EU Commissioner Almunia: Econ Fundamentals Still Good -2-
Almunia said he hoped that the impact on growth this year "will not be seriously affected."
However, "If tightening credit goes beyond a certain limit, it will have consequences over the medium term," Almunia said, adding that he was referring to "2008 and beyond."
Almunia noted that the credit jitters were "not a surprise" as the European Central Bank President Jean-Claude Trichet had been warning that risk appeared to be mispriced since very early this year.
The impact of tighter credit - short-term interest rates are up around 60 basis points over the past two months - and possible dents to confidence have "still to be measured," he said.
The cause of the current liquidity crunch - distrust between banks that may be exposed to complex debt-linked derivatives - means there is a "need to look at supervision instruments," he said.
E.U. authorities will also need to look at the "function of rating agencies," he added. Policies to better protect investors in an era of increasingly sophisticated products are also in order, he said.
Almunia also expressed confidence European economies could withstand a U.S. economic slowdown. The direct impact of such a slowdown "is not as big as some think," he said.
Europe, and the 13-member euro zone, can achieve "sustained growth based on internal demand," he said.
Strong demand from emerging markets is also a plus, he added.
He also said he didn't expect domestic demand from Spain - which has contributed a third of euro-zone demand growth in recent years despite accounting for only around a tenth of its economic size - to falter.
Spain has a house price and construction boom, as well as a current account deficit, far larger than that of the U.S.
Recent data show Spanish internal demand "continues to be in a good mood," he said. "So even if the Spanish housing sector is decelerating, I don't expect a major impact. I really don't," said Almunia, a Spaniard himself.
He also said that Tuesday's interim forecasts would, when released, cast light on how the E.U. expects German domestic demand to evolve. German private consumption has lagged dramatically since 2000, although there has been a rebound in investments in the past 12 to 18 months, he said.
Almunia also said he hoped that Italy would exit from the E.C.'s excessive deficit procedure early next year.
He said that politicians in Rome would have to exercise "extreme care ... not to worsen the fiscal position" amid doubts about the effects of the current market turbulence.
Interest rates are going up, he added, noting that this makes coping with Italy's large public debt - around 106% of gross domestic product - an "even bigger challenges than a few months ago."
The current Italian government raised personal income taxes last year and is expected to bring the budget deficit below the euro zone's 3.0%-of-GDP limit this year. However, the fiscal reform is expected to push overall public spending above 50% of GDP next year, a level that has business leaders on a war footing and demanding tax cuts.
Numerous and rigid public-sector cost centers, including multiple layers of local administrations, along with squabbling political coalitions, mean "this country is ungovernable," said Luca Cordero di Montezemolo, president of Italy's Confindustria business lobby, who is calling for lower corporate tax rates.
"Resources are being used without thinking about investments," Montezemolo said earlier Saturday in Cernobbio.
Saturday, September 8, 2007
EU Commissioner Almunia: Econ Fundamentals Still Good
European Commissioner for Economic and Monetary Affairs Joaquin Almunia on Saturday said that the fundamentals of the European Union economy are still good.
It is too early to tell what type of impact recent turbulence in short-term money markets has had, he added.
The European Commission is trying to "assess how big the downside risks are to its central scenario for growth, which continues to be good," Almunia said.
Almunia will present interim forecasts growth and inflation on Tuesday, Sept. 11
It is too early to tell what type of impact recent turbulence in short-term money markets has had, he added.
The European Commission is trying to "assess how big the downside risks are to its central scenario for growth, which continues to be good," Almunia said.
Almunia will present interim forecasts growth and inflation on Tuesday, Sept. 11
TFN NEWS BRIEFING: Macroeconomics highlights to 10:10 BST
WASHINGTON -- Federal Reserve reports on consumer credit for July, 3 p.m.;
Treasury bill auction, 2 p.m.
Treasury bill auction, 2 p.m.
Malaysia 2nd Fin Min: No Domestic Threats To GDP Target
After unveiling Malaysia's 2008 budget Friday, the government is confident that there are no domestic threats to its gross domestic product growth target, said its second finance minister at a briefing Saturday.
"There is no threat whatsoever to the growth target coming from the domestic sector," Nor Mohamed Yakcop told reporters.
Only the external environment remains an unknown, he said, referring to the ongoing U.S. subprime-market turmoil and accompanying credit crunch.
The Malaysian government forecasts GDP growth at 6% for 2007, and a range of 6% to 6.5% for 2008, led by consumer spending and higher international demand for commodities, it said in its Economic Survey on Friday.
Its one percentage point cut in corporate tax to 25% in 2009 from 26% in 2008 will mean a 900 million Malaysian ringgit ($256.9 million) lossin tax revenue for the government, Nor Mohamed said, but the government is "confident" that higher tax revenue from company earnings growth - including that from state-owned oil and gas company Petroliam Nasional Bhd. - will keep its GDP growth target intact.
Also, there aren't any plans currently to raise domestic fuel prices in 2008, and interest rates "will continue to be accommodative for growth," Nor Mohamed said.
Malaysia has kept its key overnight policy rate at 3.50% so far this year, and has only two more monetary policy committee meetings remaining in 2007.
"We don't see a big gyration in interest rates at this point in time," Nor Mohamed said
"There is no threat whatsoever to the growth target coming from the domestic sector," Nor Mohamed Yakcop told reporters.
Only the external environment remains an unknown, he said, referring to the ongoing U.S. subprime-market turmoil and accompanying credit crunch.
The Malaysian government forecasts GDP growth at 6% for 2007, and a range of 6% to 6.5% for 2008, led by consumer spending and higher international demand for commodities, it said in its Economic Survey on Friday.
Its one percentage point cut in corporate tax to 25% in 2009 from 26% in 2008 will mean a 900 million Malaysian ringgit ($256.9 million) lossin tax revenue for the government, Nor Mohamed said, but the government is "confident" that higher tax revenue from company earnings growth - including that from state-owned oil and gas company Petroliam Nasional Bhd. - will keep its GDP growth target intact.
Also, there aren't any plans currently to raise domestic fuel prices in 2008, and interest rates "will continue to be accommodative for growth," Nor Mohamed said.
Malaysia has kept its key overnight policy rate at 3.50% so far this year, and has only two more monetary policy committee meetings remaining in 2007.
"We don't see a big gyration in interest rates at this point in time," Nor Mohamed said
Business Events for the Coming Week
WASHINGTON -- Federal Reserve reports on consumer credit for July, 3 p.m.; Treasury bill auction, 2 p.m.
TUESDAY, Sept. 11
WASHINGTON -- Commerce Department reports on international trade for July, 8:30 a.m.
WEDNESDAY, Sept. 12
Nothing scheduled.
THURSDAY, Sept. 13
WASHINGTON -- Labor Department reports on weekly jobless claims, 8:30 a.m.; Treasury reports on federal budget for August, 2 p.m.; Freddie Mac, the mortgage company, reports on mortgage rates.
FRIDAY, Sept. 14
WASHINGTON -- Commerce Department reports on retail sales for August, 8:30 a.m.; Commerce Department reports on current account, second quarter, 8:30 a.m.; Federal Reserve reports on industrial production for August, 9:15 a.m.; Commerce Department reports on business inventories for July, 10 a.m.
DETROIT -- United Auto Workers' national contracts with the Detroit Three domestic automakers expire.
TUESDAY, Sept. 11
WASHINGTON -- Commerce Department reports on international trade for July, 8:30 a.m.
WEDNESDAY, Sept. 12
Nothing scheduled.
THURSDAY, Sept. 13
WASHINGTON -- Labor Department reports on weekly jobless claims, 8:30 a.m.; Treasury reports on federal budget for August, 2 p.m.; Freddie Mac, the mortgage company, reports on mortgage rates.
FRIDAY, Sept. 14
WASHINGTON -- Commerce Department reports on retail sales for August, 8:30 a.m.; Commerce Department reports on current account, second quarter, 8:30 a.m.; Federal Reserve reports on industrial production for August, 9:15 a.m.; Commerce Department reports on business inventories for July, 10 a.m.
