FOREX TRADING

Today’s beige book report, compiled in preparation for the August 10 FOMC meeting, provided a much more qualified characterization of the recovery among the 12 Fed districts compared to the report prepared in advance of the June 22-23 FOMC. Although the report opened by stating that economic activity continued to grow, the qualifier “on balance” quickly followed. This qualifier reflected that while eight Districts seemingly indicated that economic activity improved, albeit modestly, two Districts indicated steady activity with two Districts, Atlanta and Chicago, indicating the pace of activity had slowed recently. In June, it was indicated that economic activity had improved in all 12 Fed Districts. (more…)

U.S. Review

Home Is Where the Economy’s Heart Is

• Housing starts and existing home sales declined in June, reflecting the winding down of homebuyer tax credits.
• Building confidence fell to 14 in July, and June’s numbers were revised down slightly.
• The effect from the unwinding of various economic stimulus programs is evident in other data, with the leading indicators declining 0.2 percent and weekly firsttime unemployment claims bouncing back to 464,000.
• Bernanke’s midyear report to Congress outlined possible future steps the Fed may take to boost economic growth.

We Have Got to Get in Shape

If the state of the nation’s housing market is at the center of the economy’s near-term prospects, then we have got to get in shape. Nearly all of the major housing indicators reported this past week showed more weakness than was widely expected, suggesting that the payback from the homebuyer tax credit program will be a bit deeper and longer lasting than many had hoped. One of the most disconcerting pieces of news was housing starts, which fell 5 percent in June, following a downwardly revised 14.9 percent drop in May. A slight 2.1 percent rise in building permits initially took some of the sting out of the headline number, but all of that gain was in the volatile multi-family unit series. Permits for new single-family homes fell 3.4 percent, following 10.3 percent drops in both May and April

Single-family permits are now running at just a 421,000-unit pace, well below the recent trend in starts. When you couple this with July’s decline in the Wells Fargo/NAHB homebuilders’ index, there is no reason to expect housing starts to increase in July, and we may not see a gain in August either. With demand flat and credit for homebuilders still extremely tight, there is no incentive for builders to get out ahead of demand.

Existing home sales actually fell less that expected, but the trend remains unfavorable. Existing home sales have been harder to read because of the extension of the closing deadline for homebuyer tax credits from June 30 to September 30. The net effect of the deadline extension will be to moderate the slide in existing home sales over the new few months. (more…)

Overview

A week spent speculating which banks might fail their ‘stress tests’, and whether these were worth doing at all, indices alternating between fairly large up and down days to end the week in positive territory. Jakarta, Mumbai and Thailand set new highs for 2010. The Japanese stock market closed near the lowest levels in two years, pressured by a strong yen (86.27) and dragged down by the banks index. The US dollar has lost ground against all major currencies this week, the Australian dollar leading at $0.8972 (a ten-week high) and the Swiss franc at 1.0400, best this year. The Hungarian forint weakened to 292.00 per Euro because of new PM Viktor Orban’s refusal to implement IMF-suggested austerity measures. Top-quality Treasuries remain well bid, those of weaker Eurozone countries still all too close to their records over Bunds. US asset-backed securities the first casualty of new financial regulation, so the SEC has had to allow a 6-month grace period for implementation. [Rating agencies can now be sued for fraud and reckless behaviour so they are not allowing their ratings to be published in prospectuses]. ICE Sugar rallied to 18.66 cents per pound, its most expensive since March though a fraction of February’s unsustainable 30.40 peak. Most Baltic Freight rates are at their lowest in a year or more.

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The Bank of Canada, as expected, hiked rates by a quarter point to 0.75% in today’s meeting. The accompanying release, while saying economic activity in Canada was unfolding largely as expected, did cut its forecasts for growth in 2010 and 2011. Growth in 2010 is now forecast at 3.5% from 3.7%, while the forecast for 2011 was revised to 2.9% from 3.1%. “This revision reflects a slightly weaker profile for global economic growth and more modest consumption growth in Canada.”

From the Release: “Reflecting all of these factors, the Bank has decided to raise the target for the overnight rate to 3/4 per cent. This decision leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in light of the significant excess supply in Canada, the strength of domestic spending, and the uneven global recovery. (more…)

Bond prices are generally lower as investors seem a little less pessimistic towards risk to start the week. The burning question appears to be whether the notable slowing in economic activity justifies the plunge in yields.

Eurodollar futures – A three day rally for bonds last week saw 21 basis points shaved off the cost of government borrowing as investors rushed headlong into the safety of fixed income. The 10-year note faces a weaker start today even ahead of an expected decline in home builders’ confidence later this morning. September notes are a couple of ticks lower to stand at 123-04 yielding 2.95%. Meanwhile nearby Eurodollar contracts have made minor gains while contracts maturing from June 20011 onwards have declined by one or two pips. (more…)

U.S. Review

Slower Growth, Low Inflation with Big Budget Deficits

• Retail sales and industrial production set the tone for the economic outlook as momentum has slowed to a three month pace of 4 percent compared to a 7 percent year-over-year gain. This slowdown outlook was reinforced by comments by the Federal Reserve.
• Inflation, meanwhile, measured by the Consumer Price Index, is now up just 1.1 percent over the past year. Substantial slack in the economy will likely continue to put downward pressure on core CPI inflation. Slow growth and low inflation suggests big federal fiscal budgets persist for the outlook horizon.

Moderate Paced Recovery with Low Inflation

A Dose of Reality from the Fed: Participants generally anticipated that, in light of the severity of the economic downturn, it would take some time for the economy to converge fully to its longer-run path as characterized by sustainable rates of output growth, unemployment, and inflation consistent with participants’ interpretation of the Federal Reserve’s dual objectives; most expected the convergence process to take no more than five to six years.

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Overview

Stocks tried to rally for a second consecutive week, subsequently giving up those small gains, to end unchanged (though the Nikkei and Shanghai Composite lost 1.85%). Rather than the usual ‘risk on/risk off’ knee-jerk reaction investors seem to have become a little more savvy; they continue buying top-quality bonds, so that US benchmark two-year TNote set a record low yield at 0.58%, UK five-year Gilts matched 2009′s record low 1.985%, while ten-year BBB+ rated Mexican ones set a new record low at 6.64% as did Brazil’s BBB- at 4.34%. Peripheral Eurozone Treasuries remain under pressure trading at or close to record spreads with the ECB’s reluctant quantative easing in place. While buying yen, taking it to 86.50 per USD, they sold dollars against most currencies taking the Euro to $1.3008 and Cable $1.5473, an increase of 2.5% in five days leaving consensus opinion (for a stronger greenback) head-scratching calling this a ‘technical short-covering rally’; previous ‘darlings’ are lagging well behind. CBOT Wheat rallied strongly again for a third consecutive week, caused by the heat wave in Europe and parts of North America, reaching 598.5 cents per bushel and its most expensive in a year, dragging Corn up to 397 cents.

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Total CPI was bang-on expectations at -0.1% m/m, resulting in a y/y growth rate of 1.1%. The closely watched core measure came in above expectations with a 0.2% m/m gain, holding the annual rate steady at 0.9%.

The annual growth rate in total CPI dropped significantly from 2.0% in May, but this was due to baseyear effects from large energy price increases this time last year.

In recent months, a largest single downward influence on the core measure was owner’s equivalent rent (OER), which edged up 0.1% m/m in June. After six months of continuous declines, this subcomponent has finally held its ground in the past two months. Nevertheless, OER still shaved half a percentage point from the annual growth rate of the core measure. (more…)