European Mid Morning Update 29th January 2008
Even if there’s a will – at the moment there’s no way
Releases from Europe:
December Forecast Actual
Swiss Trade Balance CHF 0.95bn 0.20bn
January
French Consumer Confidence - 30.0 -34.0
Switzerland saw its Trade Surplus squashed like a pancake in December with a shock release of just CHF 198mn. Exports sank by 3.4% while imports fell by only 1.9%. Given Roth’s comments regarding the lack of urgency in a rate decision and that inflation will be softened by lower growth this will quell any though of a rate hike and could well soften the Swiss Franc against the Euro. The continuing drop in French consumer confidence conflicts with the stronger business confidence announced last week and the high level of spending in December. The Bank of France is on the bearish side also having revised expected Q4 growth to a mere 0.5%.
Elsewhere the Deloitte Economic Review has said that the decline in the housing market will be leading the economy into its weakest period of growth for 15 years – possibly even into recession. It sees house prices falling by 5% this year impacted by the credit crisis making borrowing more difficult.
Add to that the highest average pay increase in 15 years and we have a nasty mix of lower growth and high inflation. The Pound may be making gains now, but it isn’t that far from key resistance with the next leg lower due to begin over the next 5 days.
The following economic releases are due today:
December
Swiss UBS Consumption Indicator
German IFO Business Climate Survey
U.S. Durable Goods Orders (MoM) +1.9%
U.S. Durable Goods Orders ex transport (MoM) +0.0%
January
Italian Business Confidence 91.3
U.K. CBI Distributive Trade Reported Sales
U.S. Consumer Confidence 87.5
The Fed begins its two day Market Committee Meeting
U.S. new homes sales took a dive off the cliff and the Dow Jones Index ticked higher. It seems as if most attribute this to the prospect of lower rates at tomorrow’s FOMC meeting and this is almost a foregone conclusion.
The bigger question market lies over the extent of the cut.
Futures appear to be discounting a 90% chance of a 50bp cut encouraged by the drop in new home sales. This would bring rates lower by 1.25% over the past 10 days.
However there is a question mark over exactly what purpose the 75bp emergency cut was targeting.
Equity market fear is one thing and to ease the pressures on borrowing is another. The fiscal stimulation package is really intended to ease pressures in the housing market.
There is therefore an argument that the Fed will cut by only 25 bp and save ammunition for a rainy day.
The Nikkei recovered half of yesterday’s losses and today’s releases have provided a slightly better than anticipated picture of the economy. However, even the BOJ acknowledge the economy is slowing and with Dollar-Yen at current levels there is likely to be further squeeze on exports.
There is little argument for the Yen to strengthen at this point.
With the Dollar close to recent lows there is little appetite to push it much lower and the specter of the FOMC decision and the U.S. Q4 GDP release tomorrow the prospects remain for subdued trading ranges.
Note important support and resistance areas:
USDJPY EURUSD USDCHF GBPUSD
Res: 107.88-30 1.4885-21 1.0988-15 1.9954-62
Res: 107.12-43 1.4796-32 1.0918-45 1.9890-00
Spt: 106.00-39 1.4728-55 1.0845-71 1.9793-22
Spt: 105.23-64 1.4659-80 1.0806-11 1.9677-27
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