DETROIT -- United Auto Workers' national contracts with the Detroit Three domestic automakers expire.
AT A GLANCE: US Jobs Data Put Pressure On Fed To Cut Rates
AT A GLANCE: US Jobs Data Put Pressure On Fed To Cut Rates
THE EVENT
U.S. employment fell Friday for the first time in four years in August on steep drops in construction and manufacturing payrolls. Non-farm payrolls fell 4,000 in August, the first decline since August 2003, the Labor Department said. Economists had expected a gain of 112,000 payrolls. Previous reports were revised sharply lower. The unemployment rate was unchanged at 4.6%, as expected.
THE ANALYSIS
The report suggests that the housing recession is starting to grip the broader economy. It puts added pressure on Federal Reserve officials to aggressively cut interest rates, starting with its policy meeting on Sept. 18.
Financial markets expect a slew of fed funds rate cuts beyond this month - as much as 100 basis points in total by year end - to stem the recent credit crunch and its potential economic effect. That view seems supported by the jobs report.
Indeed, with job conditions clearly eroding, consumers risk losing a key source of support, though robust back-to-school sales reports and better-than-expected automobile sales for August suggest spending continues to grow. Consumer spending makes up two-thirds of economic output.
MARKET REACTION
As stocks fell on fears of a recession Friday, Harley-Davidson plunged on a production pullback, Office Depot dropped on estimate reductions but VeriFone Holdings advanced on a strong outlook. The Dow Jones Industrial Average lost 249.97, or 1.9%, to 13113.38, as 29 of 30 members fell. For the week, the Dow lost 244.36, or 1.8%, its biggest weekly drop since the end of July. The Nasdaq Composite Index fell 48.62, or 1.9%, to 2565.70. For the week, the Nasdaq lost 30.66, or 1.2%, its first drop in three weeks. The Standard & Poor's 500 Index fell 25, or 1.7%, to 1453.55. For the week, the S&P 500 fell 20.44, or 1.4%, its biggest weekly decline in a month.
A far weaker-than-expected U.S. August employment report sent Treasury prices - and expectations for a fed funds rate cut - sharply higher Friday. The 10-year yield fell below its one-year low of 4.44%. At 3 p.m. EDT, the 10-year yield was 4.37%. The two-year yield also fell below its key 4% level, ending at a two-year low level of 3.90%.
The dollar fell sharply Friday as a dismal U.S. employment report for August set the stage for cuts in U.S. interest rates and touched off an across-the-board sell-off of the U.S. currency. Late afternoon, the euro was at $1.3769 up from $1.3686 late Thursday, while the dollar was at Y113.37, down from Y115.36, according to EBS. The euro was at Y156.10, down from Y157.93 late Thursday. The U.K. pound was at $2.0279, up from $2.0233, while the dollar was quoted at CHF1.1876, down from CHF1.2014 late Thursday.
WHAT THEY SAID
=NEWSWIRES SURVEY:Fed To Ease 3 Times, To 4.50% Yr-End
Wall Street banks have ratcheted up again the amount of Federal Reserve easing they expect in coming months, with the central bank now seen cutting rates at each of its three remaining 2007 meetings. Amid a sharp crunch in credit markets and following Friday's negative August nonfarm payrolls report, economists are almost unanimous in seeing a rate cut at the upcoming Sept. 18 Federal Open Market Committee, with six of the dealer banks surveyed calling for a cut of as much as 50 basis points.
US Stocks Outlook: Jobs Data A Tipping Point?
U.S. stocks were down more than 250 points Friday as the first reported contraction in the job market in four years suggested that what began as a financial and housing-market crisis may be eating into economic growth.
Treasury Secretary Henry Paulson said the data weren't a total surprise. "The economy will continue to grow in the second half of the year," he said. "I believe we will work our way through (the credit situation) because it is against the backdrop of a very strong U.S. economy."
Edward Lazear, chairman of President George W. Bush's Council of Economic Advisers, said, "We're still confident we're going to see high growth for the next year and for the next few months as well."
Ian Shepherdson, chief U.S. economist at High Frequency Economics, said in a research note, "One number is not a trend but this will scare the Fed. They will ease 25 (basis points on Sept. 18) but should ease 50."
Ian Morris, senior economist at HSBC, said, "I think in the context of stresses in financial markets, this weak (jobs) report has significantly solidified our expectations for a 50 basis points rate cut at the Sept. 18 meeting."
Currency traders will be keeping close watch on the Y114 mark, according to Andrew Chaveriat, foreign exchange technical analyst at BNP Paribas. "It might be psychologically important to see how we close (Friday). We might see some damage if we close below Y114."
For Kenneth Kim, Fed economist at Stone & McCarthy, the data do "increase the risk of recession. Just yesterday, Atlanta Fed's (Dennis) Lockhart said that he's not yet seeing any spillover into the broader economy. That view is going to have to change."
For Torsten Slok, senior economist at Deustche Bank in New York, "the very worrying observation today is that the (jobs) numbers already were lower in June and July, so it looks like the economy shifted downgear before the credit crisis" intensified.
THE EVENT
U.S. employment fell Friday for the first time in four years in August on steep drops in construction and manufacturing payrolls. Non-farm payrolls fell 4,000 in August, the first decline since August 2003, the Labor Department said. Economists had expected a gain of 112,000 payrolls. Previous reports were revised sharply lower. The unemployment rate was unchanged at 4.6%, as expected.
THE ANALYSIS
The report suggests that the housing recession is starting to grip the broader economy. It puts added pressure on Federal Reserve officials to aggressively cut interest rates, starting with its policy meeting on Sept. 18.
Financial markets expect a slew of fed funds rate cuts beyond this month - as much as 100 basis points in total by year end - to stem the recent credit crunch and its potential economic effect. That view seems supported by the jobs report.
Indeed, with job conditions clearly eroding, consumers risk losing a key source of support, though robust back-to-school sales reports and better-than-expected automobile sales for August suggest spending continues to grow. Consumer spending makes up two-thirds of economic output.
MARKET REACTION
As stocks fell on fears of a recession Friday, Harley-Davidson plunged on a production pullback, Office Depot dropped on estimate reductions but VeriFone Holdings advanced on a strong outlook. The Dow Jones Industrial Average lost 249.97, or 1.9%, to 13113.38, as 29 of 30 members fell. For the week, the Dow lost 244.36, or 1.8%, its biggest weekly drop since the end of July. The Nasdaq Composite Index fell 48.62, or 1.9%, to 2565.70. For the week, the Nasdaq lost 30.66, or 1.2%, its first drop in three weeks. The Standard & Poor's 500 Index fell 25, or 1.7%, to 1453.55. For the week, the S&P 500 fell 20.44, or 1.4%, its biggest weekly decline in a month.
A far weaker-than-expected U.S. August employment report sent Treasury prices - and expectations for a fed funds rate cut - sharply higher Friday. The 10-year yield fell below its one-year low of 4.44%. At 3 p.m. EDT, the 10-year yield was 4.37%. The two-year yield also fell below its key 4% level, ending at a two-year low level of 3.90%.
The dollar fell sharply Friday as a dismal U.S. employment report for August set the stage for cuts in U.S. interest rates and touched off an across-the-board sell-off of the U.S. currency. Late afternoon, the euro was at $1.3769 up from $1.3686 late Thursday, while the dollar was at Y113.37, down from Y115.36, according to EBS. The euro was at Y156.10, down from Y157.93 late Thursday. The U.K. pound was at $2.0279, up from $2.0233, while the dollar was quoted at CHF1.1876, down from CHF1.2014 late Thursday.
WHAT THEY SAID
=NEWSWIRES SURVEY:Fed To Ease 3 Times, To 4.50% Yr-End
Wall Street banks have ratcheted up again the amount of Federal Reserve easing they expect in coming months, with the central bank now seen cutting rates at each of its three remaining 2007 meetings. Amid a sharp crunch in credit markets and following Friday's negative August nonfarm payrolls report, economists are almost unanimous in seeing a rate cut at the upcoming Sept. 18 Federal Open Market Committee, with six of the dealer banks surveyed calling for a cut of as much as 50 basis points.
