Market Updates | Written by CEP News | Jul 11 08 21:44 GMT |
(CEP News) - Swings in financial stocks overshadowed economic data on Friday. Press reports that Fannie Mae and Freddie Mac might require rescue from the U.S. government dominated trade - even overshadowing a new record high in oil and a surprising Canadian jobs report.
Fannie Mae and Freddie Mac closed down 45% and 47% on the week. The two U.S. government-sponsored companies own or guarantee about half of the $12 trillion U.S. mortgage industry.
There were conflicting reports about whether the Federal Reserve would allow Fannie and Freddie to borrow from the discount window. Equity markets bounced off their lows when a newswire initially reported that Fed Chairman Ben Bernanke said the government-sponsored enterprises could use the discount window. After most markets closed, except foreign exchange, Federal Reserve spokesperson Michelle Smith told reporters there have been no official discussions with Fannie and Freddie about the discount window. That sent the U.S. dollar toward session lows.
The Dow Jones industrial average closed down 128 points to 11101 and the S&P 500 closed down 14 points to 1239. On the week, the Dow lost 1.9% while the S&P 500 fell 1.7%.
Financial companies with ties to the U.S. housing industry were also punished. Lehman Brothers, the fourth-largest investment bank in the U.S., fell nearly 40% during the week.
The Canadian banking industry also took a hit. The S&P/TSX Capped Financials Index fell to its lowest level since the March 17 collapse of Bear Stearns.
In the broader market, shares lost ground for the fifth straight week. Since closing at a record high on June 18, the Toronto Stock Exchange has declined by 9%. On Friday, Toronto's S&P/TSX composite index closed down 35 points to 13709.
Canadian markets were once again boosted by commodity markets as oil showed its resilience, rallying to a record high $147.27. It was an extremely volatile week for crude as prices fell nearly $10 to begin the week, which prompted a number of analysts to say a major price correction was imminent. However, continued tensions between Iran and Israel and an unexpected U.S. supply drop later pushed up prices.
WTI crude oil closed up $3.43 to $145.08. The front month gold contract at the Chicago Board of Trade was up $18.50 to $960.40 per ounce.
In currency markets, the loonie came under pressure after a Statistics Canada report showed the economy shed 5,000 jobs in June and the unemployment rate ticked up to 6.2%.
"The Canadian economy has lost full-time jobs for two months in a row. That's not the job creation that sustains economic growth," said Adam Fazio, currency strategist at CIBC World Markets.
Nonetheless, the loonie closed up 0.0010 to 0.9906 against the U.S. dollar (1.0094 USD/CAD) and gained 0.0089 on the week. The Canadian dollar remains well within its three-cent range on either side of parity, and Fazio doesn't see a near-term catalyst for a breakout.
"It's like a spring that coils tighter and tighter but when it goes, look out," Fazio said.
The U.S. dollar was under broad pressure on speculation the U.S. government will be forced to guarantee $5 trillion in Fannie Mae and Freddie Mac obligations.
The U.S. dollar was down 0.8100 to 106.2700 against the yen and the Dollar Index was down 0.570 to 71.923. During the Friday session, the Dollar Index fell to its lowest since April 23.
The euro was up 0.0149 to 1.5937 against the U.S. dollar, up 0.0161 to 1.6085 against the Canadian dollar, up 0.0032 to 0.8013 against the pound sterling and was higher by 0.37 to 169.42 against the yen.
The pound sterling was up 0.0107 to 1.9887 against the U.S. dollar and up 0.0126 to 2.0074 against the Canadian dollar.
U.S. fixed income also sold off on worries Fannie and Freddie debt could increase the supply of outstanding U.S. government debt. The decline in Canadian employment helped the CGB market withstand the sell off.
U.S. two-year yields are up 19.4 bps to 2.60%, with five-year yields up 20.4 bps to 3.28%, 10-year yields up 16.2 bps to 3.96% and 30-year yields up 12.6 bps to 4.54%. The Eurodollar September 08 contract is down 2.0 ticks to 97.07. The yield curve is flatter, with the 10/2-year spread down 3.3 bps to 136.13 bps.
Yields on two-year Canadian government bonds are up 2.3 bps to 3.18%, with five-year yields up 3.3 bps to 3.41%, 10-year yields up 3.0 bps to 3.78% and 30-year yields up 2.8 bps to 4.09%. The Canadian 10-year note is yielding 18.16 bps less than the U.S. 10-year note.
In Germany, returns on two-year German bonds are up 1.5 bps to 4.41%, with five-year yields up 4.0 bps to 4.43%, 10-year yields up 2.8 bps to 4.43% and 30-year yields up 1.6 bps to 4.74%.
Yields on UK two-year bonds are up 1.5 bps to 4.88%, with five-year yields up 1.9 bps to 4.86%, 10-year yields up 2.5 bps to 4.89% and 30-year yields up 2.6 bps to 4.57%.
The week starts out quietly as there are no notable economic data points on Monday. Traders will be looking for weekend news on Fannie Mae and Freddie Mac before turning their focus to Bernanke's semi-annual testimony to U.S. lawmakers. Canada's central bankers will meet on Tuesday to decide what to do with the 3.00% overnight target rate. Economists see virtually no chance the bank will change rates, and futures markets are pricing the hold as a certainty.
All data taken at 5:10 p.m. EDT.
By Adam Button, abutton@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , edited by Nancy Girgis, ngirgis@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it
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Saturday, July 12, 2008
Friday's News Recap: Canadian Employment Falls, U.S. Consumer Sentiment Rebounds
News Recap | Written by CEP News | Jul 11 08 20:26 GMT |
(CEP News) - North American economic releases were characterized by elements of surprise Friday with Canadian employment unexpectedly shedding jobs in June, the University of Michigan consumer sentiment index surprising to the upside and speculation about Fannie Mae and Freddie Mac rocking markets.
For the first time since December, Canadian employment shed 5,000 jobs in June against forecasts for a modest increase of 8k. In May, 8.4k jobs were added. Meanwhile, Canada's unemployment rate ticked up to 6.2% from the previous month's 6.1%. Economists were expecting the rate to remain unchanged from May. However, in the last 12 months, employment has grown 1.7% or 290,000 jobs.
"Reality may finally be catching up with the Canadian job market," said BMO deputy chief economist Doug Porter. "We wouldn't make too much of a one-month dip in employment - that can happen even in the middle of a boom."
On the housing front, Canadian home price increases slowed to 4.1% on an annual basis in May, the slowest pace recorded in almost six years as housing markets in Alberta and British Columbia cool, Statistics Canada said. May's price increase was the slowest since July 2002 when year-over-year prices increased 4%. On a monthly basis, prices were unchanged between April and May.
Strong exports to the U.S. and record exporting to other countries drove Canada's trade surplus with the rest of the world up to $5.5 billion in May from a revised April surplus figure of $4.8 billion. Canadian exports rose for a fifth consecutive month, jumping 5.4% to $42.1 billion as both volumes and prices increased, Statistics Canada reported.
Following the collapse of Fannie Mae and Freddie Mac share prices over the last two days and speculation of a government bailout, U.S. Treasury Secretary Henry Paulson released a statement saying the Treasury Department is continuing its dialogue with regulators and firms. He also said the focus is to back Fannie Mae and Freddie Mac "in their current form".
Later, there were conflicting reports about whether the Federal Reserve would allow Fannie and Freddie to borrow from the discount window. A newswire initially cited sources that Fed Chairman Ben Bernanke said the government-sponsored enterprises could use the discount window. Later, Federal Reserve spokesperson Michelle Smith told reporters there have been no official discussions with Fannie and Freddie about the discount window.
In data releases, the preliminary consumer sentiment survey from Reuters and the University of Michigan rebounded for the first time since January, reaching a score of 56.6 in July from June's reading of 56.4. The consensus was expecting a further decline to 55.5. According to the report, 90% of respondents said they thought the U.S. economy was in recession, with the downturn expected to deepen further.
The outlook continues to look grim with the consumer outlook index falling to 48.3 in July from 49.2 in the prior report. The current conditions index rebounded to 69.5 from 67.6 in last month's final report.
In another surprising result, the U.S. monthly trade deficit unexpectedly shrank in May to -$59.8 billion, with April's deficit figure downwardly revised to -$60.5 billion from a previously reported -$60.9 billion, the U.S. Census Bureau reported. Economists had been expecting a deficit of $62.5 billion, with expectations ranging from -$65.0 billion to -$59.5 billion. A sharp decline in oil imports was responsible for the decline.
According to the U.S. Treasury, monthly receipts totalled $259.912 billion and spending came in at $209.188 billion, resulting in a deficit of $50.725 billion for June, a 145.1% increase from the prior year.
U.S. import prices continued to rise in June, according to data released from the U.S. Bureau of Labor Statistics (BLS) on Friday, which showed a 0.9% month-over-month increase in import prices excluding petroleum products and a 6.6% annual gain. In May, the import price index excluding petroleum rose 0.7% month-over-month and 6.6% year-over-year.
In overnight releases, the Federal Statistics Office of Germany (Destatis) said that German wholesale price inflation reached 8.9% year-over-year in June, the highest annualized increase recorded since January 1982 and in line with forecasts. May's rate was 8.1%. Month-over-month, the wholesale price index grew 0.9% in June, also as expected and down from the 1.4% growth rate observed in May.
WTI crude oil surged more than four dollars to $145.92 in overnight trading due to rising tensions in the Middle East and prospects of further violence in Nigeria.
Japanese consumer confidence waned further in June, falling to a reading of 32.9 despite expectations for a fall from 34.1 in May to 33.0. Household consumer confidence did slightly better than the consensus of 32.5, declining to 32.6 from 33.9.
Final figures for Japanese industrial production for May showed some small unexpected downward revisions with production expanding by 2.8% month-over-month despite the preliminary 2.9% seen earlier, and an annual 1.1% rise compared to the preliminary 1.2% rate.
Speaking at a conference in Yalta, Ukraine on Friday, International Monetary Fund Managing Director Dominique Strauss-Kahn stressed that the global economy, caught between "the ice of a recession and the fire of inflation", would not recover before next year. Strauss-Kahn also emphasized that the economic consequences of the current financial crisis is still "in front of us" but that the worst of the rout is over.
By Stephen Huebl, shuebl@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , with contributions from Erik Kevin Franco, efranco@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , Sean McKibbon, smckibbon@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it and Todd Wailoo, twailoo@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , edited by Nancy Girgis, ngirgis@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it
CEP Newswires - CEP News © 2008. All Rights Reserved. www.economicnews.ca
The Copying, Broadcast, Republication or Redistribution of CEP News Content is Expressly Prohibited Without the Prior Written Consent of CEP News.
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(CEP News) - North American economic releases were characterized by elements of surprise Friday with Canadian employment unexpectedly shedding jobs in June, the University of Michigan consumer sentiment index surprising to the upside and speculation about Fannie Mae and Freddie Mac rocking markets.
For the first time since December, Canadian employment shed 5,000 jobs in June against forecasts for a modest increase of 8k. In May, 8.4k jobs were added. Meanwhile, Canada's unemployment rate ticked up to 6.2% from the previous month's 6.1%. Economists were expecting the rate to remain unchanged from May. However, in the last 12 months, employment has grown 1.7% or 290,000 jobs.
"Reality may finally be catching up with the Canadian job market," said BMO deputy chief economist Doug Porter. "We wouldn't make too much of a one-month dip in employment - that can happen even in the middle of a boom."
On the housing front, Canadian home price increases slowed to 4.1% on an annual basis in May, the slowest pace recorded in almost six years as housing markets in Alberta and British Columbia cool, Statistics Canada said. May's price increase was the slowest since July 2002 when year-over-year prices increased 4%. On a monthly basis, prices were unchanged between April and May.
Strong exports to the U.S. and record exporting to other countries drove Canada's trade surplus with the rest of the world up to $5.5 billion in May from a revised April surplus figure of $4.8 billion. Canadian exports rose for a fifth consecutive month, jumping 5.4% to $42.1 billion as both volumes and prices increased, Statistics Canada reported.
Following the collapse of Fannie Mae and Freddie Mac share prices over the last two days and speculation of a government bailout, U.S. Treasury Secretary Henry Paulson released a statement saying the Treasury Department is continuing its dialogue with regulators and firms. He also said the focus is to back Fannie Mae and Freddie Mac "in their current form".
Later, there were conflicting reports about whether the Federal Reserve would allow Fannie and Freddie to borrow from the discount window. A newswire initially cited sources that Fed Chairman Ben Bernanke said the government-sponsored enterprises could use the discount window. Later, Federal Reserve spokesperson Michelle Smith told reporters there have been no official discussions with Fannie and Freddie about the discount window.
In data releases, the preliminary consumer sentiment survey from Reuters and the University of Michigan rebounded for the first time since January, reaching a score of 56.6 in July from June's reading of 56.4. The consensus was expecting a further decline to 55.5. According to the report, 90% of respondents said they thought the U.S. economy was in recession, with the downturn expected to deepen further.
The outlook continues to look grim with the consumer outlook index falling to 48.3 in July from 49.2 in the prior report. The current conditions index rebounded to 69.5 from 67.6 in last month's final report.
In another surprising result, the U.S. monthly trade deficit unexpectedly shrank in May to -$59.8 billion, with April's deficit figure downwardly revised to -$60.5 billion from a previously reported -$60.9 billion, the U.S. Census Bureau reported. Economists had been expecting a deficit of $62.5 billion, with expectations ranging from -$65.0 billion to -$59.5 billion. A sharp decline in oil imports was responsible for the decline.
According to the U.S. Treasury, monthly receipts totalled $259.912 billion and spending came in at $209.188 billion, resulting in a deficit of $50.725 billion for June, a 145.1% increase from the prior year.
U.S. import prices continued to rise in June, according to data released from the U.S. Bureau of Labor Statistics (BLS) on Friday, which showed a 0.9% month-over-month increase in import prices excluding petroleum products and a 6.6% annual gain. In May, the import price index excluding petroleum rose 0.7% month-over-month and 6.6% year-over-year.
In overnight releases, the Federal Statistics Office of Germany (Destatis) said that German wholesale price inflation reached 8.9% year-over-year in June, the highest annualized increase recorded since January 1982 and in line with forecasts. May's rate was 8.1%. Month-over-month, the wholesale price index grew 0.9% in June, also as expected and down from the 1.4% growth rate observed in May.
WTI crude oil surged more than four dollars to $145.92 in overnight trading due to rising tensions in the Middle East and prospects of further violence in Nigeria.
Japanese consumer confidence waned further in June, falling to a reading of 32.9 despite expectations for a fall from 34.1 in May to 33.0. Household consumer confidence did slightly better than the consensus of 32.5, declining to 32.6 from 33.9.
