top chart). The four-week moving average, which is our preferred way of looking at this volatile series, rose to 491,000, which is its highest level since the tail end of the 1990/91 recession. Actual layoff announcements have increased in recent weeks and we expect weekly first-time unemployment claims and the unemployment rate to rise significantly further. Indeed, we project that the unemployment rate, which currently stands at 6.5 percent, will approach eight percent by the middle of next year. With consumers worried about their jobs, the outlook for consumer spending is obviously not very bright.
Overall U.S. GDP growth has been supported over the past few quarters by strong export growth. Unfortunately, the latest trade figures that were released this week contained some disappointing news. As shown in the middle chart, the trade gap narrowed by $2.6 billion to $56.5 billion in September. However, the modest improvement in the trade deficit actually masks some disturbing trends in both imports and exports. Total imports of goods and services plunged $12.5 billion in September, the largest monthly decline on record. Although the collapse in oil prices caused the value of petroleum imports to tumble $6.9 billion, non-petroleum imports were off $5.2 billion, reflecting the underlying weakness in the U.S. economy.
Perhaps more disturbingly, exports nosedived $9.8 billion in September, also a record. Although the decline may have been exaggerated by the Boeing strike, which reduced output at the nation’s largest exporter, the losses in exports were broad-based. It appears that weak growth in the rest of the world is starting to show up at the U.S.’s doorstep in the form of slowing export growth. Indeed, as we discuss in the international section of this report, the Euro-zone, to which the United States ships about 20 percent of its exports, has slipped into recession. With most major foreign economies either in recession or about to enter one, U.S. export growth is sure to slow further.
In sum, it appears that the fourth quarter has gotten off to a very weak start. As noted previously, we project that real personal consumption expenditures will tumble more than 3 percent in the fourth quarter. Businesses are cutting back on capex plans, and inventories likely will be cut further. If, as we expect, real GDP falls at an annualized rate of 3.6 percent in the fourth quarter, it will be the sharpest quarterly contraction since the first quarter of 1982.
U.S. Outlook
Industrial Production • Monday
Industrial production fell 2.8 percent in September driven by weakness in manufacturing ex-autos, mining and the impact of Hurricane Ike. Over the last three months, industrial production has trended down to levels consistent with previous recessions.
We expect industrial production to continue to post declines and look for a contraction of 0.8 percent in October. Declines in ISM Manufacturing, Chicago PMI and manufacturing employment continue to show weakness in the manufacturing sector and suggest a drop in manufacturing activity. In particular, motor vehicle production should decline, reflecting weak demand. The outlook for industrial production is worrisome as slower export activity due to a stronger U.S. dollar and slower global growth may limit improvement in the second half of 2008 and early 2009.
Previous: -2.8% Wachovia: -0.8%
Consensus: 0.2%
Consumer Price Index • Wednesday
Consumer prices were flat in September, but we expect headline CPI to decline 0.5 percent in October. The outlook for consumer price inflation appears to be easing, especially with the recent sharp decline in gasoline prices. On average, prices at the pump were down roughly 20 percent in October compared to September and wholesale gasoline prices suggest further declines. We expect core prices went up 0.1 percent in month of October. Despite rapid increases in food and energy, core CPI has remained well behaved.
The rate of inflation will likely peak in the third quarter and slow moderately by the end of the year.
Previous: 0.0% Wachovia: -0.5%
Consensus: -0.8%
Housing Starts • Wednesday
Housing starts continued to move lower in September pushed by a 12 percent decline in single-family activity - the sharpest decline since late 2006. Building permits also continued to move lower, off 8.3 percent.
With the credit crunch continuing to pressure an already strained market, we expect housing starts to fall further in October to an annualized pace of 770K. While there are signs that residential construction is stabilizing, housing is unlikely to make a positive contribution to growth for several quarters as inventory levels of unsold and unoccupied homes remains elevated. The single-family market remains extremely weak and we expect this weakness to persist well into next year.
Previous: 817K Wachovia: 770K
Consensus: 780K
Global Review
It’s Official: Euro-zone Recession
Data released this week showed that real GDP in the Euro-zone declined 0.2 percent in the third quarter relative to the previous quarter, which translates into an annualized rate of decline of approximately 0.8 percent (see graph at left). If the unofficial definition of recession is two consecutive quarters of negative real GDP growth, then it seems apparent that the Euro-zone has slipped into recession.
Some individual countries in the Euro-zone released their individual GDP data this week. Among the largest individual economies the lone bright spot was France, where real GDP edged up at an annualized rate of 0.6 percent. Although investment spending posted its second consecutive quarterly decline, consumer spending continues to hold up reasonably well, growing at an annualized rate of 1.6 percent in the third quarter. However, the 7.1 percent rise in exports does not seem sustainable given weak growth in the rest of the world.
Indeed, most other Euro-zone economies, to which France sends about 60 percent of its exports, underperformed the French economy in the third quarter. Real GDP in the Netherlands was flat, and Spanish GDP fell at an annualized rate of 0.9 percent, the first contraction in the Spanish economy since at least 1995 (see top chart). In Italy, output fell at an annualized rate of 2.0 percent in the third quarter, which follows the 1.8 percent contraction in real GDP in the previous quarter.
The German economy turned out to be much weaker than previously thought. As shown in the middle chart, real GDP tumbled at an annualized rate of 2.1 percent in the third quarter, the sharpest decline since the first quarter of 1996. Although a breakdown of real GDP into its underlying demand components is not yet available, German statistical authorities said a big swing in net exports, induced by strong growth in gross imports and a sharp fall in gross exports, was partly responsible for the weakness in overall real GDP. The statistical authorities also said consumer spending rose during the quarter, which is somewhat surprising given the 1.6 percent annualized decline in real retail sales that occurred. Apparently, consumer spending on services held up fairly well in the third quarter.
