Economic Outlook: The ECB has Rattled the Sabre

This week's highlights

There are indications that for the first time in more than twelve months the ECB will raise interest rates at the meeting on 3 July. It is not 100% certain that it will raise interest rates by 0.25 percentage point, but it will surprise us and many more if the bank holds interest rates. If it does, there is no doubt that it will lose credibility and there will be widespread uncertainty about the ECB's line and communication.

However, there is one little detail which is different from when the bank has previously indicated a hike in the subsequent month. Usually a hike is indicated through the expression 'strong vigilance' while 'monitor very closely' is used when interest rates will not be raised in the subsequent month. After the last meeting, the ECB used the expression 'monitor very closely' but added that it was in a 'state of heightened alertness'. A reflection that the usual rhetoric did not quite cover the bank's need to formulate whether it should raise interest rates at the next meeting or not.

However, we assess that the ECB will raise interest rates due to

• the wording in the last press release combined with statements made at the subsequent press conference
• comments from several members of the Governing Council during the month
• Trichet's testimonial to the European Parliament

The most interesting at the press conference will be to see how the bank rewords its expression 'in a state of heightened alertness'. This includes its rhetoric about whether one hike is sufficient or there is more to come. But usually the ECB only indicates interest-rate changes one month ahead.

On the basis of Trichet's comments in his testimonial to the European Parliament, we assess that this interest-rate hike should not necessarily be seen as the start of a new series of interest- rate hikes. The bank will not just note that inflation expectations are rising since it will be prepared to react with further interest-rate hikes.

The bank noted in this connection that unit-wage costs and service prices have begun to increase, and this will give rise to concern at the ECB since it is something to which it attaches great importance. Whether the bank will raise interest rates more than once - which we consider highly likely but do no expect - will be very dependent on economic indicators and inflation expectations. Moreover, the ECB will focus on the development of wages. In this connection, it will pay attention to whether countries which can compensate wage earners with high wage increases via labour agreements will actually do so. The ECB has admonished these countries not to do so. Focus will also be on the labour talks in Germany in the autumn.

This week's other highlights

• The US: job report, ISM Manufacturing and service
• The euro zone: consumer prices
• Japan: Tankan report
• The UK: PMI and house prices
• Sweden: Monetary-policy meeting at the Riksbank

Monday

The euro zone: consumer prices, preliminary

Consumer prices are high and much too high for the liking of the ECB. Moreover, the high rate of inflation is deadly to growth in consumer spending since it erodes households' purchasing power. In May, inflation rose to 3.7% y/y. We expect inflation for June to be a tad higher or at the same level.

Japan: Tankan report from the BoJ, Q2 (1 July)

The Japanese economy is slowing down. We expect this to be confirmed through further declines in the Tankan report which is an extensive quarterly business sentiment survey based on data from more than 10,000 businesses.

In the first quarter, the current index (of manufacturing/ large businesses) fell to 11 from 19 while the index of expectations fell to 7 from 15. We expect both indices to fall further since slower domestic demand and slower global growth burden businesses just as rising commodity prices put pressure on corporate profits. Although both indices are at the lowest level in four years, they remain in positive territory and there are no prospects of recession-like growth rates.

In the first quarter, businesses said planned investment would be reduced by 1.6% in the current financial year which is the lowest level since the recession in 2001/2002. However, there are usually relatively large declines in the first quarter when businesses are still considering the targets for the new financial year. In the second quarter, we therefore expect a minor rise in planned investment. Machinery orders which are usually a good indicator of corporate investment at 6-9 months' term show moderation. This is altogether not very positive for investment which has long been an important growth engine in Japan. The level is, however, still significantly higher than during previous recessions.

Tuesday

The US: ISM Manufacturing - June

ISM is the nationwide sentiment indicator for the manufacturing industry and gives a reasonable indication of the development in industrial production and GDP. This time the financial markets will focus on whether ISM still signals that the US avoids recession. ISM is also used as a recession indicator since traditionally it falls down to around 41 - 42 during recessions. So far, it has only signalled weak growth but not recession. In May, ISM rose to 49.6 from 48.6 in April.

We expect a fall in ISM in June, which is due to the following:

• Our ISM indicator signals that ISM may fall a few points in June
• There is again turmoil in the financial markets which may pull down ISM
• Oil prices continued to rise from May to June and together with falling house prices and rising unemployment this strains demand
• The sentiment index of small businesses has fallen considerably more than ISM. They are notably bearish about sales
• New orders in the manufacturing industry rose solidly until May. However, part of the increase can be ascribed to price rises.

In addition to the index, focus will be on new orders, employment and the price index. Notably the price index, which is at a very high level, will attract attention.

The US: vehicle sales - June

Vehicle sales from producers are interesting due to high petrol prices (above USD 4 a gallon) which have already prompted Americans to reduce their driving. Rumours have it that there is some risk of a relatively sharp fall in vehicle sales although it has already fallen markedly. Notably the American car producers are hit hard by the rising petrol prices and tightening of credit standards.