Final figures for Japanese industrial production for May showed some small unexpected downward revisions with production expanding by 2.8% month-over-month despite the preliminary 2.9% seen earlier, and an annual 1.1% rise compared to the preliminary 1.2% rate.
Speaking at a conference in Yalta, Ukraine on Friday, International Monetary Fund Managing Director Dominique Strauss-Kahn stressed that the global economy, caught between "the ice of a recession and the fire of inflation", would not recover before next year. Strauss-Kahn also emphasized that the economic consequences of the current financial crisis is still "in front of us" but that the worst of the rout is over.
By Stephen Huebl, shuebl@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , with contributions from Erik Kevin Franco, efranco@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , Sean McKibbon, smckibbon@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it and Todd Wailoo, twailoo@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , edited by Nancy Girgis, ngirgis@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it
CEP Newswires - CEP News © 2008. All Rights Reserved. www.economicnews.ca
The Copying, Broadcast, Republication or Redistribution of CEP News Content is Expressly Prohibited Without the Prior Written Consent of CEP News.
A copy of CEP News disclaimer can be found at http://www.economicnews.ca/cepnews/wire/disclaimer.
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Lehman shares plunge amid market distress
By Dan Wilchins and Jennifer Ablan
NEW YORK (Reuters) - Shares of Lehman Brothers plunged to nine-year lows and stock in other Wall Street firms declined as new signs of distress in financial markets spooked investors.
Lehman fell as much as 23 percent, before recovering to close down 16.6 percent on Friday, far outpacing the drop in rivals such as Merrill Lynch & Co , which lost 3.8 percent and Goldman Sachs Group Inc , which declined 4.5 percent.
In the last two weeks, Lehman has lost about a third of its market value, and the company's shares now trade at less than half their book value, or the net accounting value of its assets, which typically signals extreme distress.
The investment bank has been the subject of false rumors in the past, and the U.S. Securities and Exchange Commission is investigating whether investors have looked to profit by spreading rumors to push down the company's shares.
On Thursday, its shares were battered by rumors -- later discredited -- that some key customers, Pimco and SAC Capital, had pulled business away from it. Pimco, the world's biggest bond fund, said on Thursday it continued to trade normally with Lehman as did SAC, a prominent hedge fund.
Standard & Poor's on Friday refuted negative speculation, saying Lehman appears to have "sound credit fundamentals."
"The persistent and ongoing pressure on Lehman's stock price in recent days has not had negative effects on Lehman's liquidity, funding or client business," said S&P, affirming its "A/Negative/A-1" rating on the stock.
On June 30, Lehman's shares dropped on rumors that it was going to be bought out at a price below its then market price. Again, the rumors could not in any way be substantiated.
The U.S. stock market fell on Friday, largely because of fears that the U.S. housing crisis would drag down the nation's major mortgage finance agencies, Freddie Mac and Fannie Mae , and because the government offered no hint that it would step in swiftly to help.
Around the time Bear Stearns collapsed, the Federal Reserve opened backup financing lines for Wall Street, which should prevent a major investment bank from failing overnight.
But even with the ability to borrow against assets at the Federal Reserve, Lehman could run into trouble, said James Ellman, president at hedge fund Seacliff Capital in San Francisco, which has about $200 million under management. He said Seacliff does not have a position in Lehman.
"They can walk all the assets they want to the Fed, but clients can still take funds elsewhere, and if enough clients decide to remove their business, that brokerage likely does not survive long-term," Ellman said.
Bear Stearns, once the fifth-largest U.S. investment bank, faced a run on the bank in March, and was forced to sell itself.
"People think Lehman will be acquired by someone at below its current share price. Just look at what happened with Bear Stearns," said Jim Huguet, co-chief executive at fund manager Great Companies, which manages $300 million. Great Companies does not have a position in Lehman.
It is extremely difficult to know the market value of the mortgages, real estate, and related securities that are valued on Lehman's books at around $60 billion, experts said.
Huguet said that it was difficult for Lehman given the ferociousness of short sellers.
"Everybody is totally negative on financial stocks, and until housing prices stabilize, and people feel like there is liquidity for these firms, the market will continue to take them down. It's interesting the way the shorts have gotten -- it's almost like a group of piranhas. Something in the water is hurt, and all of the sudden it has 10,000 piranhas on it."
Lehman spokeswoman Kerrie Cohen declined to comment.
Lehman's shares closed down $2.87, or 16.6 percent, at $14.43 on Friday. Earlier, they touched a low of $13.29, their lowest level since 1999.
(Reporting by Dan Wilchins; Editing by Toni Reinhold and Carol Bishopric)
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NEW YORK (Reuters) - Shares of Lehman Brothers plunged to nine-year lows and stock in other Wall Street firms declined as new signs of distress in financial markets spooked investors.
Lehman fell as much as 23 percent, before recovering to close down 16.6 percent on Friday, far outpacing the drop in rivals such as Merrill Lynch & Co , which lost 3.8 percent and Goldman Sachs Group Inc , which declined 4.5 percent.
In the last two weeks, Lehman has lost about a third of its market value, and the company's shares now trade at less than half their book value, or the net accounting value of its assets, which typically signals extreme distress.
The investment bank has been the subject of false rumors in the past, and the U.S. Securities and Exchange Commission is investigating whether investors have looked to profit by spreading rumors to push down the company's shares.
On Thursday, its shares were battered by rumors -- later discredited -- that some key customers, Pimco and SAC Capital, had pulled business away from it. Pimco, the world's biggest bond fund, said on Thursday it continued to trade normally with Lehman as did SAC, a prominent hedge fund.
Standard & Poor's on Friday refuted negative speculation, saying Lehman appears to have "sound credit fundamentals."
"The persistent and ongoing pressure on Lehman's stock price in recent days has not had negative effects on Lehman's liquidity, funding or client business," said S&P, affirming its "A/Negative/A-1" rating on the stock.
On June 30, Lehman's shares dropped on rumors that it was going to be bought out at a price below its then market price. Again, the rumors could not in any way be substantiated.
The U.S. stock market fell on Friday, largely because of fears that the U.S. housing crisis would drag down the nation's major mortgage finance agencies, Freddie Mac and Fannie Mae , and because the government offered no hint that it would step in swiftly to help.
Around the time Bear Stearns collapsed, the Federal Reserve opened backup financing lines for Wall Street, which should prevent a major investment bank from failing overnight.
But even with the ability to borrow against assets at the Federal Reserve, Lehman could run into trouble, said James Ellman, president at hedge fund Seacliff Capital in San Francisco, which has about $200 million under management. He said Seacliff does not have a position in Lehman.
"They can walk all the assets they want to the Fed, but clients can still take funds elsewhere, and if enough clients decide to remove their business, that brokerage likely does not survive long-term," Ellman said.
Bear Stearns, once the fifth-largest U.S. investment bank, faced a run on the bank in March, and was forced to sell itself.
"People think Lehman will be acquired by someone at below its current share price. Just look at what happened with Bear Stearns," said Jim Huguet, co-chief executive at fund manager Great Companies, which manages $300 million. Great Companies does not have a position in Lehman.
It is extremely difficult to know the market value of the mortgages, real estate, and related securities that are valued on Lehman's books at around $60 billion, experts said.
Huguet said that it was difficult for Lehman given the ferociousness of short sellers.
"Everybody is totally negative on financial stocks, and until housing prices stabilize, and people feel like there is liquidity for these firms, the market will continue to take them down. It's interesting the way the shorts have gotten -- it's almost like a group of piranhas. Something in the water is hurt, and all of the sudden it has 10,000 piranhas on it."
Lehman spokeswoman Kerrie Cohen declined to comment.
Lehman's shares closed down $2.87, or 16.6 percent, at $14.43 on Friday. Earlier, they touched a low of $13.29, their lowest level since 1999.
(Reporting by Dan Wilchins; Editing by Toni Reinhold and Carol Bishopric)
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Fannie and Freddie's Troubles are a Lose-Lose for the US Dollar
Daily Forex Fundamentals | Written by DailyFX | Jul 11 08 21:30 GMT |
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- Euro Within 1 Penny of its Record Highs
- British Pound: Time for Some Action
Fannie and Freddie's Troubles are a Lose-Lose for the US Dollar
Calling the financial markets active today is practically an understatement. The combination of soaring oil prices and problems with Fannie Mae and Freddie Mac triggered sharp volatility in the equity and currency market. At one point during the US trading session, the Dow jumped 200 points within minutes, driving EUR/JPY to a record high. The market was initially very disappointed by US Treasury Secretary Paulson's reluctance to bailout Fannie Mae and Freddie Mac, but they were pleasantly surprised by Bernanke's offer to access the discount window (The ABCs of Fannie Mae and Freddie Mac's Problems).However their optimism was short-lived as stocks resumed their slide. The biggest question in the financial markets right now is whether or not Fannie and Freddie are too big to fail? If the government stepped in to prevent the Bear Stearns meltdown from crushing the market, they will undoubtedly step in to prevent a collapse in Fannie Mae or Freddie Mac because if either GSE fails, Americans will have to shoulder the burden. Fed Chairman Ben Bernanke has already announced that the GSEs can have access to the discount window, which would allow them to borrow money directly from the Federal Reserve rather than the markets. If Fannie and Freddie's problems are not solved and they still have difficulties borrowing, this means that they will have difficulties lending, which is something that the US government can not risk at this moment. For the currency market, it is a lose-lose situation for the US dollar. Further problems at Fannie and Freddie would push stocks lower once again, which would trigger another flight to safety out of US dollars. A bailout would essentially double the public debt, risking a downgrade in the US credit rating. Expect Friday's volatility to continue into the new trading week. We have a very busy US economic calendar that includes retail sales, producer prices, consumer prices, the Empire State and Philly Fed manufacturing surveys, industrial production, the Treasury International Capital flow report, housing starts and the minutes from the last FOMC meeting. Meanwhile the trade balance was stronger than the market expected thanks to a rebound in exports. Consumer confidence also improved modestly but it still remains near a 30 year low.
Euro Within 1 Penny of its Record Highs
The Euro traded within 1 penny of its record highs on fresh fears that another major financial crisis may be around the corner. If it wasn't for the potential repeat of the Bear Stearns debacle in March, we would have a quiet summer. However US stocks fell to a new 23 month low today triggering another flight to safety into anything but US dollars. Whether the EUR/USD manages to hit a new record high will be less dependent on economic data and more dependent on how much better or worse the market feels about the health of Fannie Mae and Freddie Mac. The latest rally in the Euro helps Eurozone nations deal with the rise in oil prices but it also raises the risk of sharply weaker growth for countries other than Spain and Ireland. Like the US, there are a number of pieces of economic data on the Eurozone calendar that are worth watching. This includes the German ZEW survey of analyst sentiment, consumer and producer prices.
British Pound: Time for Some Action
The British pound strengthened against the US dollar due entirely to dollar weakness. Although the problems with Fannie Mae and Freddie Mac affect the US the most, the UK will not escape unscarred. Bond yields have started to trickle higher while the FTSE has plunged alongside the Dow. In some ways, the UK economy is in as much trouble as the US. According to the latest data from mortgage lender Halifax, house prices dropped for the fourth month in a row to the lowest level on record. More housing market data will be released next week and we do not expect the current trend to change. The UK will be reporting consumer and producer price growth along with their employment numbers for the month of June. Inflationary pressures are expected to grow, but the outlook for the unemployment numbers are mixed. Even though the labor conditions in the service sector improved last month, conditions in the manufacturing sector deteriorated.
Big Week Ahead for the Canadian and New Zealand Dollars
Of the three commodity producing currencies, the Australian dollar was the market's biggest focus this past week. Not only were employment numbers released, but currency pair soared to a new 25 year high this morning. A move above the August 1982 high of 0.9905 would mark a 26 year high for the currency. Next week, the currency market's focus will shift to the Canadian and New Zealand dollars. The Bank of Canada has a monetary policy decision. Although they are not expected to alter interest rates, watch out for any market moving comments from the BoC Governor. New Zealand on the other hand has retail sales, service sector PMI, and consumer prices due for release. Given the sharp drop in consumer and business confidence, we expect the data to be kiwi bearish. The divergence in economic activity between Australia and New Zealand has driven the exchange rate of AUD/NZD to a new 7 year high.
EUR/JPY Hits Record High
Japanese Yen crosses have had a varied reaction to the volatility in the Dow today. USD/JPY and CAD/JPY came under aggressive selling pressure, while EUR/JPY and CHF/JPY are higher. This tells us that traders are just selling US dollars and not all risky assets. Depending on which Yen crosses that you buy, the carry trade could still be working. EUR/JPY hit a new record high, which is a trend that we have seen often. When the Dow first broke the Bear Stearns low in late June, EUR/JPY also rallied to a new high. Looking ahead, the Bank of Japan is expected to leave interest rates unchanged at 0.5 percent as the economy continues to suffer.
Disclaimer
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Bank of Canada Monetary Policy Monitor
Daily Forex Fundamentals | Written by TD Bank Financial Group | Jul 11 08 21:04 GMT |
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HIGHLIGHTS
- Economic conditions and Bank rhetoric prompt us to think that the Bank will remain on the sidelines on July 15, leaving rates at 3%.
- The Bank of Canada has previously stated they have a neutral bias, and we expect a similar bias to come out of this meeting as well.
- Governor Carney has stated some concern about inflation as a result of the massive commodity rally. We expect commodity price movements to remain a key variable on the Bank's radar.
- Though there is no compelling case for making a move on rates this time around, there are brewing inflation risks which suggest that the Bank's next move may be a hike.
The market has undergone a profound shift in expectations since the June 10th Bank of Canada Fixed Announcement Date. Though the decision to keep rates on hold at 3% surprised the markets, the accompanying statement indicated that the bias is now neutral. Subsequent comments by Governor Carney reinforced that view very clearly when he stated that “going forward, there remain important downside and upside risks to inflation, but these risks are now judged to be evenly balanced.”
With a clear neutral bias, market expectations have shifted accordingly. It is now clear that the Bank is comfortable with the overnight rate at 3%, but it will be keeping a close watch on inflation. On that front, there is some cause for concern. Nonetheless, a careful assessment of both economic conditions and Bank rhetoric prompt us to think that the Bank will take an opportunity for a breather on the sidelines leaving rates at 3% on July 15. Down the road, the Bank will be compelled to begin a tightening cycle in 2009.
Slower Economic Growth Will Tame Inflation
The economic data have shown signs of modest improvement after a dismal first quarter in which the Canadian economy contracted by 0.3% (q/q, annualized), due primarily to weakness in inventories and residential structures.