US Stocks Outlook: Jobs Data A Tipping Point?
U.S. stocks were down more than 250 points Friday as the first reported contraction in the job market in four years suggested that what began as a financial and housing-market crisis may be eating into economic growth.
Treasury Secretary Henry Paulson said the data weren't a total surprise. "The economy will continue to grow in the second half of the year," he said. "I believe we will work our way through (the credit situation) because it is against the backdrop of a very strong U.S. economy."
Edward Lazear, chairman of President George W. Bush's Council of Economic Advisers, said, "We're still confident we're going to see high growth for the next year and for the next few months as well."
Ian Shepherdson, chief U.S. economist at High Frequency Economics, said in a research note, "One number is not a trend but this will scare the Fed. They will ease 25 (basis points on Sept. 18) but should ease 50."
Ian Morris, senior economist at HSBC, said, "I think in the context of stresses in financial markets, this weak (jobs) report has significantly solidified our expectations for a 50 basis points rate cut at the Sept. 18 meeting."
Currency traders will be keeping close watch on the Y114 mark, according to Andrew Chaveriat, foreign exchange technical analyst at BNP Paribas. "It might be psychologically important to see how we close (Friday). We might see some damage if we close below Y114."
For Kenneth Kim, Fed economist at Stone & McCarthy, the data do "increase the risk of recession. Just yesterday, Atlanta Fed's (Dennis) Lockhart said that he's not yet seeing any spillover into the broader economy. That view is going to have to change."
For Torsten Slok, senior economist at Deustche Bank in New York, "the very worrying observation today is that the (jobs) numbers already were lower in June and July, so it looks like the economy shifted downgear before the credit crisis" intensified.
Consumers hold key to economy's future
American consumers hold the key to whether the unexpected drop in August employment signals either a continuation of a gentle slowdown or a tumble into outright recession for the U.S. economy.
The question is whether, after years of spending, we're spooked enough now to lock up our credit cards.
A net decline of 4,000 jobs reported by the Labor Department Friday caps a summer of worrisome economic news -- soaring mortgage foreclosures, declining housing prices, credit tightening and wild stock market swings. Throughout it, though, consumer spending has remained a bright spot.
Now the picture is turning decidedly mixed. While many corporations continue to report strong earnings and predict solid growth for the year, companies from Apple to Office Depot to Harley Davidson have signaled their concerns about consumer spending.
Consumers, whose spending accounts for roughly 70 percent of the economy, have already started pulling back, said Joel L. Naroff, president and chief economist at Naroff Economic Advisors. If the pullback accelerates "it almost sets off a domino effect. Businesses, which are increasingly uncertain in their spending decisions, could say, 'Why spend into a recession?' Then you've created one."
Apple Inc. cut the price on its 8-gigabyte iPhone to $399 from $599 on Wednesday and later offered $100 store credits after complaints from buyers who earlier had paid the higher price. A day later, Kellwood Co., whose clothing brands and licenses include Phat Farm, Calvin Klein and Sag Harbor, lowered its 2007 earnings guidance due to a downturn in consumer spending.
Hovnanian Enterprises Inc., a luxury homebuilder that reported its fourth consecutive quarterly loss this week, is taking an unusal approach: It's slashing prices for three days beginning Sept. 14 in each of its 449 communities nationwide to trim excess inventory.
Harley Davidson Inc. joined the parade Friday, reducing its forecast for yearly earnings. Chief Executive Jim Ziemer cited a "difficult time for the U.S. consumer" in explaining why he's throttling back shipments of new motorcycles to dealers.
Barbara Nell, manager of The Daisy Shop on Oak in Chicago, a designer resale shop where a Chanel suit can cost $1,200, said her customers have been merely browsing since the beginning of August. High-end Oak Street, around the corner from Chicago's Magnificent Mile "is very quiet" with lots of empty stores, she said.
But Marci Kessler, owner of DoubleTake Consignment Boutique in Short Hills, N.J., said business has been brisker than usual lately, with gently used Hermes handbags selling at close to retail prices and Manolo Blahnik shoes moving quickly.
National retail chains are seeing the same push-pull on outlook.
While Office Depot Inc.'s chief financial officer said Thursday that small businesses are slowing their spending, hurt by the sagging housing market, the CEO of competitor Staples Inc. said Wednesday he hasn't seen small businesses pull back, although he said consumer spending was a worry.
Parsing the jobs numbers brings the same mixed picture.
Those who are forecasting a sharp economic slowdown point to numbers showing some industries are contracting dramatically. The manufacturing industry has lost 215,000 jobs over the past year. Construction employment has fallen by 96,000 since its peak in September 2006, and more cuts are likely as both residential and commercial building have hit the wall of tighter and more expensive borrowing costs.
Analysts who argue for calm say the details of the jobs picture are nuanced. They note, for example, that the Labor Department showed a good bit of the job weakness was in the government sector, which showed a net decline of 28,000 jobs in August. In contrast, private-sector employers added 24,000 jobs.
"Given how resilient this economy has been in the past two years, with record high oil and gasoline prices and 17 straight rate hikes by the Fed, it's way too premature to bet on a recession," said Bernard Baumohl, author of "The Secrets of Economic Indicators" and executive director of The Economic Outlook Group in Princeton Junction, N.J.
Bolstering that view is 25-year old Natalia Garzon, who works as an account executive at public relations firm Ruder Finn Inc. in New York and recently replaced both her original iPod and her three-year-old iBook.
"I love to shop," she said. "It's bad. It's to the point where I haven't paid off my bills in full in ... forever."
The question is whether, after years of spending, we're spooked enough now to lock up our credit cards.
A net decline of 4,000 jobs reported by the Labor Department Friday caps a summer of worrisome economic news -- soaring mortgage foreclosures, declining housing prices, credit tightening and wild stock market swings. Throughout it, though, consumer spending has remained a bright spot.
Now the picture is turning decidedly mixed. While many corporations continue to report strong earnings and predict solid growth for the year, companies from Apple to Office Depot to Harley Davidson have signaled their concerns about consumer spending.
Consumers, whose spending accounts for roughly 70 percent of the economy, have already started pulling back, said Joel L. Naroff, president and chief economist at Naroff Economic Advisors. If the pullback accelerates "it almost sets off a domino effect. Businesses, which are increasingly uncertain in their spending decisions, could say, 'Why spend into a recession?' Then you've created one."
Apple Inc. cut the price on its 8-gigabyte iPhone to $399 from $599 on Wednesday and later offered $100 store credits after complaints from buyers who earlier had paid the higher price. A day later, Kellwood Co., whose clothing brands and licenses include Phat Farm, Calvin Klein and Sag Harbor, lowered its 2007 earnings guidance due to a downturn in consumer spending.
Hovnanian Enterprises Inc., a luxury homebuilder that reported its fourth consecutive quarterly loss this week, is taking an unusal approach: It's slashing prices for three days beginning Sept. 14 in each of its 449 communities nationwide to trim excess inventory.
Harley Davidson Inc. joined the parade Friday, reducing its forecast for yearly earnings. Chief Executive Jim Ziemer cited a "difficult time for the U.S. consumer" in explaining why he's throttling back shipments of new motorcycles to dealers.
Barbara Nell, manager of The Daisy Shop on Oak in Chicago, a designer resale shop where a Chanel suit can cost $1,200, said her customers have been merely browsing since the beginning of August. High-end Oak Street, around the corner from Chicago's Magnificent Mile "is very quiet" with lots of empty stores, she said.
But Marci Kessler, owner of DoubleTake Consignment Boutique in Short Hills, N.J., said business has been brisker than usual lately, with gently used Hermes handbags selling at close to retail prices and Manolo Blahnik shoes moving quickly.
National retail chains are seeing the same push-pull on outlook.