Vehicle sales for May fell to 14.6m after the sales were just below 17m in 2007. The sales are the lowest they have been since June 1998. Although sales have already fallen sharply, buying a new car is something consumers postpone during difficult times. Thus we expect a further decline in vehicle sales in June.

The euro zone: unemployment - May

The unemployment rate was unchanged over the past three months while April showed a fair rise in the number of unemployed since more than 60,000 lost their jobs. However, we are somewhat careful about saying that it is already a trend change since data are affected by seasonal swings. It is important to watch developments in the labour market since a turn in the labour market is something which can put a damper on wages and the risk of second-round effects and thus lasting high inflation. A budding rise in unemployment will also put a political pressure on the ECB if the bank indicates continued interest-rate hikes.

Germany: unemployment - June

As the economy has slowed, we have seen signs that this is beginning to take hold in the labour market. Since the turn of the year, the fall in unemployment has been reduced month by month. May was the first month when unemployment rose since it began to fall in earnest in early 2006. The rise should, however, be taken with a grain of salt since it is influenced by seasonal factors. But the unemployment rate has now been unchanged for three months, and in our view this is a signal that the rate is close to the bottom.

The UK: PMI Manufacturing - June

In May, PMI Manufacturing fell to 50 which is the lowest it has been since July 2005. The index thus points to zero growth in the manufacturing industry. Most of the sub-indices fell whereas the index of sales prices rose to the highest level in the history of the index. PMI Manufacturing thus indicates slower growth combined with higher inflationary pressure.

We expect PMI to remain week over the coming months. The order indices in the CBI survey of the manufacturing industry and PMI for May point to unchanged or a slight fall in production.

The UK: house prices - June

According to Nationwide, house prices have fallen in the past seven months and the fall in May of 2.5% m/m was the sharpest fall in the history of the series. The annual rate of increase is currently -4.4% compared with 10.5% in May last year.

Most indicators show that the housing market is likely to show weakness for some months yet, with the rise in house prices slowing further. Among other things, the ratio between housing sales and the stock of unsold houses in the RICS survey - which is a good indicator of future house prices - is still falling, and the number of mortgage loans used for home purchases has fallen to an all-time low since the start of the series in 1993.

Thursday

The US: job report - June

As usual, employment is the absolutely most important indicator to the financial markets, because employment is taken to give a good indication of the state of the economy. Interest has been whetted because unemployment rose by 861,000 persons, the biggest rise in 33 years. Unemployment rose from 5% in April to 5.5% in May. We expect a small fall in the unemployment rate in June.

The employment rate is one of the indicators which have signalled that growth is slow, but that the economy is not in recession. Employment has fallen by 'only' 55,000 a month over the past three months. The fall in employment is concentrated on the usual cyclical sectors such as construction, the manufacturing industry, trade and transportation as well as business services. The public sector and the education and the health-care sectors are continuing at the usual pace.

We expect the employment situation to deteriorate over coming months. This is confirmed by the fact that most indicators signal a sharper fall in employment. We expect a fall in employment of about 80,000 in June, but we still await a number of indicators which are not released until next week.

Jobless claims fell by 13,000 between the two collection weeks (when employment data were collected). This points to falling employment. ISM's employment index for the manufacturing industry remained at its lowest level in June, which signals a bigger fall in employment in the manufacturing industry than during the preceding months. ISM's employment index for the service sector, of which only data for May are available, fell to 48.7. This indicates a small fall in employment in the service sector. ISM's total weighted employment index points to a fall in employment of 75,000. The small companies report the lowest number of jobs vacant since mid-2003.

In the construction sector, employment has fallen, but construction work has fallen more sharply still. In our view, there is a surplus of 300,000 skilled workers in the construction sector. Also, there are signs that corporate construction is falling. This means that there are prospects of a sharp fall in employment in the construction sector.

The surge in unemployment was due to the fact that a very high number of young people left school. This apparently happened earlier than usual, and it is thus probable that the unemployment rate will fall again. This should not be regarded as a signal that the labour market has improved.

Focus will also be on the development in wages, since there is much focus on inflation. The wage increase in May was 0.3% and 3.5% y/y. The general rise in unemployment is expected to lead to a lower rate of wage increase and hence to weakening inflationary pressure from the labour market.

The US: ISM Service - June

The sentiment indicator ISM service is important since the service sector accounts for 90% of employment and is thus by far the most important part of the economy. ISM for the service sector was largely unchanged at 51.7 in May (52 in April). At 51.7, the number was in fact surprisingly high in view of the fact that it is higher than the level during the recession in 2001, and consumers are under severe pressure. The service sector is relatively exposed to the consumers, and this ought to make for a weak reading of ISM for the service sector.