In April, GDP posted a robust 0.4% M/M gain, which made a nice kick off to the second quarter. The domestic side of the economy is holding up reasonably well, thanks to the income gains derived in large part from the commodity boom. In Governor Carney's Calgary address, he noted that “since 2002, rising commodity prices have fuelled a 25% improvement in our terms of trade, which alone has been responsible for roughly two-thirds of the 15 per cent gain in real per capita disposable income.” Such income gains have supported retailing activity, which is still up over 4% on a year ago basis. The real question is how the slowdown in the U.S. will impact Canada's export sector. And on that front, the storm clouds remain ominous and suggest trade will continue to be a net drag on GDP until early 2009. This means the Canadian economy should remain weak and we expect growth of 1.9% in Q3 and just 0.8% in Q4.
A slowing Canadian economy means the output gap, which is now closed, may move moderately into excess supply in the summer months. That will take some of the pressure off inflation, which reduces the need for any immediate rate increases. As such, the best recipe in this situation is to stay on the sidelines.
Inflation is Percolating
While not an immediate problem, inflation risks are turning more problematic. Thus, there is scope for keeping rates on hold now, but keeping a watchful eye on inflation going forward. Canadian core CPI remained well contained at just 1.5% Y/Y in May and has not crossed the 2% threshold which is the Bank of Canada's operational target since September 2007. However, core CPI on a three month annualized trend was 2.2% in May, and several other alternative core measures also point to inflation a little above the 2% target.
Further up the pipeline, wage pressures remain strong, and are trending well above historical averages. In May, the average hourly wages of permanent employees rose 4.6% Y/Y as a still tight labour market allowed workers to bid wages higher. Unit labor costs, or wages adjusted for productivity, have been on the rise since mid-2007 and are now nearly 4% on a year ago basis. But the likelihood of a true wage-price spiral seems small, and the risk that workers will try to negotiate higher wages to offset the erosion of purchasing power is unlikely to be as big of a threat as commodity prices. On the flip-side, capacity utilization measures have recently plummeted, and a recent change in the mortgage industry could crimp home inflation. Moreover, growing economic slack should keep the reins on inflation.
In addition, expectations for headline inflation have been creeping higher, which is no doubt concerning to the Bank. In the Bank of Canada's Summer Business Outlook Survey 35.6% of the respondents expected inflation to be above 3%, which is the highest level since the survey began. Expectations for higher prices along the production chain suggest that inflation is becoming well entrenched. Not only do businesses expect higher input prices, but they also expect to pass on those higher prices by raising output prices. Note however, that the Bank of Canada would have had a peek at this information going into the last meeting and so the neutral bias already reflects this view.
Headline inflation, however, is already a little too hot. Rising food and energy prices have pushed inflation back above the 2% rate. In May, all-items CPI was up 2.2% Y/Y. Looking ahead, inflation appears to be on an upward trend. Since the June 10th FAD, a barrel of crude oil has gained nearly $15/barrel to trade at a new all-time high of $145.29. Oil is just one of many commodities that continue to post strong gains. The Bank of Canada's commodity price index is up 48% Y/Y in June and the energy sub component is up a whopping 89% Y/Y. The steady rise in oil prices will surely push headline inflation higher in the near term.
Other commodities such as food are also poised to push headline inflation higher for a number of reasons. First, the trend appreciation in the Canadian dollar was an important factor in pushing prices lower in 2007. The media attention on the issue was an important catalyst for the downward pressure on prices. That now appears to be over. Since the beginning of the year, the loonie has stabilized around parity with the U.S. dollar, and going forward, we expect the Canadian dollar to give up some ground against the U.S. dollar. As such, the currency is no longer playing a prominent role in holding down prices and retailers are under less scrutiny to keep prices low.
Secondly, in the past couple years, food prices have been contained by the intensifying competition between Canadian grocers trying to preserve their market share, as companies like Wal-Mart are trying move into Canada. This is likely a one-time effect which is unlikely to be repeated.
Third, because of the way the Canadian CPI is constructed, food prices play a more prominent role not only in headline CPI, which includes 17% food (as compared to 13.8% in the U.S. definition), but also there are some food items like bread and meat which are included in the core CPI definition. Thus, with expected increases in food prices in the near term, there may be some follow through to headline and core inflation readings. All told, we forecast Canadian CPI to breach the 3% threshold by year end, while core should hit 2%.
The disconnect between headline and core CPI poses something of a dilemma for the Bank of Canada. The Bank of Canada normally uses core inflation as its operational guide. But the forces pushing headline inflation, particularly commodity prices, cannot be completely ignored. When Governor Carney addressed an audience in Calgary shortly after the last meeting, he acknowledged that, “the Bank needs to be mindful of the possibility that rising commodity prices may affect the relationship between total and core CPI” and added that “the Bank will also continue to look at a range of measures to assess the underlying trend of inflation.” However, the Bank has also reiterated its focus on core CPI recently, and we do not expect any sharp changes in methodology in the near term.
Credit Conditions Still on the Mend
Also arguing for steady rates in the near term is that the impact that the credit crunch has had on the Canadian economy.
The three month CDOR versus the three month OIS spread narrowed to 27 basis points over the past few months, and is well below the highs recorded last August when the credit crunch first hit or during the Bear Stearns bailout. In fact, the narrowing in the three month CDOR-OIS spread has been sufficient enough to cause the Bank of Canada to discontinue its Term PRA program of liquidity injections because “conditions in Canadian markets have improved since the end of April.”
Other positive signs of improvement in the credit market stem from the recent Business Outlook Survey. The response to the question on credit conditions indicated that although conditions have continued to deteriorate since April, the pace of weakening has slowed.
But while there has been measurable improvement in Canadian credit conditions, they are still not back to historical trends. All this suggests the need for some further repair. As such, a rate hike at this point would be far too early and disrupt the ongoing repair in credit markets.
What Will the Bank Say?
Given that the market is pricing in steady rates, the focus will be on the accompanying statement. A great deal of attention will be paid to any revisions the Bank will make to the economic forecasts. These revisions generally only occur in every second rate decision because it is when the MPR is released. This next decision is one such opportunity. In the last MPR, the Bank forecast H2 inflation of 1.9% Y/Y and core inflation of 1.5% Y/Y. There could be upward revisions to those figures and the full details will be released on Thursday with the Monetary Policy Report Update. Note, however, that the BoC's surprise pause in June was almost certainly backed by an internally revised economic and inflation forecast. Since very little time has passed since the last decision, it is unlikely that a revised forecast will translate into a substantially revised bias for the future.
We expect that the statement will stick to the broad outline set out in the last statement, and still maintain a generally neutral bias. As such, the statement “the Bank now judges that the current stance of monetary policy is appropriately accommodative” is likely to remain a fixture in the communiqué, in addition to a statement that the risks remain balanced.Outlook for Rates
There are a number of upside inflation risks that argue for higher rates going forward, but some of the froth on inflation will come off as the Canadian economy begins to cool. That suggests there is a window of opportunity for the Bank to assess what is happening with inflation trends in Canada. Consequently, we expect the Bank has now entered a protracted period of sitting on the sidelines and will not entertain serious thoughts of hiking rates until H2 2009. By that time, the Canadian economy will have gone through the storm and will be sufficiently strong to withstand higher rates.
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Friday, July 11, 2008
Argentina, Brazil, Mexico: Latin America Bond, Currency Preview
By Jamie McGee
July 11 (Bloomberg) -- The following events and economic reports may influence trading in Latin American local bonds and currencies today. Bond yields and exchange rates are from a previous session.
Argentina: The monthly inflation rate likely remained unchanged at 0.6 percent in June from the prior month, according to the median estimate of 11 economists in a Bloomberg survey. Inflation for the 12 months through June accelerated to 9.3 percent, from 9.1 percent in the prior month, according to the median estimate of seven economists in a Bloomberg survey.
The National Institute of Statistics is scheduled to release the data at 3 p.m. New York time.
The peso fell 0.1 percent to 3.017 per dollar.
The yield on the country's inflation-linked peso bonds due December 2033 rose 10 basis points, or 0.1 percentage point, to 10.04 percent, according to Citigroup Inc.'s unit in Argentina.
Brazil: Inflation in the four weeks through July 7 probably quickened by 0.88 percent, according to the median estimate of 13 economists in a Bloomberg survey.
The data is scheduled for release at 4 a.m. New York time.
The real rose 0.3 percent to 1.605 per dollar.
The yield on the country's zero-coupon bonds due January 2010 fell 7 basis points to 15.16 percent, according to Bloomberg pricing.
Mexico: Capital investment rose 10.1 percent in the year through April, from a 4.1 percent decline in the prior month, according to the median estimate of 15 economists in a Bloomberg survey.
The National Institute of Statistics is scheduled to release the fixed investment data at 3:30 p.m. New York time.
The peso was little changed at 10.3022 per dollar.
The yield on Mexico's benchmark 10 percent bonds due December 2024 fell 6 basis points, or 0.06 percentage point, to 9.21 percent, according to Banco Santander SA.
To contact the reporter on this story: Jamie McGee in New York at jmcgee8@bloomberg.net
Read more...
July 11 (Bloomberg) -- The following events and economic reports may influence trading in Latin American local bonds and currencies today. Bond yields and exchange rates are from a previous session.
Argentina: The monthly inflation rate likely remained unchanged at 0.6 percent in June from the prior month, according to the median estimate of 11 economists in a Bloomberg survey. Inflation for the 12 months through June accelerated to 9.3 percent, from 9.1 percent in the prior month, according to the median estimate of seven economists in a Bloomberg survey.
The National Institute of Statistics is scheduled to release the data at 3 p.m. New York time.
The peso fell 0.1 percent to 3.017 per dollar.
The yield on the country's inflation-linked peso bonds due December 2033 rose 10 basis points, or 0.1 percentage point, to 10.04 percent, according to Citigroup Inc.'s unit in Argentina.
Brazil: Inflation in the four weeks through July 7 probably quickened by 0.88 percent, according to the median estimate of 13 economists in a Bloomberg survey.
The data is scheduled for release at 4 a.m. New York time.
The real rose 0.3 percent to 1.605 per dollar.
The yield on the country's zero-coupon bonds due January 2010 fell 7 basis points to 15.16 percent, according to Bloomberg pricing.
Mexico: Capital investment rose 10.1 percent in the year through April, from a 4.1 percent decline in the prior month, according to the median estimate of 15 economists in a Bloomberg survey.
The National Institute of Statistics is scheduled to release the fixed investment data at 3:30 p.m. New York time.
The peso was little changed at 10.3022 per dollar.
The yield on Mexico's benchmark 10 percent bonds due December 2024 fell 6 basis points, or 0.06 percentage point, to 9.21 percent, according to Banco Santander SA.
To contact the reporter on this story: Jamie McGee in New York at jmcgee8@bloomberg.net
Read more...
U.S. Trade Gap Narrowed 1.2% in May to $59.8 Billion
By Bob Willis
July 11 (Bloomberg) -- The U.S. trade deficit unexpectedly narrowed in May as the cheaper dollar spurred gains in exports, helping make up for the soaring cost of imported oil.
The gap between imports and exports shrank 1.2 percent to $59.8 billion from a revised $60.5 billion in April that was smaller than previously estimated, the Commerce Department said today in Washington.
Growth in overseas markets and a weaker dollar are helping lift exports even as oil prices, which reached a record last week, are pushing up imports. A shrinking trade gap is one of the few economic bright spots remaining as an extended housing slump and cooling consumer spending weigh on the economy.
``We're continuing to see that in foreign demand,'' boosted by a sinking U.S. currency, said Mike Feroli, an economist at JPMorgan Chase & Co. in New York. ``It looks like we'll get yet another quarter where foreign trade will contribute around a percentage point'' to gross domestic product growth, he said.
A separate government report today showed prices of imported goods rose 2.6 percent in June from the previous month, the same as in May. The Labor Department said import prices climbed 20.5 percent from a year before.
Economists' Estimates
The trade gap was forecast to widen to $62.5 billion from an initially reported $60.9 billion in April, according to the median estimate in a Bloomberg News survey of 74 economists. Deficit projections ranged from $59.5 billion to $65 billion.
Exports increased 0.9 percent to $157.5 billion, as sales of foods, aircraft and chemicals strengthened.
Imports rose 0.3 percent to $217.3 billion after increasing 4.6 percent the prior month. The import figures reflected a record $31.2 billion in purchases of foreign crude oil, before seasonal adjustments, as well as higher demand for capital goods and consumer items such as televisions, apparel and toys. Auto imports fell $842 million to $20.6 billion.
The cost of crude oil rose as high as $135.09 a barrel on May 22, according to pricing on the New York Mercantile Exchange, and last week reached a new record of $145.85.
Imports of industrial supplies declined by $332 million to $67.2 billion. Demand for consumer goods from abroad gained $1.5 billion to $41.7 billion.
After eliminating the influence of changes in prices, the trade deficit declined to $43.6 billion, the lowest since October 2002, from $46.7 billion. Those are the numbers used to calculate gross domestic product and may prompt economists to increase their estimates of second-quarter growth.
China Deficit Widens
The trade gap with China widened to $21 billion from $20.2 billion in the prior month. The deficit with the Organization of Petroleum Exporting Countries widened by $2.3 billion to a record $17.9 billion.
The U.S. trade deficits with Canada, Mexico, Japan and the European Union all narrowed, led by a $2.5 billion decline in the shortfall with Japan, to $5 billion. Exports to Canada and the EU reached record levels.
The economy probably grew 1.5 percent in the second quarter, as growing exports helped counter weakness in manufacturing and construction, according to a Bloomberg survey of economists taken the first week of July. The economy grew 1 percent in the first quarter, when net exports contributed 0.8 percentage point to the expansion.
About $78 billion in tax rebates through June probably gave consumer spending a boost in the second quarter, helping to spur purchases of foreign televisions and other consumer goods. Economists surveyed by Bloomberg forecast consumer spending rose 2 percent in the April-to-June period, compared with a 1.1 percent gain in the first quarter.
Growth Overseas
Faster growth overseas is spurring exports of U.S.-made goods, ranging from Boeing Co. aircraft, to mining and construction equipment, steel and grains. China's economy grew 10.6 percent in the first quarter from a year earlier. India's expanded 8.8 percent, Argentina's 8.4 percent and Brazil's 5.8 percent.
In response to growing demand from China, Caterpillar Inc., the world's biggest maker of earthmoving equipment, will build a factory in eastern China to make light hydraulic excavators for the world's largest earthmover market after the U.S.
``Our customers in China are demanding a greater variety of construction equipment,'' Mary Bell, Caterpillar's global vice president for construction machines, said in a statement June 30.