A few months ago, the ECB thought that the most serious issue it faced was inflation. Indeed, the year-over-year rate of CPI inflation rose to 4.0 percent in both June and July, well above the two percent rate ECB policymakers consider to be consistent with price stability (see bottom chart). However, the ground has shifted underneath the ECB’s feet over the past few months. With the Euro-zone in recession and energy prices down sharply, inflation should be the least of the ECB’s worries at present.
The ECB joined other major central banks by cutting rates by 50 basis points on October 8, and reduced its policy rate by another 50 basis points last week. In our view, the ECB will take its policy rate down 150 basis points more by early next year as the recession deepens. As we discuss in our recent Monthly Economic Outlook, further ECB easing should cause the euro to trend lower versus the dollar in 2009.
Global Outlook
Japanese Real GDP • Monday
Real GDP in Japan declined at an annualized rate of 3.0 percent in the second quarter, the fastest rate of contraction since 2001. The consensus forecast anticipates that growth was roughly flat in the third quarter, but Japanese GDP is a bit of a black box so a range of outcomes is possible. In general, however, Japanese economic growth has clearly slowed over the last year, and it is hard to imagine Japan avoiding a downturn if many other major economies are in recession.
A few data releases next week will help investors determine the state of the Japanese economy in the current quarter. Data on department store sales print on Tuesday, and the merchandise trade balance in October will be announced on Thursday.
Previous: -3.0% (annualized rate)
Consensus: 0.1%
U.K. Retail Sales • Thursday
Real GDP in the United Kingdom tumbled at an annualized rate of 2.0 percent in the third quarter, the first quarter of negative growth since 1992. Unfortunately, a few more quarters of contraction seem likely. A widely watched manufacturing survey will print on Wednesday and data on retail spending in October, which is on the docket on Thursday, will give investors some insights into how the fourth quarter started.
Data on CPI inflation, which rose to a 16-year high of 5.2 percent in September, will print on Tuesday. However, the Bank of England recently forecasted that inflation will drop like a stone in the months ahead due to the collapse in energy prices and the incipient recession. Speaking of the Bank of England, the minutes of the November 6 policy meeting, at which the MPC slashed rates by 150 basis points, will be released on Wednesday. The minutes may give some clues about the stance of monetary policy going forward.
Previous: -0.4% (month-on-month)
Consensus: -0.8%
Euro-zone PMIs • Friday
As discussed in the main body of this report, data released this week showed that real GDP in the Euro-zone declined 0.2 percent (not annualized) in the third quarter. This contraction in overall GDP had already been signaled by the sharp decline in the manufacturing and service sector PMIs in recent months. The “flash” estimates of both indices will be released on Friday. If both indices decline further in November as the consensus forecasts anticipate, then it seems likely the recession is deepening in the current quarter.
The French economy expanded in the third quarter due in part to modest growth in consumption expenditures. Data on retail sales in October, which are slated for release on Friday, will offer some insights into the current state of consumer spending.
Previous Manufacturing PMI: 41.1 Consensus: 40.5
Previous Service PMI: 45.8 Consensus: 45.2
Point of View
Interest Rate Watch
Rates and Credit in a Recession
We expect persistently weak economic growth for this quarter and the first half of 2009. From this fundamental driver comes a view that inflation will not be a major issue in 2009. However Treasury deficits and corporate profits will raise investor concerns. In addition, we expect that weak economic growth will keep the Federal Reserve on hold and the funds rate below one percent for all of next year. Inflation concerns are just not a barrier to the Fed’s program of liquidity/credit supply to financial intermediaries.
With these fundamentals in place, what can we expect from interest rates? For Treasuries we expect continued low short rates with the two-year Treasury remaining between 1.6 and 2.0 percent for the next year. Historically, the two-year Treasury has served as a good benchmark for pricing private instruments but also as a proxy for expected future Fed funds rate moves. For us, we expect that the two-year will be consistent with no Fed moves but some upward pressure on rates as Treasury debt financing becomes a concern. We expect a steady rise in rates for 5, 10 & 30 year benchmark Treasuries as deficit financing concerns will weigh on investor demand. Credit: Trust in Short Supply
We expect that the recent improvement at the short end of the yield curve for private markets, such as LIBOR, will remain in place and improve along with further Fed easing. Credit availability is coming back into the market, at least for inter-bank lending, the worst of the credit problem may have passed - at least at the short-end of the curve. However, the credit channel from banks to borrowers will not improve as rapidly.
Topic of the Week
A Healthy Dose Of Reality
President Bush delivered a speech Thursday defending the virtues of capitalism. The notion that capitalism has to be defended is absurd to us. The capitalist, free-market system has increased the standard of living for more people than any other economic system ever devised or put in place. American-style capitalism, which has taken the brunt of criticism recently, has built the largest and most successful economy in world history. Countries which have adopted the U.S. system or moved toward it; including Japan, Korea, India and much of Eastern Europe, have rapidly achieved the greatest prosperity their nations have ever seen. Capitalism is not without its faults but its positives outweigh its negatives by a greater margin than any other system. Leaders from the G-20 countries will gather in Washington this weekend to discuss ways to increase transparency and reduce volatility in global markets and economies. There is no one silver bullet to solve the financial crisis or single way to rejuvenate global economic growth. The imbalances that have built up in the global economy, including the huge U.S. trade deficit and lack of strong domestic demand in many countries overseas, will need to be undone. Global economic growth will stagnate as these adjustments take place. Decisions made by the G-20 and policies adopted by member nations may soften the blow of this downturn but any sustained recovery in the U.S. and global economies will be driven by market forces not governments. The health and sustainability of the eventual recovery will be influenced by how far countries move away from the free-market system. The closer they stay to it, the stronger and more enduring any successive recovery is likely to be. Wachovia Corporation http://www.wachovia.com
Disclaimer: The information and opinions herein are for general information use only. Wachovia Corporation and its affiliates, including Wachovia Bank, N.A., do not guarantee their accuracy or completeness, nor does Wachovia Corporation or any of its affiliates, including Wachovia Bank, N.A., assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or any foreign exchange transaction, or as personalized investment advice. Securities and foreign exchange transactions are not FDIC-insured, are not bank-guaranteed, and may lose value.