While Office Depot Inc.'s chief financial officer said Thursday that small businesses are slowing their spending, hurt by the sagging housing market, the CEO of competitor Staples Inc. said Wednesday he hasn't seen small businesses pull back, although he said consumer spending was a worry.
Parsing the jobs numbers brings the same mixed picture.
Those who are forecasting a sharp economic slowdown point to numbers showing some industries are contracting dramatically. The manufacturing industry has lost 215,000 jobs over the past year. Construction employment has fallen by 96,000 since its peak in September 2006, and more cuts are likely as both residential and commercial building have hit the wall of tighter and more expensive borrowing costs.
Analysts who argue for calm say the details of the jobs picture are nuanced. They note, for example, that the Labor Department showed a good bit of the job weakness was in the government sector, which showed a net decline of 28,000 jobs in August. In contrast, private-sector employers added 24,000 jobs.
"Given how resilient this economy has been in the past two years, with record high oil and gasoline prices and 17 straight rate hikes by the Fed, it's way too premature to bet on a recession," said Bernard Baumohl, author of "The Secrets of Economic Indicators" and executive director of The Economic Outlook Group in Princeton Junction, N.J.
Bolstering that view is 25-year old Natalia Garzon, who works as an account executive at public relations firm Ruder Finn Inc. in New York and recently replaced both her original iPod and her three-year-old iBook.
"I love to shop," she said. "It's bad. It's to the point where I haven't paid off my bills in full in ... forever."
Argentina Bonds, Stks Close Lower; Merval -1.82%; Peso Gains
Argentine bonds and stocks closed lower Friday, tracking Wall Street's negative performance after U.S. payrolls data showed a decline in August for the first time in four years.
The peso strengthened slightly against the U.S. dollar, closing at ARS3.1625 to the dollar, compared with ARS3.1650 of Thursday closing.
"The central bank intervened only at the beginning of this atypical session," said Hector Blanco, a foreign exchange trader with ABC Mercado de Cambio in Buenos Aires, pointing to the peso's relative strength against weakness in stocks and bonds.
The benchmark Merval stock index fell 1.82% to 2,041.04, closing the first week of September with a 1.4% loss after losing more than 5% of its value in August amid global market turmoil.
Despite the general losing trend, shares of steelmaker Siderar SA (ERAR.BA) shined with a 0.27% gain to ARS3.65.
Among bonds, the closely watched inflation-linked Discount in pesos dropped to ARS109, while its yield rose to 8.74% from 8.60% as of Thursday's close. The Par in pesos fell to ARS40, with its yield increasing to 7.81%, from 7.71% at Thursday close.
Traders see market jitters and volatility continuing in the medium term, with local indexes depending on U.S. macroeconomic data.
The peso strengthened slightly against the U.S. dollar, closing at ARS3.1625 to the dollar, compared with ARS3.1650 of Thursday closing.
"The central bank intervened only at the beginning of this atypical session," said Hector Blanco, a foreign exchange trader with ABC Mercado de Cambio in Buenos Aires, pointing to the peso's relative strength against weakness in stocks and bonds.
The benchmark Merval stock index fell 1.82% to 2,041.04, closing the first week of September with a 1.4% loss after losing more than 5% of its value in August amid global market turmoil.
Despite the general losing trend, shares of steelmaker Siderar SA (ERAR.BA) shined with a 0.27% gain to ARS3.65.
Among bonds, the closely watched inflation-linked Discount in pesos dropped to ARS109, while its yield rose to 8.74% from 8.60% as of Thursday's close. The Par in pesos fell to ARS40, with its yield increasing to 7.81%, from 7.71% at Thursday close.
Traders see market jitters and volatility continuing in the medium term, with local indexes depending on U.S. macroeconomic data.
AT A GLANCE: US Jobs Data Put Pressure On Fed To Cut Rates
AT A GLANCE: US Jobs Data Put Pressure On Fed To Cut Rates
THE EVENT
U.S. employment fell Friday for the first time in four years in August on steep drops in construction and manufacturing payrolls. Non-farm payrolls fell 4,000 in August, the first decline since August 2003, the Labor Department said. Economists had expected a gain of 112,000 payrolls. Previous reports were revised sharply lower. The unemployment rate was unchanged at 4.6%, as expected.
THE ANALYSIS
The report suggests that the housing recession is starting to grip the broader economy. It puts added pressure on Federal Reserve officials to aggressively cut interest rates, starting with its policy meeting on Sept. 18.
Financial markets expect a slew of fed funds rate cuts beyond this month - as much as 100 basis points in total by year end - to stem the recent credit crunch and its potential economic effect. That view seems supported by the jobs report.
Indeed, with job conditions clearly eroding, consumers risk losing a key source of support, though robust back-to-school sales reports and better-than-expected automobile sales for August suggest spending continues to grow. Consumer spending makes up two-thirds of economic output.
MARKET REACTION
As stocks fell on fears of a recession Friday, Harley-Davidson plunged on a production pullback, Office Depot dropped on estimate reductions but VeriFone Holdings advanced on a strong outlook. The Dow Jones Industrial Average lost 249.97, or 1.9%, to 13113.38, as 29 of 30 members fell. For the week, the Dow lost 244.36, or 1.8%, its biggest weekly drop since the end of July. The Nasdaq Composite Index fell 48.62, or 1.9%, to 2565.70. For the week, the Nasdaq lost 30.66, or 1.2%, its first drop in three weeks. The Standard & Poor's 500 Index fell 25, or 1.7%, to 1453.55. For the week, the S&P 500 fell 20.44, or 1.4%, its biggest weekly decline in a month.
A far weaker-than-expected U.S. August employment report sent Treasury prices - and expectations for a fed funds rate cut - sharply higher Friday. The 10-year yield fell below its one-year low of 4.44%. At 3 p.m. EDT, the 10-year yield was 4.37%. The two-year yield also fell below its key 4% level, ending at a two-year low level of 3.90%.
The dollar fell sharply Friday as a dismal U.S. employment report for August set the stage for cuts in U.S. interest rates and touched off an across-the-board sell-off of the U.S. currency. Late afternoon, the euro was at $1.3769 up from $1.3686 late Thursday, while the dollar was at Y113.37, down from Y115.36, according to EBS. The euro was at Y156.10, down from Y157.93 late Thursday. The U.K. pound was at $2.0279, up from $2.0233, while the dollar was quoted at CHF1.1876, down from CHF1.2014 late Thursday.
WHAT THEY SAID
=NEWSWIRES SURVEY:Fed To Ease 3 Times, To 4.50% Yr-End
Wall Street banks have ratcheted up again the amount of Federal Reserve easing they expect in coming months, with the central bank now seen cutting rates at each of its three remaining 2007 meetings. Amid a sharp crunch in credit markets and following Friday's negative August nonfarm payrolls report, economists are almost unanimous in seeing a rate cut at the upcoming Sept. 18 Federal Open Market Committee, with six of the dealer banks surveyed calling for a cut of as much as 50 basis points.
US Stocks Outlook: Jobs Data A Tipping Point?
U.S. stocks were down more than 250 points Friday as the first reported contraction in the job market in four years suggested that what began as a financial and housing-market crisis may be eating into economic growth.
Treasury Secretary Henry Paulson said the data weren't a total surprise. "The economy will continue to grow in the second half of the year," he said. "I believe we will work our way through (the credit situation) because it is against the backdrop of a very strong U.S. economy."
Edward Lazear, chairman of President George W. Bush's Council of Economic Advisers, said, "We're still confident we're going to see high growth for the next year and for the next few months as well."
Ian Shepherdson, chief U.S. economist at High Frequency Economics, said in a research note, "One number is not a trend but this will scare the Fed. They will ease 25 (basis points on Sept. 18) but should ease 50."
Ian Morris, senior economist at HSBC, said, "I think in the context of stresses in financial markets, this weak (jobs) report has significantly solidified our expectations for a 50 basis points rate cut at the Sept. 18 meeting."
Currency traders will be keeping close watch on the Y114 mark, according to Andrew Chaveriat, foreign exchange technical analyst at BNP Paribas. "It might be psychologically important to see how we close (Friday). We might see some damage if we close below Y114."