The deficit with China, which makes up the largest share of the U.S. trade gap, remains a political sticking point. Some U.S. lawmakers accuse China of keeping its currency undervalued to boost exports.
Treasury Secretary Henry Paulson on June 18 urged China to let markets play a bigger role in setting the value of the yuan, while acknowledging ``the recent increased pace of appreciation'' of the Chinese currency.
Dollar's Decline
U.S. exporters are also getting a boost from a weaker dollar, which was down 8 percent against a trade-weighted basket of currencies of major trading partners in the 12 months ended in May. The dollar is down by about 27 percent since February 2002, and that has pushed up prices of commodities.
Charlotte, North Carolina-based Nucor Corp., the largest U.S.-based steelmaker by market value, is working to keep up with surging demand from emerging economies, many of them profiting from gains in prices of oil and other commodities, Chief Executive Officer Dan DiMicco said on June 25.
``Because of the global shortage of steel, we have a strong ability to export,'' DiMicco said in an interview in New York. Demand for steel and other commodities is in a ``30-plus-year bull market,'' he said, as emerging economies including China and India expand infrastructure.
To contact the reporters on this story: Bob Willis in Washington at bwillis@bloomberg.net
Read more...
July 11 (Bloomberg) -- The U.S. trade deficit unexpectedly narrowed in May as the cheaper dollar spurred gains in exports, helping make up for the soaring cost of imported oil.
The gap between imports and exports shrank 1.2 percent to $59.8 billion from a revised $60.5 billion in April that was smaller than previously estimated, the Commerce Department said today in Washington.
Growth in overseas markets and a weaker dollar are helping lift exports even as oil prices, which reached a record last week, are pushing up imports. A shrinking trade gap is one of the few economic bright spots remaining as an extended housing slump and cooling consumer spending weigh on the economy.
``We're continuing to see that in foreign demand,'' boosted by a sinking U.S. currency, said Mike Feroli, an economist at JPMorgan Chase & Co. in New York. ``It looks like we'll get yet another quarter where foreign trade will contribute around a percentage point'' to gross domestic product growth, he said.
A separate government report today showed prices of imported goods rose 2.6 percent in June from the previous month, the same as in May. The Labor Department said import prices climbed 20.5 percent from a year before.
Economists' Estimates
The trade gap was forecast to widen to $62.5 billion from an initially reported $60.9 billion in April, according to the median estimate in a Bloomberg News survey of 74 economists. Deficit projections ranged from $59.5 billion to $65 billion.
Exports increased 0.9 percent to $157.5 billion, as sales of foods, aircraft and chemicals strengthened.
Imports rose 0.3 percent to $217.3 billion after increasing 4.6 percent the prior month. The import figures reflected a record $31.2 billion in purchases of foreign crude oil, before seasonal adjustments, as well as higher demand for capital goods and consumer items such as televisions, apparel and toys. Auto imports fell $842 million to $20.6 billion.
The cost of crude oil rose as high as $135.09 a barrel on May 22, according to pricing on the New York Mercantile Exchange, and last week reached a new record of $145.85.
Imports of industrial supplies declined by $332 million to $67.2 billion. Demand for consumer goods from abroad gained $1.5 billion to $41.7 billion.
After eliminating the influence of changes in prices, the trade deficit declined to $43.6 billion, the lowest since October 2002, from $46.7 billion. Those are the numbers used to calculate gross domestic product and may prompt economists to increase their estimates of second-quarter growth.
China Deficit Widens
The trade gap with China widened to $21 billion from $20.2 billion in the prior month. The deficit with the Organization of Petroleum Exporting Countries widened by $2.3 billion to a record $17.9 billion.
The U.S. trade deficits with Canada, Mexico, Japan and the European Union all narrowed, led by a $2.5 billion decline in the shortfall with Japan, to $5 billion. Exports to Canada and the EU reached record levels.
The economy probably grew 1.5 percent in the second quarter, as growing exports helped counter weakness in manufacturing and construction, according to a Bloomberg survey of economists taken the first week of July. The economy grew 1 percent in the first quarter, when net exports contributed 0.8 percentage point to the expansion.
About $78 billion in tax rebates through June probably gave consumer spending a boost in the second quarter, helping to spur purchases of foreign televisions and other consumer goods. Economists surveyed by Bloomberg forecast consumer spending rose 2 percent in the April-to-June period, compared with a 1.1 percent gain in the first quarter.
Growth Overseas
Faster growth overseas is spurring exports of U.S.-made goods, ranging from Boeing Co. aircraft, to mining and construction equipment, steel and grains. China's economy grew 10.6 percent in the first quarter from a year earlier. India's expanded 8.8 percent, Argentina's 8.4 percent and Brazil's 5.8 percent.
In response to growing demand from China, Caterpillar Inc., the world's biggest maker of earthmoving equipment, will build a factory in eastern China to make light hydraulic excavators for the world's largest earthmover market after the U.S.
``Our customers in China are demanding a greater variety of construction equipment,'' Mary Bell, Caterpillar's global vice president for construction machines, said in a statement June 30.
The deficit with China, which makes up the largest share of the U.S. trade gap, remains a political sticking point. Some U.S. lawmakers accuse China of keeping its currency undervalued to boost exports.
Treasury Secretary Henry Paulson on June 18 urged China to let markets play a bigger role in setting the value of the yuan, while acknowledging ``the recent increased pace of appreciation'' of the Chinese currency.
Dollar's Decline
U.S. exporters are also getting a boost from a weaker dollar, which was down 8 percent against a trade-weighted basket of currencies of major trading partners in the 12 months ended in May. The dollar is down by about 27 percent since February 2002, and that has pushed up prices of commodities.
Charlotte, North Carolina-based Nucor Corp., the largest U.S.-based steelmaker by market value, is working to keep up with surging demand from emerging economies, many of them profiting from gains in prices of oil and other commodities, Chief Executive Officer Dan DiMicco said on June 25.
``Because of the global shortage of steel, we have a strong ability to export,'' DiMicco said in an interview in New York. Demand for steel and other commodities is in a ``30-plus-year bull market,'' he said, as emerging economies including China and India expand infrastructure.
To contact the reporters on this story: Bob Willis in Washington at bwillis@bloomberg.net
Read more...
Citigroup Says Sell Credit Suisse Puts, Buy Deutsche Bank Puts
By Gareth Gore
July 11 (Bloomberg) -- Citigroup Inc. said clients should use put-option spreads on Credit Suisse Group and Deutsche Bank AG to bet that earnings at Switzerland's second-biggest bank will be better than those of its German rival.
The brokerage advised selling Credit Suisse put options expiring in December with a strike price of between 5 and 20 percent below the stock's ``current price.'' Clients should also buy puts on Deutsche Bank expiring in the same month and at a similar range of strike prices, it said.
Credit Suisse shares gained 0.6 percent to 43.28 Swiss francs as of 11:28 a.m. in Zurich. Deutsche Bank declined 1.1 percent to 53.72 euros today in Frankfurt.
``We expect Credit Suisse to show more resilient operating performance than Deutsche Bank and prefer Credit Suisse for its stronger balance sheet and attractive business mix,'' London- based analysts Kiri Vijayarajah and Stuart MacDonnell wrote in a note to clients dated today.
Option prices for the Zurich-based bank trade at a premium to those for Deutsche, the bank said, creating opportunity for profit. The put-spread strategy will be profitable as long as Credit Suisse shares outperform or match those of Deutsche Bank, according to Citigroup calculations.
Put options give the buyer the right -- but not the obligation -- to sell shares at a pre-agreed price on a set date. By selling a put option, the investor is taking the bet the contract won't be exercised, allowing him to keep the premium paid for the option.
`More Conservative'
Deutsche Bank reported its first quarterly loss in five years in April after writing down loans for leveraged buyouts and asset-backed securities by 2.7 billion euros ($4.2 billion). Last week, Anshu Jain, head of global markets at the bank, said the contagion triggered by the U.S. subprime mortgage is ``by no means over.''
In April, Credit Suisse said it was cutting 500 jobs in investment banking and administration after earnings fell for a third straight quarter.
``On markdowns, Credit Suisse seems to have taken a more conservative approach to the valuation of risky assets,'' the Citigroup note said.
For related news: Most-read derivatives news: {MNI DRV } Options news: {NI OPTIONS }
To contact the reporter on this story: Gareth Gore in Madrid ggore1@bloomberg.net
Read more...
July 11 (Bloomberg) -- Citigroup Inc. said clients should use put-option spreads on Credit Suisse Group and Deutsche Bank AG to bet that earnings at Switzerland's second-biggest bank will be better than those of its German rival.
The brokerage advised selling Credit Suisse put options expiring in December with a strike price of between 5 and 20 percent below the stock's ``current price.'' Clients should also buy puts on Deutsche Bank expiring in the same month and at a similar range of strike prices, it said.
Credit Suisse shares gained 0.6 percent to 43.28 Swiss francs as of 11:28 a.m. in Zurich. Deutsche Bank declined 1.1 percent to 53.72 euros today in Frankfurt.
``We expect Credit Suisse to show more resilient operating performance than Deutsche Bank and prefer Credit Suisse for its stronger balance sheet and attractive business mix,'' London- based analysts Kiri Vijayarajah and Stuart MacDonnell wrote in a note to clients dated today.
Option prices for the Zurich-based bank trade at a premium to those for Deutsche, the bank said, creating opportunity for profit. The put-spread strategy will be profitable as long as Credit Suisse shares outperform or match those of Deutsche Bank, according to Citigroup calculations.
Put options give the buyer the right -- but not the obligation -- to sell shares at a pre-agreed price on a set date. By selling a put option, the investor is taking the bet the contract won't be exercised, allowing him to keep the premium paid for the option.
`More Conservative'
Deutsche Bank reported its first quarterly loss in five years in April after writing down loans for leveraged buyouts and asset-backed securities by 2.7 billion euros ($4.2 billion). Last week, Anshu Jain, head of global markets at the bank, said the contagion triggered by the U.S. subprime mortgage is ``by no means over.''
In April, Credit Suisse said it was cutting 500 jobs in investment banking and administration after earnings fell for a third straight quarter.
``On markdowns, Credit Suisse seems to have taken a more conservative approach to the valuation of risky assets,'' the Citigroup note said.
For related news: Most-read derivatives news: {MNI DRV } Options news: {NI OPTIONS }
To contact the reporter on this story: Gareth Gore in Madrid ggore1@bloomberg.net
Read more...
U.S. Stock Futures Drop as Fannie, Freddie Tumble, Oil Rallies
By Adria Cimino and Michael Patterson
July 11 (Bloomberg) -- U.S. stock futures tumbled, indicating the Standard & Poor's 500 Index will extend its longest stretch of weekly losses since 2004, as oil jumped to a record and concern grew that a government takeover of Fannie Mae and Freddie Mac may wipe out shareholders.
Fannie Mae and Freddie Mac, the largest buyers of U.S. home loans, plunged after a person familiar with the discussions said a government takeover of one or both companies is among several options being considered by the White House. Wal-Mart Stores Inc. and Apple Inc. declined after crude futures advanced to a record above $145 a barrel. General Electric Co. climbed, limiting the market's drop, after posting second-quarter profit that matched analysts' estimates.
S&P 500 futures expiring in September lost 12.3, or 1 percent, to 1,242.2 at 8:12 a.m. in New York. Dow Jones Industrial Average futures fell 101 to 11,116 and Nasdaq-100 Index futures slipped 15.75 to 1,828.50. Europe's Dow Jones Stoxx 600 Index lost 1.6 percent. Asian shares rose.
``We're very cautious on the financials and unfortunately we keep finding reasons to stay cautious,'' Jack Caffrey, a New York-based equity strategist at JPMorgan Private Bank, which oversees about $300 billion, said in an interview on Bloomberg Television. ``You have this sector under pressure and it will likely remain under pressure.''
The S&P 500, which fell into a bear market for the first time since 2002 this week, is headed for its sixth straight weekly decline. The index has erased a 12 percent rally that was spurred by a government-backed a rescue of Bear Stearns Cos. for less than its market value in March. Surging energy costs, deepening credit losses and rising unemployment threaten to reduce corporate profits even as Federal Reserve officials consider raising interest rates to fight inflation.
Fannie, Freddie
Fannie Mae tumbled $4.56, or 35 percent, to $8.64. Freddie Mac lost $2.10, or 26 percent, to $8. Representative Spencer Bachus, the senior Republican on the House Financial Services Committee, said yesterday that if the government comes to the assistance of Fannie and Freddie, equity investors shouldn't expect the government to halt a tumble in the companies' shares.
Wal-Mart, the world's largest retailer, lost 29 cents to $56.92. Apple, maker of the iPhone and Macintosh computers, declined $1.73 to $174.90
Crude oil rose more than $4 to a record $145.98 a barrel on concern that Israel may be preparing to attack Iran, while a strike in Brazil and renewed militant activity in Nigeria threaten to cut supplies.
GE added 17 cents to $27.81. The company's second-quarter profit fell 3.9 percent, matching analysts' estimates on a per- share basis after a surprise earnings slump in the year's first three months that hurt its stock price.
Chief Executive Officer Jeffrey Immelt repeated the 2008 forecast for $2.20 to $2.30 a share, GE said in a statement.
To contact the reporter on this story: Michael Patterson in New York at mpatterson10@bloomberg.net.
Read more...
July 11 (Bloomberg) -- U.S. stock futures tumbled, indicating the Standard & Poor's 500 Index will extend its longest stretch of weekly losses since 2004, as oil jumped to a record and concern grew that a government takeover of Fannie Mae and Freddie Mac may wipe out shareholders.
Fannie Mae and Freddie Mac, the largest buyers of U.S. home loans, plunged after a person familiar with the discussions said a government takeover of one or both companies is among several options being considered by the White House. Wal-Mart Stores Inc. and Apple Inc. declined after crude futures advanced to a record above $145 a barrel. General Electric Co. climbed, limiting the market's drop, after posting second-quarter profit that matched analysts' estimates.
S&P 500 futures expiring in September lost 12.3, or 1 percent, to 1,242.2 at 8:12 a.m. in New York. Dow Jones Industrial Average futures fell 101 to 11,116 and Nasdaq-100 Index futures slipped 15.75 to 1,828.50. Europe's Dow Jones Stoxx 600 Index lost 1.6 percent. Asian shares rose.
``We're very cautious on the financials and unfortunately we keep finding reasons to stay cautious,'' Jack Caffrey, a New York-based equity strategist at JPMorgan Private Bank, which oversees about $300 billion, said in an interview on Bloomberg Television. ``You have this sector under pressure and it will likely remain under pressure.''