US Dollar Strength May Be Tempered By Near-Term Resistance
Euro Forecast Dims on Euro Zone Recession Fears, Dow Tumbles
Japanese Yen May Rally Through GDP Numbers On Carry Flows
British Pound Could Forge New Lows As Rate And Growth Outlook Fail
The Swiss Franc At Major Support Levels, Is A Retrace In Store?
Canadian Dollar Sinks Further Against US Dollar on S&P Tumbles
Australian Dollar Looks to G-20 Summit, Risk Trends for Direction Cues
New Zealand Dollar To Test October Lows As Carry Demand Stalls
US Dollar Strength May Be Tempered By Near-Term Resistance
Fundamental Outlook for US Dollar: Bullish
Treasury Secretary Paulson announces that Troubled Asset Relief Program (TARP) will not buy troubled assets
US continuing jobless claims rise to most since December 1982, suggesting unemployment rate will climb even higher
US retail sales, import prices fall by the most on record during October
For weeks we've been discussing how risk appetite, or the lack of it, has been driving price action throughout the forex markets to the benefit of the lowest yielding major currencies: the US dollar and Japanese yen. The strength of the greenback has been all the more surprising given the dismal status of the US economy, but since the currency has managed to hold on to its status as a "safe haven” asset, fundamentals frankly do not matter at this juncture. Nevertheless, economic indicators are still worth watching since they have been impacting the US stock markets and will likely play into future rate decisions by the Federal Reserve.
Following comments from Fed Chairman Ben Bernanke, who said on Friday that "monetary policy actions have not resolved the ongoing strains in financial markets, including interbank funding markets…Central bankers and other policymakers around the world must continue to work together to address disruptions in credit markets and to promote a vibrant global economy,” Credit Suisse overnight index swaps are fully pricing in a 50bp reduction on December 16. News on November 19 may shake up these forecasts, though, as US CPI and the Federal Open Market Committee (FOMC) meeting minutes from October 29 will both hit the wires. At 8:30 ET, CPI is anticipated to plunge 0.8 percent during the month of October, which would mark the sharpest drop since 1949, while the annual measure is projected to slip to a 5-month low of 4.1 percent. However, the FOMC meeting minutes at 14:00 ET could draw more attention, especially if they highlight the downside risks to growth and declining inflation expectations. Since risk trends have been the primary driver of price action lately, it will likely be best to watch for the stock market's reaction as pessimistic turn in sentiment could lead equities lower, and thus lead the US dollar higher given their negative correlation.
From a technical perspective, the US dollar's trade-weighted index faces heavy resistance at 87.90/88.00, where the 78.6 percent fib of 92.63-70.67 looms. Meanwhile, EUR/USD has had difficultly breaking below 1.2400, suggesting that the US dollar may not be able to make significant headway in the near-term.
Euro Forecast Remains Dim on Euro Zone Recession Concerns
Fundamental Outlook for Euro: Bearish
US Dollar is Safe Haven of Choice, Rallies against Euro Despite Dismal US Data
Forex Positioning Proves Prescient in Predicting Euro Recovery, but What's Next?
View our monthly Euro-US Dollar Exchange Rate Forecast
Euro forecasts against the US Dollar took a turn for the worse on the week, as generally dismal European economic data and further losses in the US Dow Jones Industrials Average led to similar Euro/US Dollar weakness. Official confirmation that the German economy entered a technical recession through the third quarter suggested that the broader Euro Zone finds itself in a similarly weak position - forcing further deterioration in euro fundamental forecasts. Whether or not the Euro may recover against the stubbornly resurgent US Dollar will largely depend on whether global financial market conditions will improve through upcoming trade. The Euro and US Dollar find themselves inextricably linked to broader developments in risky asset classes.
Recent price swings in the Euro/US Dollar exchange rate have been almost purely a function of price action in global equity indices, and we expect that this will continue to be the case in the week ahead. Indeed, forex market reaction to historically market moving economic data has been anything but intuitive; currencies move according to equity market reactions to event risk. It is very difficult to predict how stocks may react to upcoming economic data, and overall bearish momentum suggests we can expect to see the Dow Jones and other major indices drop further through subsequent trade. Further equity market losses could easily lead to further losses in the Euro/US Dollar pair - leaving an overall bearish forecast for the Euro until we see sustained improvement in global risk sentiment.
The Euro may likewise react to any developments out of the much-anticipated G20 meeting over the weekend. Though markets are somewhat unsure of what to expect from the global economic summit, some alarmist forecasters have gone as far to suggest that global leaders could reinstate the Gold standard for currencies for the first time since 1971. Such suggestions seem outlandish to say the least, but we must nonetheless watch for key shifts in global economic policy following the meeting - especially as it relates to exchange rates. We will listen for noteworthy rhetoric from global leaders and take cues from equity market reactions to guide expectations for the Euro/US dollar price action. - DR
Japanese Yen May Rally Through GDP Numbers On Carry Flows
Fundamental Outlook for Japanese Yen: Bullish
Market Threatens To Revive Carry Unwinding As Recession Fears And Deleveraging Efforts Loom
Word Of A Chinese Bailout And The US Shifting Focus To The Consumers Can't Quell Fears
What Should We Expect From The Dollar - Japanese Yen Pair Over The Coming Month?