For Kenneth Kim, Fed economist at Stone & McCarthy, the data do "increase the risk of recession. Just yesterday, Atlanta Fed's (Dennis) Lockhart said that he's not yet seeing any spillover into the broader economy. That view is going to have to change."
For Torsten Slok, senior economist at Deustche Bank in New York, "the very worrying observation today is that the (jobs) numbers already were lower in June and July, so it looks like the economy shifted downgear before the credit crisis" intensified.
THE EVENT
U.S. employment fell Friday for the first time in four years in August on steep drops in construction and manufacturing payrolls. Non-farm payrolls fell 4,000 in August, the first decline since August 2003, the Labor Department said. Economists had expected a gain of 112,000 payrolls. Previous reports were revised sharply lower. The unemployment rate was unchanged at 4.6%, as expected.
THE ANALYSIS
The report suggests that the housing recession is starting to grip the broader economy. It puts added pressure on Federal Reserve officials to aggressively cut interest rates, starting with its policy meeting on Sept. 18.
Financial markets expect a slew of fed funds rate cuts beyond this month - as much as 100 basis points in total by year end - to stem the recent credit crunch and its potential economic effect. That view seems supported by the jobs report.
Indeed, with job conditions clearly eroding, consumers risk losing a key source of support, though robust back-to-school sales reports and better-than-expected automobile sales for August suggest spending continues to grow. Consumer spending makes up two-thirds of economic output.
MARKET REACTION
As stocks fell on fears of a recession Friday, Harley-Davidson plunged on a production pullback, Office Depot dropped on estimate reductions but VeriFone Holdings advanced on a strong outlook. The Dow Jones Industrial Average lost 249.97, or 1.9%, to 13113.38, as 29 of 30 members fell. For the week, the Dow lost 244.36, or 1.8%, its biggest weekly drop since the end of July. The Nasdaq Composite Index fell 48.62, or 1.9%, to 2565.70. For the week, the Nasdaq lost 30.66, or 1.2%, its first drop in three weeks. The Standard & Poor's 500 Index fell 25, or 1.7%, to 1453.55. For the week, the S&P 500 fell 20.44, or 1.4%, its biggest weekly decline in a month.
A far weaker-than-expected U.S. August employment report sent Treasury prices - and expectations for a fed funds rate cut - sharply higher Friday. The 10-year yield fell below its one-year low of 4.44%. At 3 p.m. EDT, the 10-year yield was 4.37%. The two-year yield also fell below its key 4% level, ending at a two-year low level of 3.90%.
The dollar fell sharply Friday as a dismal U.S. employment report for August set the stage for cuts in U.S. interest rates and touched off an across-the-board sell-off of the U.S. currency. Late afternoon, the euro was at $1.3769 up from $1.3686 late Thursday, while the dollar was at Y113.37, down from Y115.36, according to EBS. The euro was at Y156.10, down from Y157.93 late Thursday. The U.K. pound was at $2.0279, up from $2.0233, while the dollar was quoted at CHF1.1876, down from CHF1.2014 late Thursday.
WHAT THEY SAID
=NEWSWIRES SURVEY:Fed To Ease 3 Times, To 4.50% Yr-End
Wall Street banks have ratcheted up again the amount of Federal Reserve easing they expect in coming months, with the central bank now seen cutting rates at each of its three remaining 2007 meetings. Amid a sharp crunch in credit markets and following Friday's negative August nonfarm payrolls report, economists are almost unanimous in seeing a rate cut at the upcoming Sept. 18 Federal Open Market Committee, with six of the dealer banks surveyed calling for a cut of as much as 50 basis points.
US Stocks Outlook: Jobs Data A Tipping Point?
U.S. stocks were down more than 250 points Friday as the first reported contraction in the job market in four years suggested that what began as a financial and housing-market crisis may be eating into economic growth.
Treasury Secretary Henry Paulson said the data weren't a total surprise. "The economy will continue to grow in the second half of the year," he said. "I believe we will work our way through (the credit situation) because it is against the backdrop of a very strong U.S. economy."
Edward Lazear, chairman of President George W. Bush's Council of Economic Advisers, said, "We're still confident we're going to see high growth for the next year and for the next few months as well."
Ian Shepherdson, chief U.S. economist at High Frequency Economics, said in a research note, "One number is not a trend but this will scare the Fed. They will ease 25 (basis points on Sept. 18) but should ease 50."
Ian Morris, senior economist at HSBC, said, "I think in the context of stresses in financial markets, this weak (jobs) report has significantly solidified our expectations for a 50 basis points rate cut at the Sept. 18 meeting."
Currency traders will be keeping close watch on the Y114 mark, according to Andrew Chaveriat, foreign exchange technical analyst at BNP Paribas. "It might be psychologically important to see how we close (Friday). We might see some damage if we close below Y114."
For Kenneth Kim, Fed economist at Stone & McCarthy, the data do "increase the risk of recession. Just yesterday, Atlanta Fed's (Dennis) Lockhart said that he's not yet seeing any spillover into the broader economy. That view is going to have to change."
For Torsten Slok, senior economist at Deustche Bank in New York, "the very worrying observation today is that the (jobs) numbers already were lower in June and July, so it looks like the economy shifted downgear before the credit crisis" intensified.
CME Forex, Financial Estimated Futures Volumes - Sep 7
CME Forex, Financial Estimated Futures Volumes - Sep 7
For today, in contracts.
Currencies Financials
Euro 209,118 Eurodollar 4,465,347
Japanese yen 246,953 Libor 16,249
Swiss franc 107,350 Euroyen 4,472
British pound 115,943
Canadian dollar 71,318
Australian dollar 60,056
Mexican Peso 24,341
New Zealand dollar 2,921
South African Rand 28
Brazilian Real 0
Russian Rubble 0
For today, in contracts.
Currencies Financials
Euro 209,118 Eurodollar 4,465,347
Japanese yen 246,953 Libor 16,249
Swiss franc 107,350 Euroyen 4,472
British pound 115,943
Canadian dollar 71,318
Australian dollar 60,056
Mexican Peso 24,341
New Zealand dollar 2,921
South African Rand 28
Brazilian Real 0
Russian Rubble 0
U.S. dollar down sharply against yen
NEW YORK (AP) - The dollar plunged against the yen Friday and dropped sharply against the euro and the British pound after surprisingly weak U.S. jobs data signaled slower economic growth, raising the likelihood that the Federal Reserve will cut interest rates.
The dollar dropped to 113.34 Japanese yen from 115.29 yen late Thursday. The euro rose to $1.3768 in late New York trading from $1.3687, while the British pound rose to $2.0279 from $2.0231 late Thursday.
The Labor Department reported Friday that employers sliced payrolls by 4,000 in August, falling far short of economists' forecasts that payrolls would grow by 110,000. It was the first decline in jobs since August 2003. The report also showed the unemployment rate held steady at 4.6 percent, mainly because hundreds of thousands of people left the work force.
The employment report underlined the strain on the U.S. economy from the past month's painful credit crunch, and may prompt the Fed to lower a key interest rate when it meets next on Sept. 18. A cut from the current rate, 5.25 percent, would be the first reduction in four years.
Lower interest rates, used to jump-start the economy, can weaken a currency by giving investors lower returns on investments denominated in it.
Friday's evidence of a slowing economy pushed currency investors to shy away from the yen-carry trade, a riskier investment strategy that involves selling off the low-yielding yen in favor of higher-yielding dollar-denominated assets. Instead, wary currency traders sold off dollars and bought back yen.
"Today was a pretty dramatic example of a broadly lower dollar," said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Conn. "The past several weeks of the credit crisis, the dollar has been trading in a mixed fashion. Today is the first sign of the dollar weakening" against the euro, pound and yen.
In other trading, the dollar bought 1.1879 Swiss francs, down from 1.2015 late Thursday, and 1.0554 Canadian dollars, up from 1.0528
The dollar dropped to 113.34 Japanese yen from 115.29 yen late Thursday. The euro rose to $1.3768 in late New York trading from $1.3687, while the British pound rose to $2.0279 from $2.0231 late Thursday.
