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Weekly Forex Fundamentals | Written by BHF-BANK | Jan 11 10 10:24 GMT |

(Week of 11 to 17 January 2010) Trade deficit (Nov): widening due to higher import prices Retail sales (Dec): another increase led by car sales Consumer prices (Dec): moderate rise due to lower gasoline prices NY Empire manufacturing index (Jan): rebound after December plunge Industrial production (Dec): utilities and the inventory cycle have a positive impact UMI consumer sentiment (Jan): stable after marked improvement in December The trade deficit narrowed significantly in October, from $35.7bn to $32.9bn. This was due partly to further solid gains in exports and partly to a decline in the price and volume of imported petroleum. In November, import prices rose by 1.7% mom, which indicates that the nominal trade deficit could have widened to about $35bn, even though the weak dollar and stabilisation of global growth are continuing to bolster exports. After surging in November, import prices are likely to have gone down by at least 0.5% mom in December, as average crude oil prices declined by 4.5% mom. The Congressional Budget Office (CBO) estimates that December's budget deficit will have hit $92bn, about $40bn more than in December 2008. There is generally a budget surplus in December, because of corporations' quarterly income tax payments and taxes on year-end bonuses, but due to the economic crisis, those tax receipts dropped again. However, adjusted to eliminate variation attributable to shifts in the timing of payments, the deficit in December 2009 would only be about $11bn higher than in the previous December. The Beige Book could state that the economic recovery is being led by manufacturing and the inventory cycle, whereas activity in many sectors is still subdued as a result of moderate domestic demand and tight bank lending. The labour market deterioration is slowly petering out, and consumer spending is picking up modestly, but residential real estate appears to have weakened again after the initial deadline of the tax credit for first-time home buyers. Due to high unemployment and idle capacity, inflationary pressure could be reported as benign again. Retail sales increased by 1.3% mom in November, as higher sales at gasoline stations contributed about 0.5 percentage points. However, slightly lower gasoline prices will have dampened retail sales in December. Given that domestic vehicle sales rose by 2.5% mom, retail sales could have gone up by about 0.6% mom. Less cars, the increase could have been a mere 0.2% mom, after 1.2% mom in November. At the beginning of the new year, Christmas gift vouchers could have a positive impact; some of them could already have been spent just after Christmas, which would boost the December figures. The University of Michigan's (UMI) final December consumer sentiment index was revised downward from 73.4 to 72.5, but it remained much higher than the November level of 67.4. Despite a rise in gasoline prices at the beginning of the new year, we expect UMI's consumer sentiment to have remained stable in January, as the weekly ABC consumer comfort poll continued to recover. CPI's annual rate turned positive again in November for the first time in eight months, because the favourable base effects from the energy side have evaporated. Lower gasoline prices and discounts could have led to a modest increase in consumer prices of 0.1% mom in December, after 0.4% mom in November. But the annual rate will nevertheless rise sharply again to about 2.7%. Core CPI, which was stable in November, could have risen slightly by 0.1% mom. The annual rate would then continue to approach the 2% mark, but due to ongoing resource slack and high unemployment, core CPI rates are expected to decelerate again in the course of 2010. Initial jobless claims rose modestly by 1k to 434k in the week ending 2 January, but the 4-week moving average declined to 450.3k - the lowest level since mid- September 2008, before the financial crisis escalated. We predict that initial jobless claims will have remained more or less unchanged in the week ending 9 January. Business inventories could have risen noticeably by 0.6% mom in November, the second increase after 13 declines in a row. We already know that factory inventories went up by 0.2% mom, but wholesale inventories jumped by 1.5% mom. The New York Empire manufacturing index plummeted from 23.5 to a mere 2.6 in December, thus barely indicating growth. However, the Philadelphia Fed index went up and the national ISM manufacturing index actually rose to a 3 ½ year high. Although we expect manufacturing activity to decelerate again in the near future, the decline of the New York Empire manufacturing index appears exaggerated, and we forecast that it will have recovered to 11.0 in January. Industrial production rose by 0.8% mom in November, led by a sharp increase of 1.1% mom in manufacturing production. The restocking of inventories is having a positive impact on production at present, and as the ISM production component went up to 61.8 in December, manufacturing is expected to have expanded again. Furthermore, after an unseasonably warm November, cold December temperatures could have raised utility output noticeably, by at least 0.2 percentage points. We predict that total industrial production will have increased by 0.7% mom in December. At 71.9%, capacity utilisation could have reached its highest level in 2009. 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