The vacillation in risk appetite has been constrained for most of November; but the steady rise in volatility and refocus on larger fundamental themes in the currency market promise breakouts and revived trends. Considering its sensitivity to fear and greed in the currency market, the Japanese yen will act as a barometer to market conditions in the week ahead. To start the week off, risk trends will look for any accelerants in the G20 meeting. Over the previous weekend, the group issued a statement that announced they were prepared to act "urgently” to fortify financial markets and global growth. As compelling as this may sound, verbal warnings have little sway over traders who know the market responds to unwavering economic and speculative trends. To turn such a prevalent force - even temporarily - officials will need to offer the market policy steps that show a global effort is genuinely being made to stabilize the worst recession and credit crisis since the Great Depression. Confidence in this event however is low as political barriers are significant while substantial efforts made so far (individual bailout plans, massive liquidity injections and sharp rate cuts) have yielded little so far. Expect promises for fiscal stimulus from all members, collaboration on international regulation and warnings that lending rates will be lowered further.
Should the G20 fall short in their efforts to revive lender and investor confidence, market conditions and the primary fundamental drivers underlying the market will swell. Though carry interest, equity markets and other risk-sensitive assets have stalled since the turn of the month, volatility has moved back towards record highs. Like a breakout in price action, one side of the market must give: congestion or volatility. The better probability is for breakouts to revive the dominate bear trend in yen crosses. The odds are clear when we consider the factors that brought us to this point: forecasts of an economic slump and a surge in risk aversion. Even conservative market regulators forecast a global recession; and data already suggests it will be far worse than a short-lived slump. As for risk trends, returns are naturally depressed when growth stalls and fear will be driven by the knowledge that far too much credit and leverage is still floating around the market.
Also, we should not ignore the top-tier event risk on the economic docket this week - even if it does have little impact on immediate price action. The first reading of 3Q GDP is scheduled for release early Monday morning in Tokyo. While risk aversion naturally diverts capital to the Japanese yen, eventually fear will abate; and when it does, investors will look to reallocate their capital into those economies that have ultimately recovered from the global economic recession first and with the least damage. If economists' expectations prove correct, Japan will be in good form. However, considering the country's dependence on foreign consumers and its long history as a net saver, these is little doubt, Japan will trail the inevitable rebound. The other event to watch will be the BoJ rate decision. There is little chance that the central bank will lower its rates again; but it will be interesting to see any comments made after the event. Unless they come up with a unique policy plan, the market will no doubt label the group effectively impotent in the ongoing crisis. - JK
British Pound Could Forge New Lows As Rate And Growth Outlook Fail
Fundamental Outlook for British Pound: Bearish
Pound Pushes To A Six Year Low Against Dollar After BoE's King Says He Won't Discount Bringing Rates To Zero
European Central Banks Face Tumbling Inflation Rates And Recessions By Readying The Markets For Further Rate Cuts
Read The DailyFX Monthly Forecast For GBPUSD For A Fundamental And Technical Outlook
While most of the currency market was consolidating this past week, the high volatility underlying the market led the fundamentally weak British pound to push new lows. And, considering the outlook for growth and interest rates, the immediate future looks bleak for this once high-flying currency. The first concern for traders as the economic winds pick up next week will be the outlook the interest rates. Up until a few weeks ago, one of the few things the sterling had going for it was the expectations that the global recession would be short-lived and the return of risk appetite to the market would find a relatively high benchmark lending rate in the UK. However, interest rate expectations have quickly turned from boon to burden for this European economy. After the Bank of England surprised the market with a massive 150 basis point rate cut two weeks ago, any hopes that the currency would benefit from a reversal in yield appetite quickly diminished. After BoE Governor Mervyn King acknowledged he would not rule out lowering interest rates to zero to restore order to the economy and markets, speculators recognized the full scope for policy easing going forward.
However, looking to Credit Suisse overnight index swaps, we can see that only 100 basis points of additional easing are priced in over the coming 12 months. This highlights a significant imbalance between what the market is projecting and how aggressive the MPC may actually be should conditions worsen with time. A fundamental divergence of this magnitude opens the pound to significant moves as these split expectations converge into one reality. The minutes scheduled for release on Wednesday will be instrumental in driving forecasts one way or the other. The vote will be of upmost importance. Lowering the benchmark lending rate as aggressively as the BoE did to a 53-year low could not have been made easily and debate over this move's efficacy is expected. Noting the extreme: if all nine MPC members voted for the massive rate cut, it would clear the way for further, aggressive rate cuts going forward.
Aside from the vagaries of rate speculation, the economic calendar will give a more definite read on the factors that policy officials will consider when voting in future meetings. Inflation will take a play a key role in defining the scope for further cuts. Before the BoE was set its recent pace of loosening monetary policy, Governor King ironically quipped that he expected to write a number of letters to Chancellor of the Exchequer Darling explaining why inflation was so high and what would be do to tame it. While statements made by central bankers suggest they have moved on expectations of a collapse in price growth (their primary mandate for policy), they have yet to see confirmation of this yet. Should, CPI (the primary gauge for inflation) drop more sharply than expected in its October reading, it would open the door wide open to further gouges in the benchmark lending rate. The longer-term concern, however, will be in the eventual rebound in economic activity. A drop in the cost of living will help to offset the sharp decline in employment and wages expected for the coming months. And, the rest of the economic calendar will make sure to concentrate fears over growth. Housing, industrial trends, consumer spending and public borrowing readings promise nothing more provide additional confirmation that this evolving recession will be far worse than the slump of 1992. - JK
The Swiss Franc At Major Support Levels, Is A Retrace In Store?