The S&P 500, which fell into a bear market for the first time since 2002 this week, is headed for its sixth straight weekly decline. The index has erased a 12 percent rally that was spurred by a government-backed a rescue of Bear Stearns Cos. for less than its market value in March. Surging energy costs, deepening credit losses and rising unemployment threaten to reduce corporate profits even as Federal Reserve officials consider raising interest rates to fight inflation.
Fannie, Freddie
Fannie Mae tumbled $4.56, or 35 percent, to $8.64. Freddie Mac lost $2.10, or 26 percent, to $8. Representative Spencer Bachus, the senior Republican on the House Financial Services Committee, said yesterday that if the government comes to the assistance of Fannie and Freddie, equity investors shouldn't expect the government to halt a tumble in the companies' shares.
Wal-Mart, the world's largest retailer, lost 29 cents to $56.92. Apple, maker of the iPhone and Macintosh computers, declined $1.73 to $174.90
Crude oil rose more than $4 to a record $145.98 a barrel on concern that Israel may be preparing to attack Iran, while a strike in Brazil and renewed militant activity in Nigeria threaten to cut supplies.
GE added 17 cents to $27.81. The company's second-quarter profit fell 3.9 percent, matching analysts' estimates on a per- share basis after a surprise earnings slump in the year's first three months that hurt its stock price.
Chief Executive Officer Jeffrey Immelt repeated the 2008 forecast for $2.20 to $2.30 a share, GE said in a statement.
To contact the reporter on this story: Michael Patterson in New York at mpatterson10@bloomberg.net.
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Anheuser-Busch, Fannie Mae, Freddie Mac: U.S. Equity Preview
By Katherine Greene
July 11 (Bloomberg) -- The following companies may have unusual price changes in U.S. markets. Stock symbols are in parentheses after company names, and prices are as of 7:30 a.m. in New York, unless stated otherwise.
Anheuser-Busch Cos. (BUD US) rose 4.1 percent to $63.75. The brewer of Budweiser started friendly talks about a sale to its Belgian rival InBev NV (INBVF US), ending a month of opposition, the New York Times said. Separately, the Wall Street Journal reported that InBev has raised its offer to $70 a share, up from the initial offer of $65 a share.
Chevron Corp. (CVX US) slipped 0.7 percent to $95.50. The second-largest U.S. oil company said oil and natural-gas output fell 3.4 percent during the second quarter and predicted profit from refining to be ``significantly'' lower than the previous quarter.
Deckers Outdoor Corp. (DECK US): The maker of Ugg boots and Teva sandals said it agreed to open retail stores for its Ugg brand in China through a venture with Stella International Holdings. The stock dropped 3.8 percent to $123.30 in regular trading yesterday.
Fannie Mae (FNM US) dropped 27 percent to $9.66. A government takeover of one or both of the largest U.S. mortgage- finance companies is among several options that have been considered by White House officials, according to a person familiar with the discussions who spoke on condition of anonymity. Senior Bush administration officials are considering placing either or both firms in a conservatorship if their problems get worse, the person said.
Freddie Mac (FRE US) plunged 34 percent to $5.31.
Jacobs Engineering Group Inc. (JEC US): Goldman Sachs Group Inc. added the second-largest engineering-services company to its ``conviction buy'' list, saying Jacobs has exceeded estimates the past three quarters. The shares have been oversold, Goldman said.
MasterCard Inc. (MA US) climbed 3.4 percent to $262.01. The world's second-biggest credit-card network will replace Ace Ltd., a Bermuda-based insurer, in the Standard & Poor's 500 Index, S&P said. That may support MasterCard's stock price as fund managers who track the performance of the index buy shares.
Medarex Inc. (MEDX US): The co-developer of an experimental drug for skin cancer predicted 2008 sales as high as $52 million, more than the average analyst estimate of $49.5 million from a Bloomberg survey. The stock increased 5.1 percent to $7.05 in regular trading yesterday.
Wynn Resorts Ltd. (WYNN US) jumped 13.5 percent to $79.35. The casino company founded by billionaire Stephen Wynn said it may repurchase as much as $500 million more of its shares on top of a previously announced $1.2 billion buyback.
To contact the reporter on this story: Katherine Greene in New York at kgreene8@bloomberg.net.
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July 11 (Bloomberg) -- The following companies may have unusual price changes in U.S. markets. Stock symbols are in parentheses after company names, and prices are as of 7:30 a.m. in New York, unless stated otherwise.
Anheuser-Busch Cos. (BUD US) rose 4.1 percent to $63.75. The brewer of Budweiser started friendly talks about a sale to its Belgian rival InBev NV (INBVF US), ending a month of opposition, the New York Times said. Separately, the Wall Street Journal reported that InBev has raised its offer to $70 a share, up from the initial offer of $65 a share.
Chevron Corp. (CVX US) slipped 0.7 percent to $95.50. The second-largest U.S. oil company said oil and natural-gas output fell 3.4 percent during the second quarter and predicted profit from refining to be ``significantly'' lower than the previous quarter.
Deckers Outdoor Corp. (DECK US): The maker of Ugg boots and Teva sandals said it agreed to open retail stores for its Ugg brand in China through a venture with Stella International Holdings. The stock dropped 3.8 percent to $123.30 in regular trading yesterday.
Fannie Mae (FNM US) dropped 27 percent to $9.66. A government takeover of one or both of the largest U.S. mortgage- finance companies is among several options that have been considered by White House officials, according to a person familiar with the discussions who spoke on condition of anonymity. Senior Bush administration officials are considering placing either or both firms in a conservatorship if their problems get worse, the person said.
Freddie Mac (FRE US) plunged 34 percent to $5.31.
Jacobs Engineering Group Inc. (JEC US): Goldman Sachs Group Inc. added the second-largest engineering-services company to its ``conviction buy'' list, saying Jacobs has exceeded estimates the past three quarters. The shares have been oversold, Goldman said.
MasterCard Inc. (MA US) climbed 3.4 percent to $262.01. The world's second-biggest credit-card network will replace Ace Ltd., a Bermuda-based insurer, in the Standard & Poor's 500 Index, S&P said. That may support MasterCard's stock price as fund managers who track the performance of the index buy shares.
Medarex Inc. (MEDX US): The co-developer of an experimental drug for skin cancer predicted 2008 sales as high as $52 million, more than the average analyst estimate of $49.5 million from a Bloomberg survey. The stock increased 5.1 percent to $7.05 in regular trading yesterday.
Wynn Resorts Ltd. (WYNN US) jumped 13.5 percent to $79.35. The casino company founded by billionaire Stephen Wynn said it may repurchase as much as $500 million more of its shares on top of a previously announced $1.2 billion buyback.
To contact the reporter on this story: Katherine Greene in New York at kgreene8@bloomberg.net.
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Mid-Day Report: Dollar Plunges as Oil Hits New Record High
Market Overview | Written by ActionForex.com | Jul 11 08 12:37 GMT | Volatile prices actions are seen leading into US session. On the one hand, the greenback is hit hard as oil high near record high neat $146 a barrel on worries that Israel may attack Iran, renewed militant activities in Nigeria and a strike in Brazil next week. Yen and Swissy are boost propelled higher on risk aversion on falling European stock markets and an expected sharp lower open in US stock markets. The technical development so far is in line with the view that dollar's recovery has already completed earlier and further weakness is expected across the board except versus the Canadian dollar. Aussie continues to lead the way and made new 25 years high at 0.9677
The Loonie, on the other hand, is sold off after disappointing employment report which showed the job markets shrank by -5k in Jun versus expectation of 10k growth. Unemployment rate also unexpectedly climbed from 6.1% to 6.2%. While BoC is widely expected to leave rates unchanged at 3.00% next week, today's report raises some speculations that if the job market deteriorates further, BoC may opt to resume it's policy easing sooner or later.
Other data released in US session saw US trade deficit in Jun narrower than expected at -59.8b. Import price index rose 2.0% mom, while export price index rose 1.0% mom in May. Canadian housing price index was flat in May. Trader surplus came in wider than expected at 5.54b in May. U of Michigan survey will be released later and is expected to hit 28 year low of 55.5 in Jul.
Released earlier, Japanese industrial production rose 2.8% mom, 1.1% yoy. capacity utilization rose 2.2% in May. Consumer confidence dropped less than expected to 32.9 in Jun. Germany wholesale price index climbed 0.9% mom, 8.9% in June, inline with consensus.
EUR/USD Mid-Day Outlook
Daily Pivots: (S1) 1.5718; (P) 1.5759; (R1) 1.5829;
EUR/USD's rally extends further as expected and reaches as high as 1.5868 so far. With correction from 1.5908 completed at 1.5611, rise from there is expected to continue further to retest 1.5908 high first. Break will confirm that rally from 1.5302 has resumed for retesting 1.6019 record high. On the downside, though, below 1.5763 will turn intraday outlook neutral first. But another rally is sitll expected as long as downside is contained by 1.5611 support.
In the bigger picture, a medium term top is in place at 1.6019 after meeting 1.6 psychological resistance. As mentioned before, break of 1.5843 indicates that such consolidation has likely completed at 1.5302 already. Further decisive break of 1.6019 will confirm this case and bring rise to 61.8% projection of 1.4309 to 1.6019 from 1.5284 at 1.6341 first. On the downside, however, below 1.5468 support will mix up the picture by firstly suggesting that rise from 1.5302 has completed. Secondly, it will revive the case that consolidation from 1.6019 is still in progress. Retest of 1.5302 support could be seen in such case.
Economic Indicators Update
| GMT | Ccy | Events | Actual | Consensus | Previous | Revised |
|---|---|---|---|---|---|---|
| 04:30 | JPY | Japan Industrial prod'n M/M May | 2.80% | 2.90% | 2.90% | |
| 04:30 | JPY | Japan Industrial prod'n Y/Y May | 1.10% | N/A | 1.20% | |
| 04:30 | JPY | Japan Capacity utilisation May | 2.20% | N/A | -0.70% | |
| 05:00 | JPY | Japan Consumer confidence Jun | 32.9 | 31.5 | 34.1 | |
| 06:00 | EUR | Germany WPI M/M Jun | 0.90% | 0.90% | 1.40% | |
| 06:00 | EUR | Germany WPI Y/Y Jun | 8.90% | 8.90% | 8.10% | |
| 11:00 | CAD | Canada Unemployment rate Jun | 6.20% | 6.10% | 6.10% | |
| 11:00 | CAD | Canada Employment change Jun | -5K | 10k | 8.4k | |
| 12:30 | CAD | Canada New housing price index May | 0.00% | 0.10% | 0.00% | |
| 12:30 | CAD | Canada Trade balance (cad) May | 5.54B | 5.2B | 5.11B | |
| 12:30 | USD | U.S. Trade balance (usd) May | -59.8B | -62.1B | -60.9B | -60.5B |
| 12:30 | USD | U.S. Import price index M/M Jun | 2.00% | 2.00% | 2.30% | 2.60% |
| 12:30 | USD | U.S. Export price index Y/Y Jun | 1.00% | 0.40% | 0.30% | |
| 14:00 | USD | U.S. U. Michigan survey Prel. Jul | 55.5 | 56.4 | ||
| 18:00 | USD | U.S. Fed budget | 33.0B | 27.48B |
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CanWest, Ithaca, Lockerbie & Hole, Magna: Canada Equity Preview
By John Kipphoff
July 11 (Bloomberg) -- The following companies may have unusual price changes in Canadian trading today. Stock symbols are in parentheses, and share prices are from the previous close.
The Standard & Poor's/TSX Composite Index rose 1 percent to 13,743.88 yesterday in Toronto. Canada's stock benchmark is poised for a fifth-straight weekly drop, the longest such streak in six years.
CanWest Global Communications Corp. (CGS CN): Canada's biggest media company may say that third-quarter profit before one-time items was 6 cents a share, the average estimate of six analysts in a Bloomberg survey. The shares fell 1.5 percent to C$2.02 and have dropped 72 in 2008.
Ithaca Energy Inc. (IAE CN): The oil and gas producer operating in the North Sea received bank financing totaling $240 million (C$243.1 million) to support the acquisition of the Beatrice oilfield. The shares fell 3.7 percent to C$2.60.
Lockerbie & Hole Inc. (LH CN): The 110-year-old construction company said first-quarter net income rose to C$5.02 million, or 18 cents a share, from C$4.87 million, as sales increased 51 percent. The shares fell 1.5 percent to C$13.73.
Magna International Inc. (MG/A CN): North America's largest auto-parts supplier was added by Goldman Sachs Group Inc. to its ``conviction sell'' list. Analysts led by Patrick Archambault in New York cut their six-month share-price estimate by 23 percent to C$50.65 ($50), citing a negative outlook for the U.S. auto and auto parts sector. Magna fell 3.3 percent to C$56.64.
To contact the reporter on this story: John Kipphoff in Toronto at jkipphoff@bloomberg.net.
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July 11 (Bloomberg) -- The following companies may have unusual price changes in Canadian trading today. Stock symbols are in parentheses, and share prices are from the previous close.
The Standard & Poor's/TSX Composite Index rose 1 percent to 13,743.88 yesterday in Toronto. Canada's stock benchmark is poised for a fifth-straight weekly drop, the longest such streak in six years.
CanWest Global Communications Corp. (CGS CN): Canada's biggest media company may say that third-quarter profit before one-time items was 6 cents a share, the average estimate of six analysts in a Bloomberg survey. The shares fell 1.5 percent to C$2.02 and have dropped 72 in 2008.
Ithaca Energy Inc. (IAE CN): The oil and gas producer operating in the North Sea received bank financing totaling $240 million (C$243.1 million) to support the acquisition of the Beatrice oilfield. The shares fell 3.7 percent to C$2.60.
Lockerbie & Hole Inc. (LH CN): The 110-year-old construction company said first-quarter net income rose to C$5.02 million, or 18 cents a share, from C$4.87 million, as sales increased 51 percent. The shares fell 1.5 percent to C$13.73.
Magna International Inc. (MG/A CN): North America's largest auto-parts supplier was added by Goldman Sachs Group Inc. to its ``conviction sell'' list. Analysts led by Patrick Archambault in New York cut their six-month share-price estimate by 23 percent to C$50.65 ($50), citing a negative outlook for the U.S. auto and auto parts sector. Magna fell 3.3 percent to C$56.64.
To contact the reporter on this story: John Kipphoff in Toronto at jkipphoff@bloomberg.net.
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London Session Recap
Daily Forex Fundamentals | Written by Forex.com | Jul 11 08 12:07 GMT |
Crude oil prices surged to within pennies of the all time high in the London session and helped push the greenback lower against the majors. Oil rose just over $3 to $145.02/bbl in the span, and is now up nearly $9 in the last 24 hours. The push higher was seemingly due to news of potential supply disruptions out of Brazil (workers’ strike) and Nigeria (end of cease-fire). Tensions in the Middle East did not help matters either, as Iran continued on its missile test firing campaign overnight.
