ECB to Hold Rates Again
After last week's decision to cut Fed funds rates by 25 basis points, the Federal Reserve should adopt a “watch and see” position over the next months. Pausing will begin in June, if the economy will not deteriorate further, or at the following meeting. Speculations about a different approach by the Fed should support the U.S. dollar over the short/medium term. Nevertheless, Fed's work might not be done yet.
Fed might pause, but the work is not over yet
As expected, the Federal Reserve cut Fed funds rates by 25 basis points to 2.00% last Wednesday. The Federal Open Market Committee (FOMC) is worried about the state of the economy, as financial markets are in the mid of a storm and credit stays quite tight. Nevertheless, the Federal Reserve should shortly assume a “watch and see” position When? Beginning in June or August will depend on next weeks data. Inflation is moving strongly higher and deserve to be attentively observed. In addition, the effects of the fiscal stimulus decided by the administration to support consumes should become evident in the Summer. It might help to alleviate the state of the U.S. economy, which is clearly declining and might contract further in the coming months. Nonetheless, Fed could cut rates again before year end, if growth will not pick up again.
In effect, in the first quarter of 2008, the Gross Domestic Product (GDP) moved 0.6%, unchanged from the fourth quarter of last year, but below the 4.9% reached in the third quarter of 2007. Business investment (-2.5% from +6.0%) and consumer spending (+1% from +2.3%) both fell. Here, again, housing was extremely weak. It slumped 26.7% in the first quarter, after falling 25.2% in the fourth quarter of 2008. It mirrors the S&P/Case-Shiller 20 city house price index. In February, it was down 2.6% month over month and declined almost 13% from last year level.
The job market is weakening
The shiny spot stays the international trade. In fact, net exports contributed 0.2% to the overall GDP, even though down from the 1.0% shown in the fourth quarter of last year. Exports moved up 5.5% from 6.5%, while imports rose 2.5%. Good export numbers were confirmed in the ISM manufacturing index data. In April, it was unchanged at 48.6 (48.0 expected), but the exports index was the only sector above the important level of 50 and printed 57.5 versus March's 56.5. With the economy contracting, consumes might stagnate this year. In March, real spending (adjusted for inflation) rose only 0.1%, while real disposable was unchanged.
The Consumer Confidence Index slid 3.6 points to 62.3, the lowest level of the past five years in April. The fall was expected and it is coherent with last University of Michigan Consumer Sentiment index. The job market stays volatile at best. In April, payroll employment moved down 20,000 units (-75,000 units expected), after falling 81,000 and 83,000 units in March and February. The unemployment rate is now 5% compared to March's 5.1%. Manufacturing and housing were the main source of the decline and might anticipate further weakness, or no growth, in the second quarter of this year.
ECB keeping rates steady
While the United States is in the middle of the storm, the long wave of the economic contraction is just getting into the European mainland. The European Commission is forecasting that Euro zone growth will be 1.7% this year and 1.5% in 2009, while inflation could be 3.1% and 2.2%. However, E.C. predictions could be conservative and the European economy might fell below expectations by year end. However, the European Central Bank (ECB) should postpone any intervention and leave rates unchanged at 4.00% during May 8th meeting. In reality, inflation is showing some timid signs of slowdown from recent highs and growth numbers are softening from last year. In April, the German state Consumer Price Index (CPI) declined 0.3% month on month and 2.6% year on year. In the Eurozone (fifteen nations), the CPI is 3.3% below March 3.6%.
At the moment, economic data is mixed in Europe. German GFK consumer confidence index, as an example, rose to 5.9 points (4.5 expected) in May from April's 4.8, the highest level of the past seven months. Good employment's rate and rising wages are balancing strong inflation numbers. In April, the unemployment rate declined to 8.1% from 8.4% in March, but the Bloomberg Euro zone retail Purchasing Manager's Index (PMI), a mid month survey of economic conditions in Europe, declined 6.4 points to 41.8 points from 48.2 points in March. Finally, Germany retail sales slid 0.1% in real terms (+0.5% expected) and are now down 6.3% on a yearly basis (-2.1% expected). In the first quarter of 2008, retail sales fell 1.2%.
Euro/Usd moving lower
EUR/USD failed to overcome the strong resistance at 1.59/1.60 and quickly declined below the important support at 1.56/1.55. The short term trend is on the downside, considering the divergence between price and the Rsi indicator on the daily and weekly chart. The next target could be 1.5350, 1.5220, although a quick rebound to 1.5550/1.5650 is possible. Only a move above 1.5740 will mark the end of current short term decline.
GBP/USD is consolidating between 2.00 and 1.9520. A move above 2.0050 would target 2.01 a decline below 1.9470 would instead target 1.94.
USD/JPY moved away from the support at 100. The 105.50/106.50 level is at the conjunction of various resistance lines and could hold at first touch. The next target could eventually be 107.00.
Angelo Airaghi
MG Financial Group
http://www.mgforex.com
Angelo Airaghi is a Commodity Trading Advisor, registered with the National Futures Association and the Commodity Futures Trading Commission. He has been an active professional since 1990 working for major international financial companies. In the past 10 years, Angelo Airaghi has been an analyst and commentator for national and international media.
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