The Labor Department reported Friday that employers sliced payrolls by 4,000 in August, falling far short of economists' forecasts that payrolls would grow by 110,000. It was the first decline in jobs since August 2003. The report also showed the unemployment rate held steady at 4.6 percent, mainly because hundreds of thousands of people left the work force.
The employment report underlined the strain on the U.S. economy from the past month's painful credit crunch, and may prompt the Fed to lower a key interest rate when it meets next on Sept. 18. A cut from the current rate, 5.25 percent, would be the first reduction in four years.
Lower interest rates, used to jump-start the economy, can weaken a currency by giving investors lower returns on investments denominated in it.
Friday's evidence of a slowing economy pushed currency investors to shy away from the yen-carry trade, a riskier investment strategy that involves selling off the low-yielding yen in favor of higher-yielding dollar-denominated assets. Instead, wary currency traders sold off dollars and bought back yen.
"Today was a pretty dramatic example of a broadly lower dollar," said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Conn. "The past several weeks of the credit crisis, the dollar has been trading in a mixed fashion. Today is the first sign of the dollar weakening" against the euro, pound and yen.
In other trading, the dollar bought 1.1879 Swiss francs, down from 1.2015 late Thursday, and 1.0554 Canadian dollars, up from 1.0528
Colombia's Stks Fall On Weak US Employment Data; Peso Down
Colombia's Stks Fall On Weak US Employment Data; Peso Down
BOGOTA (Dow Jones)--The Colombian stock index fell Friday following the U.S. market, which plummeted after the Labor Department reported the first job market contraction in four years.
The IGBC stock index fell 1% to 10,731.63 points, while the Dow Jones Industrial Average dropped 1.9% to 13,110 points.
"The local market followed the markets abroad," said Marcela Giraldo, a market analyst with local brokerage Corredores Asociados. "The bad employment data is a clear sign of a possible recession in the U.S., which would be very bad news for countries like Colombia," she added.
The financial holding company Suramericana de Inversiones SA (SURAMINV.BO) was the most-traded share as 8.6 billion pesos ($3.96 million) worth of shares changed hands. Its price fell 1.6% to COP18,660.
"Suramericana is the benchmark of the Colombian stock market," Giraldo said.
As investors sold shares, the peso depreciated to COP2,184, its weakest level since March 16, from COP2,173.15 on Thursday.
On the debt market, the yield on the benchmark government peso-denominated bond maturing in 2020 rose to 10.579%, from 10.538% on Thursday.
BOGOTA (Dow Jones)--The Colombian stock index fell Friday following the U.S. market, which plummeted after the Labor Department reported the first job market contraction in four years.
The IGBC stock index fell 1% to 10,731.63 points, while the Dow Jones Industrial Average dropped 1.9% to 13,110 points.
"The local market followed the markets abroad," said Marcela Giraldo, a market analyst with local brokerage Corredores Asociados. "The bad employment data is a clear sign of a possible recession in the U.S., which would be very bad news for countries like Colombia," she added.
The financial holding company Suramericana de Inversiones SA (SURAMINV.BO) was the most-traded share as 8.6 billion pesos ($3.96 million) worth of shares changed hands. Its price fell 1.6% to COP18,660.
"Suramericana is the benchmark of the Colombian stock market," Giraldo said.
As investors sold shares, the peso depreciated to COP2,184, its weakest level since March 16, from COP2,173.15 on Thursday.
On the debt market, the yield on the benchmark government peso-denominated bond maturing in 2020 rose to 10.579%, from 10.538% on Thursday.
Saturday, September 1, 2007
USDJPY, Nikkei 225 Likely to Gain Amidst Carry Trade Resurgence
Written by Terri Belkas, Currency Analyst
SEP 2
Capital Spending ex Software (2Q) (19:50 EST; 23:50 GMT)
Labor Cash Earnings (YoY) (JUL) (21:30 EST; 01:30 GMT)
Expected: 10.3%
Expected: -0.5%
Previous: 14.2%
Previous: -0.9%
How Will The Markets React?
Japanese capital spending growth is anticipated to slow down to an annual rate of 10.3 percent in Q2 – the weakest pace since Q4 2005 – signaling that businesses are not investing as heavily as they anticipate softer demand amidst an economic slowdown in the US. Nevertheless, even a drop in line with estimates still leaves the figure at relatively robust levels as capital spending remains a driver of Japanese expansion. In fact, the Q2 GDP report showed that capital investment climbed 1.2 percent, accelerating from a 0.3 percent gain in Q1. What about the consumer? That has been a far less resilient sector of the economy, as spending only rose 0.4 percent in Q2, half the pace of Q1. The current quarter isn’t likely to show a marked improvement either, as tepid wage growth limits disposable income. Indeed, labor cash earnings for the month of July are anticipated to show contracting payroll growth for the eight consecutive month, with estimates pinned at an annual rate of -0.5 percent. Given these deteriorating conditions, there is an increased burden on exporters and manufacturers to support Japanese expansion. Furthermore, it also limits the ability of the Bank of Japan to normalize interest rates, as declining wages and softer spending will do little to fuel inflationary pressures, as the economy remains in slight deflation.
Bonds – 10-Year Japanese Government Bond Futures
The Tokyo afternoon session gapped down sharply pm Friday, possibly leaving a runaway gap that suggests a bias reversal, especially as the daily charts show a reverse flag formation. Support at 135.00 has been holding up for the past week, but JGBs could plummet if Japanese economic data proves to be stronger than expected, as traders ramp up speculation of a September rate hike by the Bank of Japan. A bearish move lower could target 134.44, with sharper declines targeting 133.81.
The Japanese yen has appreciated quite a bit over the past two months, as risk aversion has pervaded the forex markets and led carry trades to unwind. Fundamental data hasn’t played much of a role in this, however, as Japanese expansion showed a sharp slowdown in Q2 and data continues to signal that the economy has yet to emerge from deflation. As it stands, there are really only two fundamental events that could perpetuate a strong move by the Japanese yen: a rate hike by the Bank of Japan or a jump in inflation – neither of which we’ll see this week. Nevertheless, traders should be aware of the Japanese economic data on tap this week, as the results could have an impact on future policy decisions by the BOJ. Capital spending is anticipated to remain strong, but show a slowdown from the quarter prior, while wage growth is predicted to soften further, which will not bode well for consumer spending. With two drivers of economic growth – business investment and consumption – showing diminishing power, the picture does not look good for Japan. Regardless, USDJPY price action will likely remain contingent upon risk aversion trends, and now that Fed Chairman Ben Bernanke has somewhat assured investors that he will support the markets in times of distress, carry trades and equities could resume their gains next week, with a break above trendline resistance at 116.93 targeting 119.34.
As traders became more risk seeking at the end of the week, the Nikkei 225 broke through trendline resistance to end the session up 2.57 percent at 16,569.09. Japanese economic data has generally not played much of a role in Nikkei 225 trading, and next week isn’t likely to represent a shift from the norm. Capital spending is anticipated to remain strong, but show a slowdown from the quarter prior, while wage growth is predicted to soften further, which will not bode well for consumer spending. With two drivers of economic growth – business investment and consumption – showing diminishing power, the picture does look good for Japan. Similar to USDJPY trading, Nikkei 225 price action will likely remain contingent upon risk aversion trends. Now that Fed Chairman Ben Bernanke has somewhat assured investors that he will support the markets in times of distress, carry trades and equities could resume their gains next week, with the Nikkei 225 possibly targeting the 200 SMA at 17,275.
SEP 2
Capital Spending ex Software (2Q) (19:50 EST; 23:50 GMT)
Labor Cash Earnings (YoY) (JUL) (21:30 EST; 01:30 GMT)
Expected: 10.3%
Expected: -0.5%
Previous: 14.2%
Previous: -0.9%
How Will The Markets React?