EUR/USD was bid on the developments, rising from an open near 1.5770 to a close just above the 1.5800 mark. The only piece of relevant data out of the Eurozone was German wholesale prices and they came in as expected, rising 0.9% on the month after a 1.4% result the prior. This result was welcomed as inflation numbers of late in the EU had been blowing away expectations and creating a stir at the ECB.
USD/CAD was bid near the end of the London session as Canadian employment data for June were disappointing. Payrolls fell -5.0K after an 8.4K add the prior month while the unemployment rate rose to 6.2% from 6.1%. The market was expecting an increase in payrolls of 8.0K and for the unemployment rate to remain steady at 6.1%, so the results were disconcerting. USD/CAD opened London trading near 1.0100 and was trading near 1.0150 after the number (currently around 1.0165/70). That said, the rally in USD/CAD looks a touch overdone given that the increase in oil prices should be CAD supportive and offset some of the negative employment data.
The NY session should see some price action as we get the US trade balance data for May and the University of Michigan consumer sentiment numbers for June (preliminary). The confidence survey will be closely watched for any increase/decrease in inflation expectations, which could impact Fed rate hike expectations. The futures market is currently pricing in one 25 bps rate hike by the Fed by the end of this year. This should shift around quite a bit if inflation expectations continue to become unmoored.
Upcoming Economic Data Releases (NY Session) Prior Estimate
* 7/11 12:30 CA Int'l Merchandise Trade MAY C$5.1 C$5.0
* 7/11 12:30 CA New Housing Price Index MoM MAY 0.0% 0.1%
* 7/11 12:30 US Trade Balance MAY -$60.9B -$62.4B
* 7/11 12:30 US Import Price Index (MoM) JUN 2.3% 2.0%
* 7/11 12:30 US Import Price Index (YoY) JUN 17.8% 18.6%
* 7/11 14:00 US U. of Michigan Confidence JUL P 56.4 55.5
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Crude oil prices surged to within pennies of the all time high in the London session and helped push the greenback lower against the majors. Oil rose just over $3 to $145.02/bbl in the span, and is now up nearly $9 in the last 24 hours. The push higher was seemingly due to news of potential supply disruptions out of Brazil (workers’ strike) and Nigeria (end of cease-fire). Tensions in the Middle East did not help matters either, as Iran continued on its missile test firing campaign overnight.
EUR/USD was bid on the developments, rising from an open near 1.5770 to a close just above the 1.5800 mark. The only piece of relevant data out of the Eurozone was German wholesale prices and they came in as expected, rising 0.9% on the month after a 1.4% result the prior. This result was welcomed as inflation numbers of late in the EU had been blowing away expectations and creating a stir at the ECB.
USD/CAD was bid near the end of the London session as Canadian employment data for June were disappointing. Payrolls fell -5.0K after an 8.4K add the prior month while the unemployment rate rose to 6.2% from 6.1%. The market was expecting an increase in payrolls of 8.0K and for the unemployment rate to remain steady at 6.1%, so the results were disconcerting. USD/CAD opened London trading near 1.0100 and was trading near 1.0150 after the number (currently around 1.0165/70). That said, the rally in USD/CAD looks a touch overdone given that the increase in oil prices should be CAD supportive and offset some of the negative employment data.
The NY session should see some price action as we get the US trade balance data for May and the University of Michigan consumer sentiment numbers for June (preliminary). The confidence survey will be closely watched for any increase/decrease in inflation expectations, which could impact Fed rate hike expectations. The futures market is currently pricing in one 25 bps rate hike by the Fed by the end of this year. This should shift around quite a bit if inflation expectations continue to become unmoored.
Upcoming Economic Data Releases (NY Session) Prior Estimate
* 7/11 12:30 CA Int'l Merchandise Trade MAY C$5.1 C$5.0
* 7/11 12:30 CA New Housing Price Index MoM MAY 0.0% 0.1%
* 7/11 12:30 US Trade Balance MAY -$60.9B -$62.4B
* 7/11 12:30 US Import Price Index (MoM) JUN 2.3% 2.0%
* 7/11 12:30 US Import Price Index (YoY) JUN 17.8% 18.6%
* 7/11 14:00 US U. of Michigan Confidence JUL P 56.4 55.5
Forex.com
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Canadian Economy Loses 5,000 Jobs, As Growth Outlook Dims
Daily Forex Fundamentals | Written by DailyFX | Jul 11 08 11:35 GMT |
The Canadian economy lost 5,000 jobs in June, which was the first time since December 2007, pushing the unemployment rate to 6.2%. The economy has started to whither from the headwinds of the U.S. slowdown and the financial crisis. The recent commodity boom has propped up the economy, but the declining manufacturing sector and slowing domestic growth have led employers to cut jobs. June also saw the recent trend of replacing fulltime workers (-39,200) for part-timers (+34,200) continue, as the growth outlook dims. Despite the slowing economy some industries remain strong with professional and scientific services adding 37,100 jobs, but that couldn’t prevent the overall service sector from losing 5,400 jobs. Governor Carney surprised markets at the last monetary policy meeting by holding rates steady, as headline inflation rising to 2.2% has become a concern for the central bank. However, if job losses continue to mount the MPC may need to return to their easing policy.
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The Canadian economy lost 5,000 jobs in June, which was the first time since December 2007, pushing the unemployment rate to 6.2%. The economy has started to whither from the headwinds of the U.S. slowdown and the financial crisis. The recent commodity boom has propped up the economy, but the declining manufacturing sector and slowing domestic growth have led employers to cut jobs. June also saw the recent trend of replacing fulltime workers (-39,200) for part-timers (+34,200) continue, as the growth outlook dims. Despite the slowing economy some industries remain strong with professional and scientific services adding 37,100 jobs, but that couldn’t prevent the overall service sector from losing 5,400 jobs. Governor Carney surprised markets at the last monetary policy meeting by holding rates steady, as headline inflation rising to 2.2% has become a concern for the central bank. However, if job losses continue to mount the MPC may need to return to their easing policy.
DailyFX
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Currency Technical Report
Daily Forex Technicals | Written by FX Greece | Jul 11 08 12:04 GMT |
EUR/USD
Resistance: 1,5800/ 1,5825-35/ 1,5850-55/ 1,5885/ ,5910
Support : 1,5765-70/ 1,5740/ 1,5710/ 1,5670/ 1,5620
Comment: Euro moved above the resistance level, which sets the ranges for the short term consolidation, and that led the pair to 1.5800. Retracements from 1.5800 area were weak and it is possible, according to yesterday's picture, that the pair may reach these levels again or move higher.
First important resistance above yesterday's highs is the area of 1,5820-30, where we have set our positions and ranges for our scenario, that the downward move from 1.5900 tops is a downward part within the consolidation.
A move above 1.5830-35, could lead to 1.5855-60 area or even the previous tops at 1.5900-10. In the current phase, euro should not move higher than 1.5900-10 area. According to the daily chart, the short term ranges should be limited at 1,5950-60 area….
An upward move to 1.5820-30 and a quick retracement below 1.5750, would be a sign of weakness. In such case, our next target will be at 1.5660-70, bringing the area of 1.5450-70 back in the game…
TRADING EUR/USD
SWING TRADING: Yesterday's rise and daily close, make us cautious regarding the immediate resumption of the decline, as the double top scenario or a move higher is back in the game. A clear break of 1.5830-35 could lead to a position reduction, which could be tried again in the area of 1.5900-10 or 1.5950-70, with stops above all time highs….
INTRADAY TRADING : We will use any reaction to 1.5825-32 and 1.5855 area for sell positions with stops above 1.5875. If the second orders are not triggered, out target will be at 1.5760 area. If the pair reaches 1.5850-60 area, our target will be at 1.5800….
Sell positions for a quick move could be tried in the first reach of 1.5800 area and the upper Bollinger in the hourly chart…
GBP/USD
Resistance : 1,9750-70/ 1,9800/ 1,9850/ 1,9890
Support: 1,9680-00/ 1,9650/ 1,9625/ 1,9580/ 1,9550
Comment : The pound is clearly weaker than euro, and yesterday's reaction proved to be a corrective move. First intraday resistance is found at 1.9800-10, followed by the area of 1.9850, which is more important. As long as these levels hold as resistance, the base of 1.9650 or a move towards 1.9570-00, would be possible targets.
Above 1.9850, next resistance level emerges at 1.9880-00 and the double top scenario will be back in the game…
TRADING GBP/USD :
SWING TRADING : The scenario remains the same. " The retracement at 1.9830-50 area, allowed us to try sell positions according to our basic scenario. We keep our stops above 1.9900 or we move them to the levels, where our positions were opened…
INTRADAY TRADING : We keep our positions small and try sell positions at 1.9790-9810 and 1.9840-50 area, with stops above 1.9885…
USD/JPY
USD/CHF
FX Greece
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EUR/USD
Resistance: 1,5800/ 1,5825-35/ 1,5850-55/ 1,5885/ ,5910
Support : 1,5765-70/ 1,5740/ 1,5710/ 1,5670/ 1,5620
Comment: Euro moved above the resistance level, which sets the ranges for the short term consolidation, and that led the pair to 1.5800. Retracements from 1.5800 area were weak and it is possible, according to yesterday's picture, that the pair may reach these levels again or move higher.
First important resistance above yesterday's highs is the area of 1,5820-30, where we have set our positions and ranges for our scenario, that the downward move from 1.5900 tops is a downward part within the consolidation.
A move above 1.5830-35, could lead to 1.5855-60 area or even the previous tops at 1.5900-10. In the current phase, euro should not move higher than 1.5900-10 area. According to the daily chart, the short term ranges should be limited at 1,5950-60 area….
An upward move to 1.5820-30 and a quick retracement below 1.5750, would be a sign of weakness. In such case, our next target will be at 1.5660-70, bringing the area of 1.5450-70 back in the game…
TRADING EUR/USD
SWING TRADING: Yesterday's rise and daily close, make us cautious regarding the immediate resumption of the decline, as the double top scenario or a move higher is back in the game. A clear break of 1.5830-35 could lead to a position reduction, which could be tried again in the area of 1.5900-10 or 1.5950-70, with stops above all time highs….
INTRADAY TRADING : We will use any reaction to 1.5825-32 and 1.5855 area for sell positions with stops above 1.5875. If the second orders are not triggered, out target will be at 1.5760 area. If the pair reaches 1.5850-60 area, our target will be at 1.5800….
Sell positions for a quick move could be tried in the first reach of 1.5800 area and the upper Bollinger in the hourly chart…
GBP/USD
Resistance : 1,9750-70/ 1,9800/ 1,9850/ 1,9890
Support: 1,9680-00/ 1,9650/ 1,9625/ 1,9580/ 1,9550
Comment : The pound is clearly weaker than euro, and yesterday's reaction proved to be a corrective move. First intraday resistance is found at 1.9800-10, followed by the area of 1.9850, which is more important. As long as these levels hold as resistance, the base of 1.9650 or a move towards 1.9570-00, would be possible targets.
Above 1.9850, next resistance level emerges at 1.9880-00 and the double top scenario will be back in the game…
TRADING GBP/USD :
SWING TRADING : The scenario remains the same. " The retracement at 1.9830-50 area, allowed us to try sell positions according to our basic scenario. We keep our stops above 1.9900 or we move them to the levels, where our positions were opened…
INTRADAY TRADING : We keep our positions small and try sell positions at 1.9790-9810 and 1.9840-50 area, with stops above 1.9885…
USD/JPY
USD/CHF
FX Greece
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India Rating May Be Cut on Fiscal Concerns, S&P Says
By Kartik Goyal and Cherian Thomas
July 11 (Bloomberg) -- India's credit rating may be cut to ``speculative grade'' if faster inflation and higher government spending ahead of next year's election impair the budget deficit, Standard & Poor's said.
India's long-term local currency debt is rated BBB- by S&P, the lowest investment grade. A one-notch drop in its ranking would place Asia's third-largest economy on par with Indonesia, El Salvador and Guatemala.
``Political compulsions may make it difficult for the government to take timely measures to staunch fiscal or monetary slippages,'' S&P analyst Takahira Ogawa said in an e-mailed statement today. ``Failure to respond adequately to negative developments could point to a sustained deterioration in macroeconomic stability and increase the probability that the government's ratings could be lowered to speculative grade.''
The risk of a downgrade comes just 18 months after India was lifted to the investment category by S&P for the first time since 2002. A lower rating may deter foreign investors and make it more expensive for Indian companies to raise money, slowing growth in the $912 billion economy.
``A rating downgrade on India will be detrimental for companies' investment plans,'' said Amandeep Chopra, who helps manage the equivalent of $6.3 billion of stocks and bonds at UTI Asset Management in Mumbai. ``It will further widen the cost of borrowing for companies.''
To contact the reporters on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net. Cherian Thomas in New Delhi at cthomas1@bloomberg.net
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July 11 (Bloomberg) -- India's credit rating may be cut to ``speculative grade'' if faster inflation and higher government spending ahead of next year's election impair the budget deficit, Standard & Poor's said.
India's long-term local currency debt is rated BBB- by S&P, the lowest investment grade. A one-notch drop in its ranking would place Asia's third-largest economy on par with Indonesia, El Salvador and Guatemala.
``Political compulsions may make it difficult for the government to take timely measures to staunch fiscal or monetary slippages,'' S&P analyst Takahira Ogawa said in an e-mailed statement today. ``Failure to respond adequately to negative developments could point to a sustained deterioration in macroeconomic stability and increase the probability that the government's ratings could be lowered to speculative grade.''
The risk of a downgrade comes just 18 months after India was lifted to the investment category by S&P for the first time since 2002. A lower rating may deter foreign investors and make it more expensive for Indian companies to raise money, slowing growth in the $912 billion economy.
``A rating downgrade on India will be detrimental for companies' investment plans,'' said Amandeep Chopra, who helps manage the equivalent of $6.3 billion of stocks and bonds at UTI Asset Management in Mumbai. ``It will further widen the cost of borrowing for companies.''
To contact the reporters on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net. Cherian Thomas in New Delhi at cthomas1@bloomberg.net
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BOJ May Keep Rate at 0.5% as Costs Weaken Spending
By Mayumi Otsuma
July 11 (Bloomberg) -- The Bank of Japan will probably keep interest rates on hold next week as rising energy and commodity costs erode incomes and discourage spending by businesses and households in the world's second-largest economy.