Fundamental Outlook for Swiss Franc: Bearish
Consumer confidence in Switzerland fell to its lowest level since 2003 at -27 from -17 in July, According to the SECO
ZEW survey rose to -88.5 from -91.1 as investor confidence rose as central banks stepped in to help the economy.
The Swiss Franc resembled its traditional form to end the week as a bullish spike in equity markets sent the typically safe haven currency lower against the dollar. The move would sent the USD/CHF above the 1.2000 price level for the first time since September, 2007, its high of 1.2002 would have it break the 200-Day SMA. This would be the first time it breached this significant technical level since October 20,2006 and may prove to be a formidable obstacle. Swiss fundamental data typically doesn't impact price action, yet the slight improvement in investor confidence could be a sign of improving global confidence, which could add to Franc weakness, and the historic drop I consume confidence will lower the outlook fro domestic growth.
Swiss retail sales and the trade balance will dot the economic calendar during the week and may provide some event risk as they may give traders a clue to the possible interest rate direction for the SNB. Given that the BoE has begun aggressively cutting interest rates and the ECB is expected to continue easing, we may see the Swiss central bank follow their lead as they did when they surprised markets with their coordinated effort. A decline in consumer consumption and exports would leave the country without any avenues of growth. The export driven nation has seen the impact of the credit crisis weigh on demand for its products which has sent it into a recession along with its European counterparts. Therefore, another rate cut is very likely at their December policy meeting which could extend the Franc's losses against the dollar. If we see a clean break above the technical levels of the 200-Day SMA at 1.1964 and 1.200, that would leave the June 22, 2007 high of 1.2430 as the next level of resistance. -JR
Canadian Dollar Sinks Further Against US Dollar on S&P Tumbles
Fundamental Outlook for Canadian Dollar: Bearish
Canadian Dollar Loses Luster Despite Jump in Commodities - Why?
US Dollar/Canadian Dollar Technical Outlook Points Towards 1.3025
View our monthly US Dollar - Canadian Dollar Exchange Rate Forecast
Subsequent forecasts for the future of the US Dollar/Canadian Dollar exchange rate will largely depend on outlook for commodity prices and global equity indices. Given that oil and other key commodity costs have been trading off of broader financial market risk sentiment, it is perhaps unsurprising to note that the Loonie has remained especially sensitive to equity market declines. As such, we will watch for stock market reactions to key US economic event risk in the week ahead. Wednesday will bring a combination of US housing, inflation, and Federal Reserve Open Market meeting minutes - likely to force noteworthy reactions out of US and Canadian equity indices. Forex traders will likewise watch for noteworthy developments out of the weekend's G20 summit and subsequent reactions out of global risky asset classes.
It remains especially difficult to predict USD/CAD price action through shorter time frames, but overall momentum continues to support US Dollar Strength and Canadian Dollar weakness through longer-term trade. - DR
Australian Dollar Looks to G-20 Summit, Risk Trends for Direction Cues
Fundamental Outlook for Australian Dollar: Bearish
Business Confidence fell to the lowest in 11 years, says National Australia Bank
Westpac Consumer Confidence rebounds in November on rate cuts, fiscal boost
RBA slashes GDP growth forecasts, signals more interest rate cuts
The Australian Dollar will again find itself at the mercy of risk sentiment as a light economic calendar is unlikely to produce a catalyst to derail the priced-in fundamental outlook familiar to forex traders. The Retail Sales reading is expected to see receipts correct a bit to grow 0.4% in the third quarter versus a -0.6% contraction in the three months through June. Still, traders are likely to take the improvement with a grain of salt with the pace of sales growth slower by close to 80% from a year before. Economic slowdown is likely to be equally on display in September's Westpac Leading Index figure. The release matched a 5-year low in August, suggesting the economy was growing at an annualized rate of just 2.5% (as compared to the trend average at 4%). Economists' forecasts suggest the pace of annual growth slowed to a near-standstill reading at 0.4% by the end of the third quarter. Motor Vehicle Sales too is likely to extend loses in October as the shaky economy and limited credit access steers consumers away from big-ticket purchases. On balance, these releases collectively point to substantially more monetary easing ahead for the larger antipodean country (as is sure to be telegraphed in the release of the minutes from the last RBA policy meeting). Looking at overnight index swaps, the markets are pricing in a 0.75 to 1.0 percent rate cut at the RBA's next meeting in December with a total of 150-175 basis points in easing over the next 12 months.
All told, the data docket is set up to add to but not meaningfully alter the established outlook for the Australian economy. The upcoming G-20 summit holds far more market-moving potential. The heads of state from the world's top 20 economies are set to meet in Washington, DC over the weekend to hash out a joint plan for dealing with what the International Monetary Fund is forecasting to be a global recession of a magnitude unseen since the Second World War. A preliminary meeting of the G-20 finance ministers in San Paolo, Brazil last week issued a statement urging countries to use "all their policy flexibility, [including] monetary and fiscal policy.” The action plan (or lack thereof) that will emerge at the beginning of next week will be instrumental in shaping risk appetite going forward: if the markets find the outcome favorable, the Australian Dollar will have room to rise as traders re-establish exposure to risky assets; otherwise, the Aussie will again fall victim to the US Dollar and the Japanese Yen. The technical outlook cautiously favors the former scenario, with AUDUSD showing an inverted Head and Shoulders chart formation and positive divergence with the RSI oscillator.