One explanation may be that the consumers have received their cheques, and this may have lifted consumption. On the other hand, consumers are under severe pressure, turmoil has returned to the financial markets, the oil prices and long bond yields have risen. We expect this to cause a fall in the ISM for the service sector in June.

In addition to the overall index, there will be special focus on the employment index, because employment in the service sector is one of the factors that support employment.

The euro zone: monetary-policy meeting at the ECB

See This week's highlight.

The UK: PMI service - June

PMI service fell in May to 49.8 and thus went below 50 for the first time since March 2003. This means that PMI service is currently indicating a setback in the service sector. The subindices showed that activity indices fell, while the price indices, as has been the case these past few months (also for PMI Industry) rose to a record high. So also the service sector is showing clear signs of considerably slower growth in combination with a stronger inflationary pressure.

We expect PMI service to remain week over the coming months. Admittedly, the actual retail sales have shown an unusually high rise, but most surveys and indicators point to lower consumer spending, and our view concurs with this. The slowdown in the housing market will also tend to keep down PMI service.

Sweden: monetary-policy meeting at the Riksbank on 3 July

The sharply rising inflation rate and slowing growth put the Riksbank into a dilemma. We expect that fears of inflation win the game, and that the Riksbank chooses to raise interest rates by 0.25 percentage point. We admit that the decision could go either way, and that the Riksbank may choose to buy time by turning more hawkish and raising the projected interest- rate curve. The Riksbank will also release a new monetary policy report. We expect the report to raise its estimate of the inflation rate. Consumer prices and policy rate

The inflation rate has definitely risen faster than expected by the Riksbank, and it has yet to peak. It is chiefly rising food and energy prices which lift the inflation rate, but there is also underlying inflationary pressure due to the rising rate of wage increase, expectations about higher inflation and low productivity. Furthermore, if inflation remains high over a long period - even though it has increased due to temporary effects - it will increase the risk of accelerating wage increase and inflation expectations. This is obviously worrying the Riksbank and prompts us to expect a last interest rate increase, although economic growth is definitely slowing down.

Friday

Germany: order inflow - May

The German order inflow has shown serious signs of weakness lately and has been falling for the past five months. It is mainly export orders which have pulled down the order intake, whereas domestic orders are better than expected. The order intake of the PMI showed a heavy fall in May, but a corresponding rise in June, while stocks are almost record high. We expect the order intake to change and rise slowly in May. This is rather because we see a need for a small correction after recent months' fall and the slightly better PMI.

Jyske Markets - FX Research
http://www.jyskebank.dk/finansnyt

The analysis is based on information which Jyske Bank finds reliable, but Jyske Bank does not assume any responsibility for the correctness of the material nor for transactions made on the basis of the information or the estimates of the analysis. The estimates and recommendation of the analysis may be changed without notice. The analysis is for personal use of Jyske Bank's customers and may not be copied.

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Week Ahead In US Financial Markets (June 30-July 4 2008)

Financial Markets Summary For The Week of June 30-July 4

The country may be celebrating its independence, but the markets will see a week of very important data and an address on the financial crises and the economy from the Fed and US Treasury. The major events of the week will be the publication of the June non-farm payrolls report on Thursday. Wednesday will see an address on the economy by US Treasury Secretary Paulson and a talk on the current global financial disruption by FOMC Gov. Mishkin. Monday will see the release of the Chicago PMI and total vehicle sales for June. The June estimate of the ISM will be published the following day, with factor orders and the ADP employment estimate the primary data released on Wednesday. The week will conclude with the aforementioned June non-farm payrolls data, the ISM non-manufacturing survey and the weekly jobless claims series.

Fed Talk

The week of June 30-July 4 will see a truncated week of Fed talk. July 1 will see Atlanta Fed President Lockart speak on the economic outlook and financial turmoil. The following day US Treasury Secretary Paulson will speak on the markets and the economy. FOMC Gov. Mishkin will speak on “The Global Financial Disruption and the World Economy” at a conference in Israel. Time TBA.

Chart of The Week

Chicago PMI (June) Monday 09:45 AM

The general headline business barometer should see a decline to 47.0 for the month of June on the back of a weak month of new orders and a sharp rise in the cost of production. We have for some time thought that the manufacturing industry would experience a very rough month of June. Our below market forecast is specifically predicated on the weak response in motor vehicle assemblies post settlement of the American Axel strike. Given the very real problems in the auto industry we think that the published production schedules out of Detroit will prove to have been overoptimistic in retrospect and provide a continuing deadweight on economic activity in the upper Midwest for some time to come.