Japanese capital spending growth is anticipated to slow down to an annual rate of 10.3 percent in Q2 – the weakest pace since Q4 2005 – signaling that businesses are not investing as heavily as they anticipate softer demand amidst an economic slowdown in the US. Nevertheless, even a drop in line with estimates still leaves the figure at relatively robust levels as capital spending remains a driver of Japanese expansion. In fact, the Q2 GDP report showed that capital investment climbed 1.2 percent, accelerating from a 0.3 percent gain in Q1. What about the consumer? That has been a far less resilient sector of the economy, as spending only rose 0.4 percent in Q2, half the pace of Q1. The current quarter isn’t likely to show a marked improvement either, as tepid wage growth limits disposable income. Indeed, labor cash earnings for the month of July are anticipated to show contracting payroll growth for the eight consecutive month, with estimates pinned at an annual rate of -0.5 percent. Given these deteriorating conditions, there is an increased burden on exporters and manufacturers to support Japanese expansion. Furthermore, it also limits the ability of the Bank of Japan to normalize interest rates, as declining wages and softer spending will do little to fuel inflationary pressures, as the economy remains in slight deflation.
Bonds – 10-Year Japanese Government Bond Futures
The Tokyo afternoon session gapped down sharply pm Friday, possibly leaving a runaway gap that suggests a bias reversal, especially as the daily charts show a reverse flag formation. Support at 135.00 has been holding up for the past week, but JGBs could plummet if Japanese economic data proves to be stronger than expected, as traders ramp up speculation of a September rate hike by the Bank of Japan. A bearish move lower could target 134.44, with sharper declines targeting 133.81.
The Japanese yen has appreciated quite a bit over the past two months, as risk aversion has pervaded the forex markets and led carry trades to unwind. Fundamental data hasn’t played much of a role in this, however, as Japanese expansion showed a sharp slowdown in Q2 and data continues to signal that the economy has yet to emerge from deflation. As it stands, there are really only two fundamental events that could perpetuate a strong move by the Japanese yen: a rate hike by the Bank of Japan or a jump in inflation – neither of which we’ll see this week. Nevertheless, traders should be aware of the Japanese economic data on tap this week, as the results could have an impact on future policy decisions by the BOJ. Capital spending is anticipated to remain strong, but show a slowdown from the quarter prior, while wage growth is predicted to soften further, which will not bode well for consumer spending. With two drivers of economic growth – business investment and consumption – showing diminishing power, the picture does not look good for Japan. Regardless, USDJPY price action will likely remain contingent upon risk aversion trends, and now that Fed Chairman Ben Bernanke has somewhat assured investors that he will support the markets in times of distress, carry trades and equities could resume their gains next week, with a break above trendline resistance at 116.93 targeting 119.34.
As traders became more risk seeking at the end of the week, the Nikkei 225 broke through trendline resistance to end the session up 2.57 percent at 16,569.09. Japanese economic data has generally not played much of a role in Nikkei 225 trading, and next week isn’t likely to represent a shift from the norm. Capital spending is anticipated to remain strong, but show a slowdown from the quarter prior, while wage growth is predicted to soften further, which will not bode well for consumer spending. With two drivers of economic growth – business investment and consumption – showing diminishing power, the picture does look good for Japan. Similar to USDJPY trading, Nikkei 225 price action will likely remain contingent upon risk aversion trends. Now that Fed Chairman Ben Bernanke has somewhat assured investors that he will support the markets in times of distress, carry trades and equities could resume their gains next week, with the Nikkei 225 possibly targeting the 200 SMA at 17,275.
The Carry Unwind
If the forecast for a slowdown in the US economy is indeed correct what trade in the currency market would benefit most from such outcome? For those traders betting on this scenario we believe a short USDJPY position may offer the most promising opportunity in 2008. Over the past two years USDJPY has been essentially a one way trade to the upside as the pair benefited from the widening interest rate differentials between the dollar and the yen as well as increased risk appetite as global equity markets soared across the board. A sharp deceleration in US growth will reverse both of those dynamics making the carry trade far less attractive and setting in motion the long unwind process.
On the interest rate front market participants expect the Fed to begin easing in response to the turbulence of the past several weeks. Although it appears as though FOMC members are reluctant to cut rates, if labor data continues to deteriorate the Fed will have no choice but to act. As the loosening cycle builds force the rate differentials between the dollar and the yen will begin to compress and may even accelerate if the BOJ continues its normalization process as Asian economies appear to be relatively insulated from the liquidity crunch affecting western markets.
More importantly however, the slowdown in US economy is sure to impact the profit margins of US corporations and will likely cause a decline in the Dow. Over the past two years the carry trade benefited tremendously from the rise in equities as risk tolerance increased significantly. In fact USDJPY has a greater than 0.6 correlation with Dow Jones index suggesting that the carry trade has been driven as much by the stock market rally as by the interest rate spread between the yen and the dollar. As equities rallied many speculators finances their US stock purchases with very cheap yen loans levering up their positions. That is why any downdraft in stocks immediately brings a decline in the USDJPY pair as those positions are unwound. Should the US stock market enter a prolonged bear phase, USDJPY is quite likely to follow as stop losses and margin calls will trigger a sharp decline in the pair.
Risks to the Trade
There are of course critical risks to this trade. First and foremost the US economy may weather the collapse of housing and remain resilient as exports most notably in the technology sector helped by the lower dollar pick up the slack in demand. Secondly, Japanese retail investors, who continue to be the biggest proponents of the carry trade, as they seek yield for their large pool of domestic savings could provide a very strong bid for the carry trade irrespective of cuts by the Federal reserve. The latter scenario could be especially likely if the Fed’s policy initiate is slow and gradual resulting in only modest compression of yields. Finally, a short USDJPY incurs significant interest rates costs for investors, and those contemplating a long term position should most particularly mindful of the leverage of the position which could magnify those costs many fold. Nevertheless, those traders who are confident in their prognosis of a slowdown in US economy in 2008 may want to express that idea through the short USDJPY position which should benefit disproportionately from any decline in US interest rates and equity prices.
The USDJPY may have completed a 12 year correction in the form of a triangle at 124.13. Triangles unfold in 5 waves (A-B-C-D-E) and the structure above is clearly in 5 waves. There is risk of wave E extending higher towards the next major resistance level of 128.00 but the weight of evidence suggests that wave is complete at 124.13. For one, wave E is close to 61.8% of wave C. Alternating legs of triangles are often related by 61.8% or a derivation of Φ (Phi….618). Wave E would be exactly 61.8% of wave C at 122.57. The top was at 124.13. A difference of just 155 pips when projecting a move that is nearly 3000 pips works out to just over a 5% error. The time relationships between the different legs of the triangles also favor the idea that wave E is complete at 124.13. The weeks that each leg of the triangle took to unfold (from A to E) were 41, 16, 27, 37, 30. The average length of time for each leg is 30.2. Wave E took 30 weeks. The 'look' is right for a top and reversal of significant proportion. A terminal thrust in the direction of the larger trend succeeds completion of a triangle. In the case of the USDJPY, a terminal thrust would result in a drop below the 1995 low of 81.12. A break of the base of the triangle at 101.26 would strongly signal that price is headed below 81.12. However, with the evidence making a strong case that the triangle is complete at 124.13, a bearish bias is warranted at the current juncture against 124.13.