New Zealand Dollar To Test October Lows As Carry Demand Stalls
Fundamental Outlook For New Zealand Dollar: Bearish
Retail spending in New Zealand Contracts for Third Consecutive Quarter
Dour Fundamentals Forecasts Ongoing Weakness in Carry Trades
The New Zealand dollar fell against the greenback for three consecutive sessions this week, and may fall back towards the October lows next week as investors continue to curb their appetite for risk. Tightening demands for carry trades paired with lower commodity prices favors a bearish outlook for the New Zealand dollar, and the kiwi is likely to face increased selling pressures over the coming week as fears of a global recession intensify. Falling commodity prices dragged the Jefferies/Reuters CRB index to its lowest level since 2003, and slowing demands from the global economy suggests that prices will continue to fall lower, which would only stoke increased selling pressures for the commodity bloc over the near-term.
The event risks scheduled for the following week will also play an key role in driving price action for the high-yielding currency as deteriorating fundamentals continues to spur bets that the Reserve Bank of New Zealand will aggressively cut borrowing costs well into the next year in order to avoid a deep and severe recession. RBNZ Governor Alan Bollard reiterated this week that New Zealand is in a 'period of slow growth,' and went on to say that household consumption is likely to deteriorate over the coming months as growth prospects deteriorate. Dr. Bollard noted that the government may establish a fiscal stimulus package in order to 'stabilize the economy throughout the downturn,' which suggests that policymakers are looking to increase their efforts as the downside risks to growth intensify. Moreover, Credit Suisse overnight index swaps continues to reflect a bearish outlook for the New Zealand dollar as market participants raised bets that the RBNZ will lower the benchmark interest rate by at least 175bp over the next 12 months amid expectations for 150bp worth of projected cuts last week.
Meanwhile, the G20 Summit in Washington D.C. scheduled for the weakened could stoke increased volatility in the currency market next week as global leaders meet to respond to the financial crisis, and may help to ease fears of a global meltdown. However, the absence of President-elect Barack Obama suggests that the group is less likely to agree on any long-term commitments at the meeting, and may not reach a sound solution until Senator Obama comes into office next year. As a result, the event may fail to spark volatility in the currency market as the fundamental outlook for the global economy turns increasingly bleak. - DS DailyFX Disclaimer Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.
Background
The Jobless Claims Report is a weekly release that shows the number of first-time (initial) filings for state jobless claims nationwide. The data is seasonally adjusted, as certain times of the year are known for above-average hiring for temporary work (harvesting, holidays).
Due to the short sample period, week-to-week results can be volatile, so reported results are most often headlined as a four-week moving average, so that each week's release is the average of the four prior jobless claims reports. The release will show which states have had the biggest changes in claims from the previous week; the revised edition shows up about a week later, at which time a full breakdown by state and U.S. territory is available.
Also released with this report are the relatively minor data points of the insured unemployment rate and the total unemployed persons. These are not seen as valuable indicators because the total unemployed figure tends to stay relatively constant week to week.
What it Means for Investors New jobless claims for the week reflect an up-to-the-minute account of who is leaving work unexpectedly, reflecting the "run rate" of the economy's health with little lag time. The Jobless Claims Report gets a lot of press due to its simplicity and the theory that the healthier the job market, the healthier the economy: more people working means more disposable income, which leads to higher personal consumption and gross domestic product (GDP).
The fact that jobless claims are released weekly is both a blessing and a curse for investors; sometimes the markets will take a mid-month jobless claims report and react strongly to it, particularly if it shows a difference from the cumulative evidence of other recent indicators. For instance, if other indicators are showing a weakening economy, a surprise drop in jobless claims could slow down equity sellers and could actually lift stocks, even if only because there isn't any other more recent data to chew on.
A favorable Jobless Claims Report can also get lost in the shuffle of a busy news day, and hardly be noticed by Wall Street at all. The biggest factor week to week is how unsure investors are about the future direction of the economy.
Most economists agree that a sustained change (as shown in the moving averages) of 30,000 claims or more is the benchmark for real job growth or job loss in the economy. Anything less is deemed statistically insignificant by most market analysts.
Strengths:
Weekly reporting provides for timely, almost real-time snapshots.
As a tightly-presented release, investors can easily pick up the raw release and quickly apply the information to market decisions.
Initial claims are provided gross and net of seasonal adjustments, and give a breakdown for every state's individual results.
Some states' figures are shown along with a comment from that state's reporting agency regarding specific industries in which noteworthy activity is happening, such as "fewer layoffs in the industrial machinery industry".
Weaknesses:
Summer and other seasonal employment tends to skew the results.
Highly volatile - revisions to advance report can be very big on a percentage basis
Jobless claims in isolation tell little about the overall state of the economy.
No industry breakdowns are provided, just the national figure.
Financial Markets Summary For The Week of November 10-14 2008
The week ahead in financial markets will see a modest quantity of data that will hit the tapes largely on Thursday and Friday. The major market moving events will be the Friday release of the October advance retail sales data and the Thursday release of the US Trade Balance, Jobless Claims and the US Budget Statement. On Friday in Frankfurt Germany, Fed Chair Bernanke and ECB President Trichet will lead a cast of global central banking all-stars that will address monetary policy within the current global financial crisis.