Total Vehicle Sales (June) Monday Afternoon

When one takes a look at the carnage in the auto industry due to the steep climb in the price of gasoline the idea that the rebate checks afforded consumers by the Federal government will provide a net boos to domestic auto sales looks quite suspect. Year to date, the sale of light duty truck and SUV's which have been the bread and butter of Detroit for the past decade, are down -15.7% and -25.3% respectively. Total sales for cars are flat year over year and we do not see any material improvement for the month. Our forecast implies domestic sales will fall to 10.4mln units and the total vehicle sales to 14.1mln for the month of June.

ISM Manufacturing (June) Tuesday 10:00 AM

The sharp increase in the cost of production should take a healthy bite out of industrial activity in June. Our forecast implies a decline in the headline manufacturing index to 48.0 for the month, which would be the fifth consecutive reading indicating contraction in the industrial sector. The primary culprit for the decline, in addition to the aforementioned rise in prices paid, should be the seventh consecutive reading indicating contraction in the new orders component, with a healthy risk to the downside emanating from the continued retrenchment in the domestic auto industry. The combined impact of rising costs and diminished demand from domestic sources should be expected to push the production component back into terrain indicating contraction and provide the foundation for a very pessimistic report to end the second quarter of 2008.

ADP Employment Change (June-25) Wednesday 08:15 AM

We expect that the ADP forecast will catch up with the reality of continuing retrenchment in the labor sector and report a net subtraction of -20k in payrolls for the month of June. After a few months of overshooting the mark, the gents at Macroeconomic Advisers who provide the estimate, should make the adjustments in the model necessary to account for the modest amount of bloodletting that continues to define an economy basically moving sideways.

Factory Orders (May) Wednesday 10: 00 AM

Another flat month of orders for durables signals that factor orders should see a equally dreary outcome. Although, the shipments category can be expected to advance slightly, other than a decent month of orders for civilian aircraft and a pickup in activity at the Department of Defense, there is little to write home about in the manufacturing sector.

Jobless Claims (Week Ending 28 June) Thursday 08:30 AM

Jobless claims have advanced quietly to 384K and we expect to see a slight retrenchment to 380K in the series. More importantly, has been the upward movement in the continuing claims series that feeds into the estimate of unemployment within the non-farm payroll series. Standing at 3.139 million, this does support our longer-term call of the rate of unemployment to move to 6.0% in early 2009.

Non-Farm Payrolls (June) Thursday 08:30 AM

The employment situation in June should provide a fairly representative picture of the US economy. Flat with a risk to the downside. We anticipate that payrolls will decline -37K for the month on the back of continued retrenchment in total private employment with goods production and the construction industry providing fuel for further downside movement. One factor minimizing the damage for the month inside the labor sector, should be the return to the payrolls of workers in the auto industry after the settlement of the American Axel strike. This should keep losses in the manufacturing sector down to around -30K, which would be around -15k less than was the trend before the strike. If one adds that gain, to the -37k that we expect, the headline number would arrive at -52K, which is just below the three-month average of -55K for non-farm payrolls.

Just as important, will be the look at the rate of unemployment for the month. We expect that the Bureau of Labor Statistics will make the necessary seasonal adjustments to reflect the early entry on the job market of 16-24 year olds in May that was the primary catalyst for the strong move to 5.5% in May. Based on this we anticipate that the unemployment rate will fall back to 5.4%. This seasonal inspired change, does not impact our bearish outlook for the rate of unemployment to move to 5.5% in the short term and to 6.0% in early 2009.

ISM Non-Manufacturing (June) Thursday 10:00 AM

The early arrival of the rebate checks and a healthy amount of pent up demand for discretionary consumption provided the fuel for one of the few decent US macro reports in May. We expect that the composite index should remain in terrain indicting modest growth with the headline falling to 51.4. The primary risk to our forecast will be the rise in prices in June, which surely weighed heavy on consumers attempting to estimate just how much further the cost of energy and gasoline will continue to rise.

Joseph Brusuelas
Merk Hard Currency Fund
http://www.merkfund.com/

The views in this article were those of Axel Merk as of the newsletter's publication date and may not reflect his views at any time thereafter. These views and opinions should not be construed as investment advice nor considered as an offer to sell or a solicitation of an offer to buy shares of any securities mentioned herein. Mr. Merk is the founder and president of Merk Investments LLC and is the portfolio manager for the Merk Hard Currency Fund. Foreside Fund Services, LLC, distributor.

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Australian & New Zealand Weekly: RBA on Hold - Terms of Trade Boost Noted

Australian & New Zealand Weekly

Week beginning 30 June 2008

* Australia: RBA on hold - terms of trade boost noted.
* Aus data: credit, inflation gauge, retail, dwelling approvals & trade.
* New Zealand data: building consents, business & jobs confidence.
* ECB: President Trichet has signalled a rate rise.
* Eur CPI expected to approach 4% annual.
* US data: ISM's and payrolls the main focus.
* Key economic & financial forecasts.

Australia: RBA on Hold - Terms of Trade Boost Noted

The Reserve Bank Board meets on Tuesday July 1, with the result of their deliberations to be announced at 2:30 pm. We expect the Board will decide to leave rates unchanged.