The DJIA and JPY crosses have tracked each other for the better part of this decade. With this in mind, analysis of the DJIA can support or refute our bearish bias on the JPY crosses. Over the last 100+ years, stocks have exhibited what is termed the decennial pattern. In the pattern, years 0-2 of the decade are bearish for stocks as is year 7. Specific examples include the Panic of 1907 when the stock market crashed in both March and October. The DJIA ended 1907 down 38%. 1917 saw a 23% drop in the DJIA. 1927 was a positive year for stocks but the DJIA dropped 5.2% in the September-October period. In 1937, stocks began plummeting in March and ended the year down 32%. The biggest declines of that year came in September and October when Stocks fell 20%. 1947 was flat (up 3% for the year). Stocks declined 12% in 1957 and 9.3% of that decline occurred in the September-October period. 1967 was a positive year but stocks declined 8.7% in the September-October period. A drop of 17% occurred in 1977 with 5.4% of the decline occurring in the September-October months. The DJIA ended up 1% in 1987 but October 19th was Black Monday, the second largest one-day percentage decline in stock market history. Equities rallied strongly in 1997, finishing the year up 22%. However, the September-October months were bearish (down 3%). In summary, history tells us that the September-October months are seasonally bearish and years ending in 7 are cyclically bearish. The confluence of these two patterns have led to the worst stock market crashes in history. Given the high correlation between stocks and the JPY crosses, the biggest decline in years may be in store for the JPY crosses over the next two months. Recent technical articles on the JPY/Dow relationship can be found at Early August and June.
Show me the Money
Speculators and investors may disagree about the extent of the damage from the recent fallout in the sub-prime markets but one fact is incontrovertibly clear – credit is no longer cheap or easily available. Although long term jumbo mortgage rates have come off their highs they are still more than 100 basis points higher than the traditional 30 year fixed mortgage. Furthermore, not only has credit become expensive, but lending standards have been tightened considerably over the past month. Poor credit ratings and no income verification loans are quickly becoming history. Potential house buyers will now require a strong personal balance sheet and will have to adhere to more stringent lending terms.
This change in the real estate markets will inevitably lead to lower home sale prices and less mortgage equity withdrawal activity in the next year. Already existing home sales have declined to 5.70 Million annual rate down from the peak of 7,21 Million units less than two years ago while new homes sales are averaging 870K units from their peak of 1389K. Although residential real estate directly accounts for only 5% of the GDP, some analysts calculate that the indirect impact of the real estate market on the US economy, when finance and retail sectors are factored in, may be responsible for as much as 50% of GDP growth over the past several years.
In short the contraction in real estate market should lead to a deceleration in the overall economy, but because this process is gradual, its effects may not be fully realized until 2008. Indeed given the blazing 4% GDP growth recorded in the 2nd quarter of 2007, it’s hard to believe that a US recession is possible in the near future. Yet the GDP numbers represent economic activity before the recent market turbulence. Going forward US demand is likely to slow significantly as the weight of the new reality in the credit markets begins to bear down on the US consumer facing more than 1 Trillion dollars of Adjustable Rate Mortgages in the next year. The average combined loan-to-value ratios of these 2004-2006 vintage loans are approximately 92%, allowing fro very little margin of error. Therefore, this combination of massive increases in mortgage costs in conjunction with much tighter credit standards is likely to result in a new wave of bankruptcies and is the primary reason to expect an economic slowdown in 2008. Evidence of deceleration in growth is already building in the employment numbers. June’s Non Farm payrolls report printed below the key 100K job level for the first time since February and latest weekly numbers jobless claims numbers ballooned to 334K – highest level in 5 months.
This change in the real estate markets will inevitably lead to lower home sale prices and less mortgage equity withdrawal activity in the next year. Already existing home sales have declined to 5.70 Million annual rate down from the peak of 7,21 Million units less than two years ago while new homes sales are averaging 870K units from their peak of 1389K. Although residential real estate directly accounts for only 5% of the GDP, some analysts calculate that the indirect impact of the real estate market on the US economy, when finance and retail sectors are factored in, may be responsible for as much as 50% of GDP growth over the past several years.
In short the contraction in real estate market should lead to a deceleration in the overall economy, but because this process is gradual, its effects may not be fully realized until 2008. Indeed given the blazing 4% GDP growth recorded in the 2nd quarter of 2007, it’s hard to believe that a US recession is possible in the near future. Yet the GDP numbers represent economic activity before the recent market turbulence. Going forward US demand is likely to slow significantly as the weight of the new reality in the credit markets begins to bear down on the US consumer facing more than 1 Trillion dollars of Adjustable Rate Mortgages in the next year. The average combined loan-to-value ratios of these 2004-2006 vintage loans are approximately 92%, allowing fro very little margin of error. Therefore, this combination of massive increases in mortgage costs in conjunction with much tighter credit standards is likely to result in a new wave of bankruptcies and is the primary reason to expect an economic slowdown in 2008. Evidence of deceleration in growth is already building in the employment numbers. June’s Non Farm payrolls report printed below the key 100K job level for the first time since February and latest weekly numbers jobless claims numbers ballooned to 334K – highest level in 5 months.
The Best Trade for the End of the Year?
For those traders forecasting a significant slowdown in US economy in 2008 we take a look at the merits and dangers of selling USDJPY from both a fundamental and technical perspective.
Yen: The Best Trade for the End of the Year?
For those traders forecasting a significant slowdown in US economy in 2008 we take a look at the merits and dangers of selling USDJPY from both a fundamental and technical perspective. The stock market is entering its worst period historically within the monthly seasonal and 10 year cyclical patterns. Given the high correlation between stocks and the JPY crosses, the biggest decline in years may be in store for the JPY crosses over the next few months.
President Bush Announces Plan That Boosts Risky Currencies
Friday is looking up for risky currencies, as President Bush will announce a plan to help US homeowners who are at risk of defaulting on their mortgage loan. This has eased the concerns of many forex traders who have been resting their money in low-yield currencies like the yen. Now, with the subprime mortgage issues being addressed by the US government, high-risk investments will resume. Reports Reuters:
"There is some reaction to Bush's plans to help out people who are in trouble with their mortgage payments and markets are also expecting some comments from Bernanke this afternoon regarding rate cuts. Both these factors are helping the carry trade," said Carsten Fritsch, currency strategist at Commerzbank Corporates & Markets in Frankfurt.
"There is some reaction to Bush's plans to help out people who are in trouble with their mortgage payments and markets are also expecting some comments from Bernanke this afternoon regarding rate cuts. Both these factors are helping the carry trade," said Carsten Fritsch, currency strategist at Commerzbank Corporates & Markets in Frankfurt.
Yen Bounces Back From Wednesday's Drop
Investors, confident that the US mortgage situation could be weathered, pulled money out of the yen on Wednesday and put it back into risky carry trades. However, things did not look so promising for the US on Thursday. As a result, the yen was once again strengthened by nervous investors. Reuters reports:
The yen brushed off a rebound in European and Asian stocks and climbed after British newspaper The Times reported that the co-head of RBS Greenwich Capital's collateralised debt obligations unit had left the bank along with six colleagues.
The yen brushed off a rebound in European and Asian stocks and climbed after British newspaper The Times reported that the co-head of RBS Greenwich Capital's collateralised debt obligations unit had left the bank along with six colleagues.
Investment in European Stocks Weakens Yen
While the US had a rough day yesterday, European stocks performed well enough to tempt investors away from the yen. Though a stable currency, the yen is a low-yielding investment and traders are ready to try their hand at a riskier venture with European stocks. There is no word yet on how this may affect Wall Street. According to Forbes:
This has pushed the yen down as investors make tentative steps back to engaging in the risky carry trade - where investors sell low-yielding currencies such as the yen to buy higher-yielding ones elsewhere. With no US data due this afternoon, how equities fare on Wall Street is likely to determine whether the rise in risk appetite can be sustained.
This has pushed the yen down as investors make tentative steps back to engaging in the risky carry trade - where investors sell low-yielding currencies such as the yen to buy higher-yielding ones elsewhere. With no US data due this afternoon, how equities fare on Wall Street is likely to determine whether the rise in risk appetite can be sustained.
Credit Problems Strengthen Yen
Once again, fear of US mortgage problems has led investors back to arms of the reliable yen. A low-yield, low-risk currency, the Japanese yen has become a safe haven for skittish traders in recent weeks. Investors are right to be concerned, as the US housing market hasn't been in this kind of shape in two decades. Reuters reports:
The yen extended gains against the dollar after a measure of U.S. home prices reflected the biggest year-on-year decline in the second quarter since 1987.
The yen extended gains against the dollar after a measure of U.S. home prices reflected the biggest year-on-year decline in the second quarter since 1987.
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