Fed Talk
The week in Fed talk will see Ben Bernanke and ECB President Jean-Claude Trichet speak as part of a panel discussion on monetary policy at a conference hosted by the ECB in Frankfurt, Germany. Bank of Israel Gov. Fisher, People's Bank of China Deputy Gov. Su Ning and Banco de Mexico Gov. Ortiz will also participate on the panel on Friday November 14. The week will kickoff with Treasury's interim assistant secretary for financial stability Neel Kashkari addressing the troubled asset relief program on Monday. Minneapolis FRB President Stern will speak on both Wednesday and Thursday, topics TBA. Thursday will see Philadelphia Fed FRB President Plosser speak on the economic outlook. US Trade Balance (September) Thursday 08:30 AM
The trade balance for September should see one final month of solid gains on the back what was still decent demand from the external sector for US goods and services. Our forecast implies a decline in the deficit to $57.4bln for the final month of the third quarter. Across purchasing managers surveys, demand from the external sector held up rather well all things considered, and even the disappointing factory orders for the month, saw a pick up in orders for farm machinery that almost surely was a function of demand from abroad. On a real basis, the fall in the cost of imported oil will drive the real goods balance and the ex-petroleum component towards lows not seen in recent years. Jobless Claims (Week Ending November 8) Thursday 08:30 AM
The week ending November 8 should see another increase in continuing claims that should push the tally towards 3.90mln and the headline should increase to 485K. With the impact of the Gulf Coast hurricanes moving out of the series, the underlying trend should continue its slow march towards 500k. The primary focus of our analysis continues to be the fact that unemployed workers are facing a deteriorating labor market which is necessitating a much longer stay on the benefits rolls for a much longer period of time. US Budget Statement (October) Thursday 10:00 AM
Given the extraordinary response of the federal government outlays to address the financial crisis and the sharp deceleration in overall economic activity have created the conditions whereby the market should ready itself for a fiscal year of unusually sharp increases in the operating deficit. Of particular importance will be the pace of decline in the total receipts, which were down -1.7% year over year through the end of the fiscal year 2008. We anticipate a swing from the $45.72bln surplus in September to a -$125bln deficit in October. Import Price Index (October) Thursday 08:30 AM
The decline in commodity prices during the month of October was the worst single monthly performance in nearly 52 years. This development should underlie a third straight month of declines in inflation via the import channel. Our forecast implies a decline of -4.2% on a monthly. On an annual basis, we expect to observe an increase of 12.62%, down from the 14.5% posted in September. Advance Retail Sales (October) Friday 08:30 AM
The 3.1% contraction in real personal consumption in the third quarter of 2008 provides a vivid illustration of the consumer led recession that still has some miles to go before it reaches its completion. Consumers are in the process of building up cash reserves for the trouble ahead and the near death spiral in auto sales provides a fair amount of insight into what we expect to see in the rate of personal consumption in the near term. We anticipate that the nadir for the current contraction in overall economic output will be the final quarter of 2008 and we expect to see that demonstrated in the advance retail sales data. Our forecast implies that retail sales will see a -2.2% decline month over month and the core ex auto, will fall -1.4% over that same interval. University of Michigan Consumer Sentiment Survey (November) Friday 10:00 AM
Given the recent turbulence in financial markets, the acceleration of job cuts and the ongoing tightening of credit should combine to send the preliminary estimate of consume sentiment to recent lows in the survey. We think that the real problems in the economy and the concern over the trajectory of unemployment will outweigh the election of a new US President and the fall in gasoline prices and consumer sentiment should fall to 54. Business Inventories (September) Friday 10:00 AM
One of the troubling developments that have accompanied the decline in real personal consumption has been the in increase in inventory to sales ratios in the macro data of late. The inventory ratio inside the August business inventories report stands at 1.27 months, which is exactly where it stood one year ago, before the market observed a inventory inspired contraction in overall output. The context of the current ratio of inventory to sales, is that of a contraction in real personal consumption and is one of the factors behind our very bearish estimate of a decline in overall growth in the fourth quarter of -4.1%. We expect to see business inventories increase 0.2% in September, followed by a significant period of constrained growth in inventories.
Joseph Brusuelas
Chief Economist
Merk Investments http://www.merkfund.com/
The views in this article were those of Axel Merk as of the newsletter's publication date and may not reflect his views at any time thereafter. These views and opinions should not be construed as investment advice nor considered as an offer to sell or a solicitation of an offer to buy shares of any securities mentioned herein. Mr. Merk is the founder and president of Merk Investments LLC and is the portfolio manager for the Merk Hard Currency Fund. Foreside Fund Services, LLC, distributor.
EURUSD: Break Of The 1.5298 Level Or The 1.2330 Level To Trigger Directional Moves.
GBPUSD: Failure At The 1.6673 Level To Yield Losses Towards Its YTD Low at 1.5265.
USDJPY: Corrective Recovery Off The 90.91 Level Loses Momentum.