Since the last Board meeting, when rates were also kept on hold, there have been a number of significant developments. The June Board Minutes which were released on June 17 were more "soothing" than the May Board Minutes. There was no reference in June to "members spent considerable time discussing the case for a further rise in the cash rate". In addition the Minutes referred to the Federal Budget as "mildly contractionary"; talked of business credit "slowing sharply" and anticipated that "a moderation in employment growth could be expected soon".

Of course that observation could be interpreted as prophetic since the June 12 employment report showed that there had actually been a contraction in jobs for the first time in 19 months, with job numbers falling by 19,700 in May.

However eleven days after the Board Meeting the Governor spoke of the economic outlook and allocated around 15 lines to evidence of the slowing economy and 55 lines to his concerns with the potential expansionary impact of the near 20% boost to the terms of trade, which has still to impact the income data.

This can be expected to work through the export numbers from April. The sharp leap in coal export prices has only just started to impact export data for March and April (27% increase in coal export prices assessed so far) and we are advised that the near 100% increase in iron ore prices will start impacting export values in the May data.

It is clear that the Bank is highly uncertain as to exactly how that stimulus will affect domestic spending. Recall that the RBA has forecast a slowdown in domestic spending growth from 6% in 2007 to around 2.5% in 2008 and holding there in 2009. That sequence of a sharp slowdown followed by a period of weak growth is assessed as necessary to reduce inflation from its current 4.25% to 2.75% by end 2010. The terms of trade will boost national incomes by 3% over this period.

We expect that the stimulus to spending and demand from this new income boost will be slow to come through and be much more muted than in previous stages of this commodity cycle. That is because firstly the government which collects one third of the surplus profits through taxes is unlikely to grant further tax cuts in the style of Howard/Costello as it fears "stoking" further inflation pressures. Another important channel is through an employment stimulus but we assess that labour shortages in the resources sector and its regions will mute the flexibility of resource companies to ratchet up hiring. In short, the spillover to spending and demand that the Reserve Bank fears is likely to be lagged and muted precluding the pressure to raise rates in 2008.

Further, we expect that the slowdown in global growth is likely to see a stalling of the terms of trade boom in 2009 (see figure). That would see a reversal of the income stimulus and may partly offset the lagged stimulus from 2008. Scrutiny of the impact on demand in 2004 following the initial follow through boost to the terms of trade shows that if domestic forces are sufficiently powerful (as we saw in 2004 when an abrupt reversal in the housing market slowed consumer spending) then the stimulatory impact on demand from a terms of trade boost may be limited.

We expect that in 2009 the lagged demand boost from the terms of trade rise will be offset by the downward momentum of domestic forces. However such a boost should be sufficient to limit the Bank's flexibility to cut rates in 2009.

The near term test for policy will come on July 23 when the June quarter CPI will be released. We believe that such is the Bank's desire not to tighten that it will be prepared to accept a higher starting point for inflation than the 4.2% it currently faces. For that starting point to increase we will need to see quarterly underlying inflation print above 0.9%. The last four reads have been: 0.9%; 0.9%; 1.1%; and 1.3%. With 0.9% dropping out, and given the recent sequence, it seems likely that annual inflation will rise.

Our early estimate for underlying inflation is in the 1.0-1.2% range, indicating that in annual terms underlying inflation will rise for the June quarter. However we expect that as long as the next quarterly read is below 1.3% the Bank can avoid another hike and argue that in a quarterly sense inflation has peaked.

Recall that all the Bank needs to do to avoid another rate hike in August is to argue that while its inflation task may have increased (needing to bring inflation down from say, 4.4% / 4.5% to 2.75% rather than 4.2% to 2.75%) the growth outlook has surprised on the downside since it last produced its inflation forecast.

Apart from the surprise reduction in jobs in May there has been other evidence to justify a weaker growth outlook than in May. Certainly business credit growth has stalled. In the three months to April business credit growth showed a 5% (annualised growth pace). That compared with a 25% annualised growth pace for the previous 3 months. Some of our customers have commented on how quickly activity appears to have slowed down. Credit market conditions have also deteriorated. Borrowing costs of AA banks are back close to the peaks of the recent crisis.

No doubt the Reserve Bank is receiving comparable anecdotal evidence from its surveys as indicated in the June Minutes. Despite persistent market pricing to the contrary we continue to stand by our view that rates have peaked in this cycle .