Governor Masaaki Shirakawa and his six colleagues will leave the overnight lending rate at 0.5 percent at a two-day meeting ending July 15, according to all 39 economists surveyed by Bloomberg. The rate, doubled in February 2007, is the lowest among major economies.
Shirakawa says the risk that record commodity prices discourages spending and derails growth is more pressing than tackling inflation. Consumer sentiment is at a six-year low and companies predict profits will fall for the first time in seven years.
``The Bank of Japan is being forced to focus on the economy's downside risks,'' said Kazuhiko Sano, chief strategist at Nikko Citigroup in Tokyo. ``Still, a rate cut could fan inflationary expectations and is out of the question.''
Japan's economy probably shrank last quarter on slower exports and consumer spending, the drivers of the expansion in the first quarter, according to economists surveyed by Bloomberg last month. The central bank lowered its assessment of consumer spending in all of Japan's nine regions in its quarterly regional economic report this week.
`Risk Materializing'
``Growth probably won't make the Bank of Japan's prediction,'' for the year ending March 2009, said Mamoru Yamazaki, chief Japan economist at RBS Securities in Tokyo.
Large companies expect profits to decline 7 percent in fiscal 2008, the first drop since the 2001 recession, the bank's Tankan survey showed July 1.
``A drop in corporate profits, the source for the economy's positive cycle, will definitely discourage companies from making new investment, raising wages and hiring more workers,'' said Yasunari Ueno, chief market economist at Mizuho Securities in Tokyo. ``There's no way the bank will raise rates when incomes are being eroded and domestic demand is worsening.''
Only two of 33 economists who gave predictions through December expect a rate increase this year. The remaining 31 forecast no change. The central bank shelved in April its policy calling for higher interest rates.
April Prediction
The bank will probably say next week that the economy won't expand as much as it predicted in April while consumer inflation will be faster than projected, economists said. Policy makers will review its semi-annual outlook report published in April on July 15 at 3 p.m.
``The bank may have to push back its prediction for when the economy regains momentum,'' said Seiji Shiraishi, chief economist at HSBC Securities in Tokyo.
In April, board members predicted the economy would expand 1.5 percent in the year ending March 2009 and consumer prices excluding fresh food would climb 1.1 percent. The bank doesn't typically release new forecasts in its mid-term review, only describing how the economy and prices have performed since its last semi-annual report.
Core consumer prices rose 1.5 percent in May from a year earlier. Inflation by that measure will surge to about 2.4 percent in the third quarter, said Ryutaro Kono chief economist at BNP Paribas in Tokyo. The central bank regards prices as stable when they are between zero and 2 percent.
``Even if core prices surpass the range, that would be temporary and wouldn't trigger rate action by the bank,'' Kono said.
Shirakawa will hold a news conference at 3:30 p.m.
==============================================================================
As of 07/11/08 BOJ BOJ BOJ BOJ BOJ BOJ
Rates Rates Rates Rates Rates Rates
==============================================================================
Date of Release 07/15 08/19 09/17 10/07 10/31 11/21
Time period 2008 2008 2008 2008 2008 2008
Measure % % % % % %
------------------------------------------------------------------------------
# of replies 39 33 33 33 33 33
Median Forecast 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
% Forecast at Median 100.0% 100.0% 100.0% 100.0% 100.0% 97.0%
Average Forecast 0.50% 0.50% 0.50% 0.50% 0.50% 0.51%
Expected change 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
High Forecast 0.50% 0.50% 0.50% 0.50% 0.50% 0.75%
Low Forecast 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Previous forecast 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
==============================================================================
Action Economics 0.50% --- --- --- --- ---
Aletti Gestielle 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
BNP Paribas 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Bank of America 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Barclays Capital 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
CFC Seymour 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
CPR Asset Management 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Capital Economics 0.50% 0.50% 0.50% 0.50% 0.50% 0.75%
Credit Suisse 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
DBS Group 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
DZ Bank 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Dai-Ichi Life Resrch 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Daiwa Research Inst. 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Daiwa Sec SMBC 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Deutsche Bank 0.50% --- --- --- --- ---
HSBC 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Intesa Sanpaolo 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Investec 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
J.P. Morgan 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Lehman Brothers 0.50% --- --- --- --- ---
Lloyd's TSB 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
M.M. Warburg & Co. 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Macquarie Securities 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Merrill Lynch 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Mitsubishi UFJ Sec 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Mizuho Securities 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Morgan Stanley 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Nikko Citigroup 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Nomura Securities 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Norinchukin Research 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
RBS Securities 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Shinkin Asset 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Shinshu Univeristy 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Stone & McCarthy 0.50% --- --- --- --- ---
Tapiola Insurance 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Totan Research 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Unicredit MIB 0.50% --- --- --- --- ---
WestLB 0.50% --- --- --- --- ---
Westpac 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
==============================================================================
To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net
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India's Inflation Accelerates to Fastest in More Than 13 Years
By Kartik Goyal
July 11 (Bloomberg) -- India's inflation accelerated to the fastest pace since 1995, raising concerns the central bank will increase borrowing costs for a third time this year.
Wholesale prices rose 11.89 percent in the week to June 28, after gaining 11.63 percent in the previous week, commerce ministry spokesman Rajeev Jain told Bloomberg News in an interview today. Economists expected an 11.75 percent increase.
To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net.
Read more...
July 11 (Bloomberg) -- India's inflation accelerated to the fastest pace since 1995, raising concerns the central bank will increase borrowing costs for a third time this year.
Wholesale prices rose 11.89 percent in the week to June 28, after gaining 11.63 percent in the previous week, commerce ministry spokesman Rajeev Jain told Bloomberg News in an interview today. Economists expected an 11.75 percent increase.
To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net.
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New Zealanders' Net Wealth Posts Biggest Decline in 10 Years
By Tracy Withers
July 11 (Bloomberg) -- The average net wealth of New Zealand consumers posted the biggest fall in almost 10 years as house prices and stocks declined while rising interest rates increased debt.
Net wealth, which includes the value of homes, investments and bank deposits less debt, dropped 1.6 percent in the first quarter, according to a report released today by Auckland-based financial adviser Spicers. The value of stocks and pension funds fell 1.8 percent while debt increased 2.2 percent.
Falling net wealth adds to signs household spending may slow, curbing economic growth. Consumer confidence fell to a 17- year low in the first quarter and the economy contracted 0.3 percent, putting the economy on the brink of a recession.
As well as the decline in the value of investments, house prices are falling, Spicers said in the report e-mailed to Bloomberg News. Housing makes up about 80 percent of total assets owned by households.
``We expect the value of housing assets to remain under pressure for the foreseeable future,'' Spicers said. ``Houses are taking longer to sell, prices continue to come under pressure and household budgets are straining.''
Household debt is rising at a slower pace as consumers take a more cautious approach to borrowing, Spicers said. Households no longer have the safety net of rapidly rising house prices to give them comfort when they borrow, it said.
Average net wealth has increased 95 percent the past 10 years.
To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.
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Foreign Direct Investment in China Jumps 45.6 Percent
By Li Yanping and Nipa Piboontanasawat
July 11 (Bloomberg) -- Foreign direct investment in China rose 45.6 percent in the first half from a year earlier, swelling inflows of cash that may stoke inflation in the world's fastest-growing major economy.
Spending by overseas companies increased to $52.4 billion, the Ministry of Commerce said today on its Web site.
China is adding controls to try to stem inflows of speculative capital from investors attracted by a strengthening yuan and interest rates at a decade high. So-called hot money inflows may have reached more than $200 billion in the first five months of this year, according to Michael Pettis, a finance professor at Peking University.
``Foreign direct investment has been one of the major channels for hot money since the beginning of 2007,'' said Shi Lei, an analyst at Bank of China Ltd. in Beijing. ``Speculators can always find a way to circumvent government rules.''
Besides the risk of stoking inflation that reached a 12- year high in February, hot money puts the nation at risk of ``massive outflows'' if expectations for currency gains reverse, according to a central bank report last month.
The yuan has gained 6.9 percent versus the dollar this year and 21 percent since a fixed exchange rate was scrapped in 2005. The key one-year lending rate is 7.47 percent, and the deposit rate is 4.14 percent.
Trade Surplus
The cash from foreign direct investment adds to the $21.4 billion pumped into the economy last month by the trade surplus.
China's foreign-exchange reserves, the world's largest, surged 40 percent to a record $1.68 trillion in March from a year earlier, according to the latest official data. The increase through June may be announced as early as today.
``As long as the yuan continues to appreciate and the economy outperforms other countries, China will remain an attractive destination for funds,'' said Zhu Baoliang, chief economist at State Information Center in Beijing, an affiliate of China's top economic planning agency.
The government is adding measures to try to stop investors from circumventing capital controls.
The State Administration of Foreign Exchange said last week that it will inspect exporters' foreign-exchange settlements from July 14 to try to prevent sham transactions that let hot money in.
China is also drafting regulations to control cross-border payments for services, with the same aim, according to an official at the regulator, who wouldn't be identified.
To contact the reporter on this story: Li Yanping in Beijing at yli16@bloomberg.net; Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net
Read more...
July 11 (Bloomberg) -- Foreign direct investment in China rose 45.6 percent in the first half from a year earlier, swelling inflows of cash that may stoke inflation in the world's fastest-growing major economy.
Spending by overseas companies increased to $52.4 billion, the Ministry of Commerce said today on its Web site.
China is adding controls to try to stem inflows of speculative capital from investors attracted by a strengthening yuan and interest rates at a decade high. So-called hot money inflows may have reached more than $200 billion in the first five months of this year, according to Michael Pettis, a finance professor at Peking University.
``Foreign direct investment has been one of the major channels for hot money since the beginning of 2007,'' said Shi Lei, an analyst at Bank of China Ltd. in Beijing. ``Speculators can always find a way to circumvent government rules.''
Besides the risk of stoking inflation that reached a 12- year high in February, hot money puts the nation at risk of ``massive outflows'' if expectations for currency gains reverse, according to a central bank report last month.
The yuan has gained 6.9 percent versus the dollar this year and 21 percent since a fixed exchange rate was scrapped in 2005. The key one-year lending rate is 7.47 percent, and the deposit rate is 4.14 percent.
Trade Surplus
The cash from foreign direct investment adds to the $21.4 billion pumped into the economy last month by the trade surplus.
China's foreign-exchange reserves, the world's largest, surged 40 percent to a record $1.68 trillion in March from a year earlier, according to the latest official data. The increase through June may be announced as early as today.
``As long as the yuan continues to appreciate and the economy outperforms other countries, China will remain an attractive destination for funds,'' said Zhu Baoliang, chief economist at State Information Center in Beijing, an affiliate of China's top economic planning agency.
The government is adding measures to try to stop investors from circumventing capital controls.
The State Administration of Foreign Exchange said last week that it will inspect exporters' foreign-exchange settlements from July 14 to try to prevent sham transactions that let hot money in.
China is also drafting regulations to control cross-border payments for services, with the same aim, according to an official at the regulator, who wouldn't be identified.
To contact the reporter on this story: Li Yanping in Beijing at yli16@bloomberg.net; Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net
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India's Industrial Production Grows at Slowest Pace in 6 Years
By Kartik Goyal
July 11 (Bloomberg) -- India's industrial production grew at the slowest pace in more than six years in May as spiraling prices prompted consumers to cut back on purchases of cars, fridges and other manufactured goods.
Production at factories, utilities and mines rose 3.8 percent from a year earlier after gaining a revised 6.2 percent in April, the statistics office said in New Delhi today. Economists expected a 6.5 percent increase.
Manufacturing output may weaken further as the fastest inflation since 1995 dents spending and makes it more likely the central bank will raise interest rates for a third time this year. Maruti Suzuki India Ltd., which produces half the cars sold in Asia's third-largest economy, and truck maker Tata Motors Ltd. trimmed output in May as higher borrowing costs discouraged buyers.
``With continued interest rate hikes, weakening foreign demand and rising costs of production, we are becoming more concerned about the outlook for industrial output,'' said Sonal Varma, an economist with Lehman Brothers Inc. in Mumbai. ``We expect production to moderate this year.''
Accelerating inflation, fuelled by soaring oil and commodities prices, and weaker global demand are hurting industrial production across Asia. Manufacturing in Singapore posted its biggest fall in two years in May. South Korea's output increased 8.3 percent in the same month, easing from a 10.4 percent gain in April.
Concern over weaker industrial output has contributed to a 31 percent decline in the Bombay Stock Exchange's benchmark Sensitive Index this year. Higher interest rates are also damping investor confidence.
Interest Rates
The Reserve Bank of India last month raised its benchmark interest rate twice to a six-year high of 8.5 percent and lifted its cash reserve ratio to 8.75 percent, aiming to tame inflation that reached 11.89 percent last month.
The increased cost of funds prompted lenders such as State Bank of India Ltd., the nation's biggest, ICICI Bank Ltd. and HDFC Bank Ltd. to raise lending rates. Higher borrowing costs may discourage consumer borrowing in a country where the majority of automobiles and apartments are bought on loans.
Maruti, Ford India Private Ltd. and Honda Siel Cars India Ltd. produced fewer cars in May, according to the Society of Indian Automobile Manufacturers. Ford produced 3,414 cars in May, about four times less from a year ago. Honda Siel Cars made 43 percent fewer vehicles.
`Tremendous Pressure'
``Profit margins of automakers are under tremendous pressure,'' said Sugato Sen, director of the Society of Indian Automobile Manufacturers. ``Production may decline in the coming months on higher interest rates and record inflation.''
Manufacturing, which accounts for about 80 percent of India's industrial production, gained 3.9 percent in May. Electricity output rose 2 percent, mining grew 5.5 percent. Consumer-goods production increased 7.2 percent.
Cement sales by companies such as Grasim Industries Ltd., India Cements Ltd. and other producers grew 4 percent in May, less than April's 7.2 percent gain, according to the Cement Manufacturer's Association.
A slowdown in exports of Indian clothes, steel and electronics goods may also have contributed to the drop in factory output. India's overseas sales rose 13 percent in May from a year ago, less than half of April's 31.5 percent growth.
To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net.
Read more...
July 11 (Bloomberg) -- India's industrial production grew at the slowest pace in more than six years in May as spiraling prices prompted consumers to cut back on purchases of cars, fridges and other manufactured goods.
Production at factories, utilities and mines rose 3.8 percent from a year earlier after gaining a revised 6.2 percent in April, the statistics office said in New Delhi today. Economists expected a 6.5 percent increase.
Manufacturing output may weaken further as the fastest inflation since 1995 dents spending and makes it more likely the central bank will raise interest rates for a third time this year. Maruti Suzuki India Ltd., which produces half the cars sold in Asia's third-largest economy, and truck maker Tata Motors Ltd. trimmed output in May as higher borrowing costs discouraged buyers.