EURUSD
While EUR remains trapped between the 1.3298 level, its Oct 30'08 high and the 1.2330 level, its YTD low, medium term decline off the 1.6038 high remains on hold. This now puts the pair on a consolidation to sideways path until meaningful directional moves is activated through a break either way(1.2330 or 1.3298).The entire G10 currency complex and our 7 currency model with the exception of USDJPY remains in corrective phases suggesting that on ending those corrective recoveries the various pairs should resume their primary trends.EUR is in alignment with this view and the 1.2330 and beyond are expected to be tested and finally broken to resume its medium term decline towards the 1.2134 level, its .50 Ret (its 0.8231-1.6038 high, monthly chart) ahead of the 1.1827 level, its Mar'06 low and subsequently its Nov'05 low at 1.1640.Resistance is initially located at 1.3116 level, representing its Nov 05'08 high where a break higher could target the 1.3259/98 level, its Oct 10'08 low/Oct 30'08 high. This is the location of its current range top and decisively clearing there will set the pay up for a run at the 1.3666 level, its Dec'04 high.On the whole, we still retain our medium term bearish bias and expect the pair to head to the downside after completing its corrective price activities. Directional Bias:
Nearer Term -Mixed
Short Term -Bearish
Medium Term -Bearish
Performance in %:
Past Week: +0.29%
Past Month: -5.03%
Past Quarter: -9.87%
Year To Date: -12.50%
Weekly Range:
High -1.3116
Low -1.2527
GBPUSD
GBP ended the week lower reversing most of its previous week gains to close week at 1.5534. This is a fall out from its failure at the 1.6673 level, its 0ct 30'08 high followed with the formation of an evening star candle pattern (top reversal signal) and subsequent declines through layers of support. We have our eyes on a test and break of the 1.5265 level, its YTD low to resume its medium to long term weakness started at the 2.1161 level towards the 1.5219 level, its Oct'02 low followed by the 1.4837 level, its Oct 2001 high and possibly beyond. Daily studies remain supportive of this view. In case of a build up on its Friday gains, we could see a recovery higher targeting its psycho level at 1.6000 followed by the 1.6347 level, its Oct 23'08 high and later the 1.6673 level, its 0ct 30'08 high. Another resistance lies at the 1.6786 level, its Oct 10'08 on invalidating the latter. All in all, having maintained its declines off the 1.6673, GBP now looks for a break and close below its YTD low at 1.5265 to trigger the resumption of its medium to longer term decline which is presently on hold. Directional Bias:
Nearer Term -Bearish
Short Term -Bearish
Medium Term -Bearish
Performance in %:
Past Week: -2.51%
Past Month: -9.84%
Past Quarter: -10.54%
Year To Date: -21.07%
Weekly Range:
High -1.6399
Low -1.5534
USDJPY
The pair's inability to extend corrective recovery off the 90.91 through its psycho level/.50 Ret (110.67-90.91 decline) at 100.00/84 has now increased the odds of lower prices towards the 95.75 level, its Mar'08 low ahead of its bigger support at its YTD low at 90.91.Below here will turn focus to the 86.52 level, its 1.618 Fib Ext and the our longer term support resting at the 79.70 level, its April'1995 low. This view is consistent with its medium term decline started at the 110.67 high.Alternatively, to invalidate the above view, the pair will have to break and close above the 100.00/84 resistance levels to signal further upside recovery gains towards its Oct 20'08 high at 102.42 ahead of its Oct 14'08 high at 103.07.On the whole, we maintain our bearish medium term outlook on USDJPY and envisage the resumption of that trend at the end of the present corrective recovery. Directional Bias:
Nearer Term -Mixed
Short Term -Bearish
Medium Term -Bearish
Performance in %:
Past Week: -0.14%
Past Month: -7.12%
Past Quarter: -0.03%
Year To Date -12.00%
Weekly Range:
High -100.55
Low -96.76
Weekly Chart: USDJPY
Mohammed Isah
Market Analyst www.fxtechstrategy.com
This report is prepared solely for information and data purposes. Opinions, estimates and projections contained herein are the author's own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness and neither the information nor the forecast shall be taken as a representation for which the author incur any responsibility. The does not accept any liability whatsoever for any loss arising from any use of this report or its contents. This report is not construed as an offer to sell or solicitation of any offer to buy any of the currencies referred to in this report
Background There is a simultaneous release of the Industrial Production and Capacity Utilization reports.
Industrial production figures are based on the monthly raw volume of goods produced by industrial firms such as factories, mines and electric utilities in the United States. Also included in the industrial poduction figures are the businesses of newspaper, periodical and book publishing, traditionally labeled as manufacturing.
The industrial production data is used in conjunction with various industry capacity estimates to calculate capacity utilization ratios for each line of business, with a base year used as a benchmark level of 100% (currently 2002). Aggregate utilization ratios are also provided for areas such as total manufacturing and total high-tech production
The industrial production and related capacity utilization figures are considered coincident indicators, meaning that changes in the levels of these indicators usually reflect similar changes in overall economic activity, and therefore gross domestic product (GDP). The release will show percentage changes on month-to-month and year-over-year levels, shedding light on short-term rates of change and business cycle growth, respectively.
The Federal Reserve watches this figure closely because it understands that inflation shows itself first at the industrial level, when supplies of basic materials get tight - either for their manufacturers or for the corporate clients who buy them. Rises in the cost of commodities and materials will begin to get passed on down the line, ending up with individual consumers of higher-cost finished products.
Also, the industrial sector exhibits the most volatility in terms of nominal output during a business cycle peak to trough. As a result, big changes here have been a historical forecaster of business cycle inflection points.
What it Means for Investors: Capacity utilization levels, although technically upper bound by 100%, don't approach this value. Utilization levels above 82-85% are seen as "tight" and forecast price increases or supply shortages in the near future. Levels below 80% mean there is some slack in the economy, which could lead to recession worries and employment losses.
As with many indicators, Wall Street will have a perceived "consensus number" before the release - if the difference is larger than expected, stock and bond markets will react in the short term. A higher-than-expected number during a time of economic expansion will cause inflationary fears. If the economy is lagging, an upside surprise in the release could trigger the purchase of equities on the hope of a turnaround. The reverse is also true; lower-than-expected numbers during a time when fears of economic overheating already exist could provide a short-term lift to stock and bond prices.
This report can be used to see what specific areas of industrial production are doing better than others. This can lead investors to an analysis of supply chains and which sectors could be benefiting - or suffering - based on the trends in industrial production.
Strengths:
Sector breakdown allows for inspection of the relative performance of many lines of business, such as electronics, chemicals and basic metals.
Press releases will include valuable analysis, which removes overly volatile components to provide a more relevant trendline and puts current numbers into perspective.
A timely indicator that is released only weeks after data is measured
Weaknesses:
It only deals with physical goods-producing industries, which make up less than half of economic output. Services, as well as construction production, are not included.
The capacity numbers are drawn from many different sources, and sometimes pure estimates are used when no information is available
Historical comparisons are made difficult by heavy transition of component industries, as well as the changing demographics of U.S. output as a whole (manufacturing output is in a constant decline as a % of GNP).
The Closing Line This report is declining in its level of importance as the years pass; the United States is simply not the huge industrial power it once was. The position of manufacturing in the economic food chain is the highlight of the report, and inflection points in the economy are often confirmed with big changes in this report.