Australia: Data Wrap

Q2 job vacancies

• The quarterly ABS survey of job vacancies is less timely and more volatile than other measures of labour demand. The businesses included in the survey sample vary from quarter to quarter, and the data is only sampled on one day in the quarter, leaving results vulnerable to distortion from survey composition and timing. In fact, the May quarter is the final release of this series, with the survey not being conducted during 2008-09, although the Statistician said it may be reinstated for 2009-10.
• For what it's worth, the Q2 job vacancies report concurs with our other preferred leading indicators of employment in suggesting jobs growth resilience over 2008H2. Total job vacancies rose 3.4%qtr sa in Q2 after a 2.7% fall previously. This left their uptrend intact, although trend growth has slowed to 1.1%qtr (from 1.5%qtr prev), the weakest since 2005Q4. Annual trend growth slowed to 9.0%yr from 11.4%yr previously, down from a peak pace of 15.7%yr in 2006Q4 to its weakest since 2006Q2. Private sector vacancies rose 3.6% after a 3.0% fall previously, slowing trend growth to 1.1%qtr and 8.9%yr. Public sector vacancies rose 1.1% after a flat result previously, slowing trend growth to 1.1%qtr and 9.7%yr.
• With the slowing uptrend in vacancies, the trend vacancy rate edged up marginally to 1.69 from 1.68 previously, a new high. Historically, turning points in the vacancy rate have led turning points in annual jobs growth by around 6 months. The flattening of the uptrend in the vacancy rate is another pointer to resilience in jobs growth through 2008H2, concurring with our other preferred leading indicators of labour demand. For example, the Q2 read of our Westpac-ACCI Labour Market Composite Index remained consistent with only a gradual slowing in jobs growth through 2008H2 to a 2%yr pace.

Round-up of local data released last week

Date	Release	Previous	Latest	Mkt f/c
Thu 26	Q2 job vacancies		3.4%	-

New Zealand: The Week ahead & Economic Wrap

Stairway to recession

It was a week of data best forgotten. Q1 GDP was as just as dismal as expected, but there was little to cheer about elsewhere.

The week began with the RBNZ reporting a 1.1% fall in credit card transactions for May - in contrast to the official figures for electronic cards transactions, which recorded a 0.6% gain for the same month. These figures add to the uncertainty around retail sales - a sector that is already facing harsh times.

The Westpac Consumer Confidence survey hammered home this point, with a jaw-dropping decline in Q2. The index fell 15 points to 81.7 in June - the lowest level since the 1991 recession. The pressure on consumers has intensified over the past few months as sharply higher prices for everyday items such as food, fuel, and shelter have continued to eat into disposable incomes. Of these, the highly publicised rise in fuel prices is likely to be the main culprit. For the average household, the latest round of price increases since March translates into an extra $430 per year (assuming no volume response and prices remaining at current levels for the rest of the year). To that we can add a further 2% increase in food prices, a 5% decline in the currency which is putting upward pressure on import prices, falling house prices, rising unemployment, and increased debt servicing costs as people on fixed mortgages roll off onto markedly higher rates. It's no wonder consumers are feeling grumpy.

The current account deficit improved to 7.8% of GDP for the year to March 2008, but was significantly larger than we or the market were expecting. The trade balance slid back to a deficit of $127m, as the peak of the dairy bonanza and exports from the Tui oil field were outweighed by a sharp rise in both the price and volume of oil imports, and a sizeable jump in imports of plant and machinery. The other surprise was a fall in income earned by overseas subsidiaries of New Zealand companies. This would have to be a small and fairly idiosyncratic group, so reported earnings can be lumpy. We expect the trend improvement in the deficit to continue, but a whopping 40% increase in world oil prices in Q2 must take a toll in the near term.

Friday brought the keenly awaited GDP figures for Q1, which were widely seen as providing the first step towards recession. They didn't disappoint, printing at -0.3%, in line with market forecasts. Drought slammed agriculture output down by 5.6%, even larger than the sharp decline we had factored in. Dairy output fell by more than 12%, with declines also in lamb and beef production. This weakness flowed through to the manufacturing sector, with reduced primary processing, which is likely to be repeated in Q2.

Domestic demand has slowed abruptly. Household spending (private consumption) fell 0.4% in the quarter, as rising fuel and food prices, high interest rates and a slump in the housing market put a strain on consumer finances. While this was in line with our forecasts, it will be of concern to the RBNZ - we estimate that they had consumer spending rising in a range of 0.5% to 0.8% in their June forecasts. Again, household spending was likely even weaker in Q2, given the decline in consumer confidence. The slump in the housing market, due to high interest rates and slower net migration, saw residential construction fall 5.5%. Softer building activity pulled down GDP in the construction sector by 5.2%. The real estate and business services sector also contracted as house sales fell sharply.

Merchandise trade, which had the misfortune to be released at the same time as GDP, was weaker than expected at -$198m, and very weak for a May month. Exports were softer than expected, mainly due to an extremely low volume of dairy exports, down 29.7% on a year ago. Although the data have been volatile over the past few months, the overall effect of drought on export volumes is becoming clear, and has probably been more important than we initially thought.