``With continued interest rate hikes, weakening foreign demand and rising costs of production, we are becoming more concerned about the outlook for industrial output,'' said Sonal Varma, an economist with Lehman Brothers Inc. in Mumbai. ``We expect production to moderate this year.''
Accelerating inflation, fuelled by soaring oil and commodities prices, and weaker global demand are hurting industrial production across Asia. Manufacturing in Singapore posted its biggest fall in two years in May. South Korea's output increased 8.3 percent in the same month, easing from a 10.4 percent gain in April.
Concern over weaker industrial output has contributed to a 31 percent decline in the Bombay Stock Exchange's benchmark Sensitive Index this year. Higher interest rates are also damping investor confidence.
Interest Rates
The Reserve Bank of India last month raised its benchmark interest rate twice to a six-year high of 8.5 percent and lifted its cash reserve ratio to 8.75 percent, aiming to tame inflation that reached 11.89 percent last month.
The increased cost of funds prompted lenders such as State Bank of India Ltd., the nation's biggest, ICICI Bank Ltd. and HDFC Bank Ltd. to raise lending rates. Higher borrowing costs may discourage consumer borrowing in a country where the majority of automobiles and apartments are bought on loans.
Maruti, Ford India Private Ltd. and Honda Siel Cars India Ltd. produced fewer cars in May, according to the Society of Indian Automobile Manufacturers. Ford produced 3,414 cars in May, about four times less from a year ago. Honda Siel Cars made 43 percent fewer vehicles.
`Tremendous Pressure'
``Profit margins of automakers are under tremendous pressure,'' said Sugato Sen, director of the Society of Indian Automobile Manufacturers. ``Production may decline in the coming months on higher interest rates and record inflation.''
Manufacturing, which accounts for about 80 percent of India's industrial production, gained 3.9 percent in May. Electricity output rose 2 percent, mining grew 5.5 percent. Consumer-goods production increased 7.2 percent.
Cement sales by companies such as Grasim Industries Ltd., India Cements Ltd. and other producers grew 4 percent in May, less than April's 7.2 percent gain, according to the Cement Manufacturer's Association.
A slowdown in exports of Indian clothes, steel and electronics goods may also have contributed to the drop in factory output. India's overseas sales rose 13 percent in May from a year ago, less than half of April's 31.5 percent growth.
To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net.
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Nukaga Says Japan to Increase Pension Burden on Time
By Keiko Ujikane
July 11 (Bloomberg) -- The Japanese government will increase its contribution to the national pension program as scheduled, Finance Minister Fukushiro Nukaga said, after the Nikkei newspaper reported it may postpone the plans.
``The government is not thinking of delaying its promise for now,'' Nukaga said at a press conference in Tokyo today. Japan has pledged to increase its contribution to the program to half from the current third by the year starting April 1.
The Nikkei said the plan may be postponed by at least six months because of opposition to raising the sales tax to fund it, citing Hiroyuki Sonoda, deputy policy chief of the ruling Liberal Democratic Party. The government estimates it may need 2.3 trillion yen to raise the contribution, equivalent to revenue earned by a 1 percentage-point increase in the sales tax.
``The LDP would have to have a political death wish to increase the consumption tax at this time,'' John Richards, head of debt markets strategy at RBS Securities Japan Ltd. in Tokyo, wrote in a report today. ``A cigarette tax hike is now more likely than a consumption tax hike to fund increased government contributions to the public pension fund.''
Prime Minister Yasuo Fukuda said last month that he will consider whether to raise the 5 percent sales tax ``over the next two to three years.'' Fukuda's popularity has slumped since he took office last September, and his LDP-led coalition must defend its two-thirds majority in lower house elections due by September 2009.
Cigarette Tax
Lawmakers from ruling and opposition parties began meeting last month to discuss raising tobacco taxes. Hidenao Nakagawa, a former LDP secretary-general, wants the government to consider tripling the retail price of a pack of cigarettes to 1,000 yen to help fund rising social welfare costs.
Richards of RBS Securities said a 200 yen increase ``would produce enough revenue to more than cover the required pension contribution, since the demand for cigarettes is highly inelastic.''
Economic and Fiscal Policy Minister Hiroko Ota also told reporters today that the government wasn't discussing delaying the plan to increase the pension burden.
Nukaga said the government has promised the public that it will secure stable funding based on the assumption it will raise the government's pension contribution from April 2009.
To contact the reporters on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net
Read more...
July 11 (Bloomberg) -- The Japanese government will increase its contribution to the national pension program as scheduled, Finance Minister Fukushiro Nukaga said, after the Nikkei newspaper reported it may postpone the plans.
``The government is not thinking of delaying its promise for now,'' Nukaga said at a press conference in Tokyo today. Japan has pledged to increase its contribution to the program to half from the current third by the year starting April 1.
The Nikkei said the plan may be postponed by at least six months because of opposition to raising the sales tax to fund it, citing Hiroyuki Sonoda, deputy policy chief of the ruling Liberal Democratic Party. The government estimates it may need 2.3 trillion yen to raise the contribution, equivalent to revenue earned by a 1 percentage-point increase in the sales tax.
``The LDP would have to have a political death wish to increase the consumption tax at this time,'' John Richards, head of debt markets strategy at RBS Securities Japan Ltd. in Tokyo, wrote in a report today. ``A cigarette tax hike is now more likely than a consumption tax hike to fund increased government contributions to the public pension fund.''
Prime Minister Yasuo Fukuda said last month that he will consider whether to raise the 5 percent sales tax ``over the next two to three years.'' Fukuda's popularity has slumped since he took office last September, and his LDP-led coalition must defend its two-thirds majority in lower house elections due by September 2009.
Cigarette Tax
Lawmakers from ruling and opposition parties began meeting last month to discuss raising tobacco taxes. Hidenao Nakagawa, a former LDP secretary-general, wants the government to consider tripling the retail price of a pack of cigarettes to 1,000 yen to help fund rising social welfare costs.
Richards of RBS Securities said a 200 yen increase ``would produce enough revenue to more than cover the required pension contribution, since the demand for cigarettes is highly inelastic.''
Economic and Fiscal Policy Minister Hiroko Ota also told reporters today that the government wasn't discussing delaying the plan to increase the pension burden.
Nukaga said the government has promised the public that it will secure stable funding based on the assumption it will raise the government's pension contribution from April 2009.
To contact the reporters on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net
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Yuan's Advance This Year Matches Gains for All 2007; Bonds Rise
By Judy Chen and Kim Kyoungwha
July 11 (Bloomberg) -- The yuan's advance this year matched its gains for all of 2007 as China pledged to maintain efforts to strengthen the currency to stem inflation and narrow the trade surplus. Bonds rose.
The local currency climbed to the highest since authorities abandoned a dollar link in July 2005 as U.S. Treasury Secretary Henry Paulson yesterday urged China to accelerate the yuan's appreciation that is ``a key'' to the country's economic progress. The yuan rose 2.5 percent in the past three months, the best performance among the 10 most-active currencies in Asia outside Japan, as Premier Wen Jiabao reaffirmed in July that the battle against inflation remains his government's top priority.
``Inflation is still a huge issue,'' said Naomi Fink, a Tokyo-based senior currency strategist at Bank of Tokyo- Mitsubishi UFJ Ltd. ``China cannot afford to support exports by stopping the yuan rise. The dollar's strength would only aggravate already existing inflationary pressure.''
The yuan strengthened 0.34 percent this week to 6.8359 a dollar as of 3:05 p.m. in Shanghai, from 6.8589 on July 4, according to the China Foreign Exchange Trade System. It touched 6.8352 today, the strongest since the end of the dollar peg, increasing this year's gain to 6.86 percent this year.
Quicker Inflation
Inflation accelerated to 8.1 percent in the first five months of the year, from 4.8 percent for all of 2007, posing a threat to economic stability as the nation prepares to host the Olympics next month. The strengthening of the yuan has helped lower import costs as oil prices reached a record $145.85 a barrel on July 3 and narrow a record trade surplus that has flooded the economy with cash.
The June trade surplus narrowed 21 percent to $21.4 billion from a year earlier, the customs bureau said yesterday. The yuan is ``obviously substantially undervalued,'' Dominique Strauss- Kahn, managing director of the International Monetary Fund, said on July 9.
``Solid export growth and the still-large trade surplus should support a stronger effective yuan exchange rate going forward,'' Song Yu, an economist at Goldman Sachs Group Inc. in Hong Kong, said in a report yesterday.
The Westpac Nominal Effective Exchange Rate, a trade- weighted index for the yuan, has climbed 6 percent this year, almost double the 3.4 percent gain last year.
`Biggest Challenge'
``The biggest challenge for the central bank is to deter bets on yuan gains while allowing its steady appreciation,'' said Liu Dongliang, a foreign-exchange analyst in Shenzhen at China Merchants Bank Co., the country's sixth largest lender. ``Wider fluctuations would keep some hot money out of the country by raising speculators' transaction costs.''
Liu said the currency won't rise more than 5 percent versus the dollar in the second half of this year.
In its efforts to tighten controls on speculative capital, the State Administration of Foreign Exchange, said July 2 that it will require exporters to deposit foreign-currency income, including prepayments, into designated bank accounts from July 14 before the currency regulator confirms authenticity of the revenue and allows it to be converted.
``Exporters are hurrying to repatriate earnings from overseas and convert the money to the yuan before the start of the new rules, which boosted the demand for the local currency in the past two days,'' said Liu Hantao, a foreign-exchange trader at China Construction Bank Corp. in Beijing.
Bonds Advance
One-year non-deliverable forward contracts show traders are betting on a 5.7 percent advance in the yuan to 6.465 in the next 12 months. The currency will reach 6.65 per dollar by year- end, according to the median estimate of 27 analysts surveyed by Bloomberg News.
Forwards are agreements in which assets are bought and sold at current prices for delivery at a later specified time and date. Non-deliverable contracts are commonly used for currencies that aren't freely convertible and are settled in dollars.
Local-currency bonds rose after the finance ministry sold debt at a lower-than-expected yield today. The government sold at least 24 billion yuan ($3.5 billion) of three-year bonds at a yield of 3.92 percent, compared with 3.95 percent traders expected, said Nie Shuguang, a fixed-income trader at Industrial Bank Co. in Shanghai.
The yield on the 4 percent note due in October 2012 fell 10 basis points to 4.05 percent, according to the China Interbank Bond Market. The price climbed to 99.79 from 99.41. A basis point is 0.01 percentage point.
To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net; Kim Kyoungwha in Beijing at kkim19@bloomberg.net.
Read more...
July 11 (Bloomberg) -- The yuan's advance this year matched its gains for all of 2007 as China pledged to maintain efforts to strengthen the currency to stem inflation and narrow the trade surplus. Bonds rose.
The local currency climbed to the highest since authorities abandoned a dollar link in July 2005 as U.S. Treasury Secretary Henry Paulson yesterday urged China to accelerate the yuan's appreciation that is ``a key'' to the country's economic progress. The yuan rose 2.5 percent in the past three months, the best performance among the 10 most-active currencies in Asia outside Japan, as Premier Wen Jiabao reaffirmed in July that the battle against inflation remains his government's top priority.
``Inflation is still a huge issue,'' said Naomi Fink, a Tokyo-based senior currency strategist at Bank of Tokyo- Mitsubishi UFJ Ltd. ``China cannot afford to support exports by stopping the yuan rise. The dollar's strength would only aggravate already existing inflationary pressure.''
The yuan strengthened 0.34 percent this week to 6.8359 a dollar as of 3:05 p.m. in Shanghai, from 6.8589 on July 4, according to the China Foreign Exchange Trade System. It touched 6.8352 today, the strongest since the end of the dollar peg, increasing this year's gain to 6.86 percent this year.
Quicker Inflation
Inflation accelerated to 8.1 percent in the first five months of the year, from 4.8 percent for all of 2007, posing a threat to economic stability as the nation prepares to host the Olympics next month. The strengthening of the yuan has helped lower import costs as oil prices reached a record $145.85 a barrel on July 3 and narrow a record trade surplus that has flooded the economy with cash.
The June trade surplus narrowed 21 percent to $21.4 billion from a year earlier, the customs bureau said yesterday. The yuan is ``obviously substantially undervalued,'' Dominique Strauss- Kahn, managing director of the International Monetary Fund, said on July 9.
``Solid export growth and the still-large trade surplus should support a stronger effective yuan exchange rate going forward,'' Song Yu, an economist at Goldman Sachs Group Inc. in Hong Kong, said in a report yesterday.
The Westpac Nominal Effective Exchange Rate, a trade- weighted index for the yuan, has climbed 6 percent this year, almost double the 3.4 percent gain last year.
`Biggest Challenge'
``The biggest challenge for the central bank is to deter bets on yuan gains while allowing its steady appreciation,'' said Liu Dongliang, a foreign-exchange analyst in Shenzhen at China Merchants Bank Co., the country's sixth largest lender. ``Wider fluctuations would keep some hot money out of the country by raising speculators' transaction costs.''
Liu said the currency won't rise more than 5 percent versus the dollar in the second half of this year.
In its efforts to tighten controls on speculative capital, the State Administration of Foreign Exchange, said July 2 that it will require exporters to deposit foreign-currency income, including prepayments, into designated bank accounts from July 14 before the currency regulator confirms authenticity of the revenue and allows it to be converted.
``Exporters are hurrying to repatriate earnings from overseas and convert the money to the yuan before the start of the new rules, which boosted the demand for the local currency in the past two days,'' said Liu Hantao, a foreign-exchange trader at China Construction Bank Corp. in Beijing.
Bonds Advance
One-year non-deliverable forward contracts show traders are betting on a 5.7 percent advance in the yuan to 6.465 in the next 12 months. The currency will reach 6.65 per dollar by year- end, according to the median estimate of 27 analysts surveyed by Bloomberg News.
Forwards are agreements in which assets are bought and sold at current prices for delivery at a later specified time and date. Non-deliverable contracts are commonly used for currencies that aren't freely convertible and are settled in dollars.
Local-currency bonds rose after the finance ministry sold debt at a lower-than-expected yield today. The government sold at least 24 billion yuan ($3.5 billion) of three-year bonds at a yield of 3.92 percent, compared with 3.95 percent traders expected, said Nie Shuguang, a fixed-income trader at Industrial Bank Co. in Shanghai.
The yield on the 4 percent note due in October 2012 fell 10 basis points to 4.05 percent, according to the China Interbank Bond Market. The price climbed to 99.79 from 99.41. A basis point is 0.01 percentage point.
To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net; Kim Kyoungwha in Beijing at kkim19@bloomberg.net.
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