Next week is much quieter on the data front, but no more promising. May building consents follow a mind-boggling 82% increase in April, as developers scrambled to beat an increase in fees on 1 May. We expect a 44% decline this time, but the risk is to the downside. Business confidence levelled out last month, but remains at levels consistent with recession. The clearer prospect of interest rate cuts may boost morale, but profits are still being squeezed from both sides. Finally, Q2 employment confidence is likely to remain gloomy - the economic news has deteriorated further since March, we have had confirmation than employment contracted unexpectedly in Q1, and there have been highly publicized layoffs by some key NZ firms. Overall, the evidence so far points to GDP growth in Q2 being even more negative than Q1, thereby meeting the technical definition of a recession.

Round-up of local data released last week

Date	Release	Previous	Latest
Mon 23 Jun	May credit card transactions	4.4%	-1.1%
Wed 25 Jun	Q2 consumer confidence	96.5	81.7
Thu 26 Jun	Q1 current account NZDmn s.a.	-3,117	-3,527
Fri 27 Jun	Q1 GDP %qtr	0.8%	-0.3%
	May merchandise trade NZDmn	-296	-196

Data previews

Aus May private credit

Jun 30, Last: 0.4%, WBC f/c: 0.6%

Mkt f/c: 0.6%, Range: 0.4% to 0.9%

• Credit growth has slowed appreciably as the RBA's aggressive tightening of monetary policy bites and in the wake of unsettled global financial markets.
• Credit expanded by just 0.4% in April, the weakest result since 2001 and followed gains of 0.6% in Feb and 0.8% in March. That is well off the avg. monthly pace of 1.2% over 20071.
• We're forecasting credit to increase by 0.6% in May.
• Housing credit growth, which was 0.75% in April, will continue to grind lower in the near-term given that new lending contracted sharply over the three months to April.
• Business credit hit a brick wall over the last three months, increasing by just 0.1% in April. This most likely overstates the underlying slow down. We expect a 0.7% rise in May.

Credit: business an abrupt correction

Aus RBA policy announcement

Jul 1, Last: 7.25%, WBC f/c: 7.25%

Mkt f/c: 7.25%

• The RBA left interest rates unchanged at 7.25% at their last three meetings and is almost certain to do so again in July.
• The RBA's aggressive tightening of monetary policy has already had a substantial impact on domestic demand. Accordingly, the Bank has moved to the sidelines to assess the full impact of past rate rises - compounded by the dampening effect of unsettled global markets.
• The June quarter CPI data, to be published on July 23, is the next major focus. This may show that quarterly core inflation has moderated in this environment of softer demand.
• However, the RBA remains uncertain about the outlook beyond that, with the concern that demand will get a second wind as the terms of trade jump boosts national income. This suggests that the risks to rates remains skewed to the high side.

RBA now on hold as prior hikes bite

Aus May retail sales

Jul 2, Last: -0.2%, WBC f/c: 0.1%

Mkt f/c: 0.1%, Range: -0.3% to 0.7%

• Retail sales continued to weaken in April, falling 0.2%. This followed a 0.2% rise in March and 0.1% declines in Jan and Feb. Consumers are tightening spending in response to higher interest rates and rising fuel prices.
• May should see a slight firming of +0.1%. Fuel prices continued to rise in May (+2.6%) but official rates were unchanged and there were no market-led moves either. Retailers also brought forward winter sales. While the response has reportedly been muted, the last time this happened, in 2005, sales rose 1.4%.
• The overall backdrop for consumers remains negative though. Sentiment posted a slight rise in May (+2.7%) and equity markets bounced (+4.2%) but both were still well down on year ago levels and saw renewed falls in June. Employment also fell 0.2% in May suggesting slower income gains.

Retail sales stall

Aus May dwelling approvals

Jul 2, Last: 7.8%, WBC f/c: -5.0%

Mkt f/c: -3.0%, Range: -7.0% to 5.0%

• Dwelling approvals jumped 7.8% in April led by a sharp spike in apartment approvals. The gain followed a 5.5% fall in March and substantial declines in the previous four months.
• Clearly the spike in apartments will reverse in May. The private houses component should also decline after a somewhat surprising 1.3% gain in April. With mortgage interest rates up 140bps since August, housing markets are coming under intense pressure with finance approvals down 17% since their January peak. That said, an acute shortage of housing should prevent a sharp post-GST style slump. Indeed, finance approvals for the construction of new dwellings have been relatively steady compared to total finance approvals.
• Overall we expect a 5.0% decline in dwelling approvals in May with risks to the downside.

Dwelling approvals

Aus May international trade balance, AUDbn

Jul 3, Last: -$0.957bn, WBC f/c: -$1.4bn

Mkt f/c: -$0.95bn, Range: -$1.6bn to $0.4bn

• The deficit fell $1591mn in Apr to $0.957bn, the lowest since Feb-07. Exports surged 5.8% led by a 7.4% jump in non-rural as the terms of trade boost began to flow through to coal prices and volumes built upon March's gains. Imports fell 2.2%.
• The May data will include the new iron ore contract prices (Rio's up 85% v last yr) and revise April's data also. We assume that 50% of iron ore is sold at a price 85% above a year ago, and the rest at spot prices. Combined with other non-rural volume gains, we expect a 6.5% non-rural X rise from the originally published Apr level, but with rural X down 4% and near flat services, we expect a 4% rise (from originally reported April level) for total X.
• X rise will be swamped by a 6% imports jump (goods 7.4%), lifting the deficit to $1.4bn (risks of a lower deficit from higher % of iron ore at contract price & Apr deficit will be revised lower).

Deficit up: NR led X rise swamped by M jump

NZ May building consents s.a.

Jun 30, Last: 82%, WBC f/c: -45%

• April dwelling consents surged by a mind-boggling 82% m/m as Easter timing issues were exacerbated by lumpy apartments as developers brought forward applications in order to avoid an increase in fees from 1 May.
• We expect almost half of that increase to unwind in May, with total consents down 45% in the month. But the risk is on the downside. Housing turnover provides a good 3-month lead on monthly building consents, and at current levels, they suggest consents should only be around 1400 per month rather than the 2800 reported in April.
• Continued weakness in non-residential consents is expected given poor confidence, weak economic growth and tight credit conditions.

Housing activity monthly, seasonally adjusted

NZ Jun NBNZ business confidence

Jun 30, Last: -49.7%

• General business confidence and own activity expectations levelled out last month, but remain at levels consistent with recession.
• The recovery looks to be some way away yet, though the RBNZ's clear signal for lower interest rates later this year may help to boost morale.
• Soaring fuel prices have put paid to any chance of a moderation in inflation expectations and pricing intentions.

NBNZ business confidence

NZ Q2 employment confidence index

Jul 1, Last: 128.8

• T he Westpac McDermott Miller employment confidence index fell 4.7 points to 128.8 in the March 2008 quarter, the biggest quarterly decline since the survey began in 2004.
• In March, talk of recession, rising business pessimism, and a sharp correction in the housing market (implying a contraction in the residential construction industry), all pointed to a moderation in the demand for labour, resulting in reduced job security and lower confidence.
• Since then, the economic news has deteriorated further. Employment contracted unexpectedly in Q1, and there have been highly publicized layoffs by some key NZ firms.
• All of these factors are expected to weigh heavily on employment confidence in Q2.

NZ Employment Confidence Indices

US Jun ISM factory and non-manufacturing surveys

Jul 1, Factory Last: 49.6, WBC f/c: 49.0

Jul 3, Non-man Last: 52.0, WBC f/c: 49.0

• The factory ISM headline has been in contractionary territory for the past four months although in May the headline was the highest since January and the production measure rose back above 50. But signals from the regional Fed factory surveys out of New York, Philadelphia and Richmond Fed were all weaker in June, and orders of capital equipment fell 0.8% in May. We sense that the economy is slowing again heading into Q3 so a renewed dip in the ISM headline to 49 or below is expected.
• The non-manufacturing ISM was below 50 right through Q1 but rose back into positive territory in April and May. The only evidence re June services activity we have to date is a weak Richmond Fed (not a reliable signal), but given our view that the economy is slipping again, this indicator should also soon head back below 50. Our June forecast is 49.0.

US ISM surveys

European Central Bank to tighten, just once

Jul 3, ECB Last: 4.0%, WBC f/c: 4.25%

• The ECB left rates on hold at 4.0% after the June 5 Council meeting but President Trichet said the risks to price stability had "further increased" and the Council was now "in a state of heightened alertness" - comments he repeated on June 25. He explained that the on hold decision was not unanimous; some wanted to lift rates; and it was "not excluded" that rates might be lifted by a "small amount" next month.
• With May CPI revised to a record high of 3.7% and 4% possible in June, other Council members echoing Trichet's sentiments and none offering a dovish perspective, we have to accept that a rate rise is now more likely than not. But Trichet himself has stressed he is not hinting at a "series of increases". Indeed recent survey evidence points to renewed economic weakness in H2 2008, which should prevent the ECB from hiking yet again and may allow for modest ECB easing in 2009.

ECB & BoE official interest rates

US Jun non-farm payrolls

Jul 3, Payrolls ch' Last: -49k, WBC f/c: -70k

Jul 3, Unemployment rate % Last: 5.5%, WBC f/c: 5.3%

• Payroll employment has averaged declines of around 65k per month so far this year, and the jobless rate has been trending higher, although teenage school-leavers hitting the numbers earlier than usual exaggerated May's 0.5 ppt rate jump to 5.5%.
• US GDP has barely grown since the end of Q3 last year. Confidence in the job market collapsed in June. The numbers receiving unemployment insurance payments rose to the highest in more than 4 years in the payrolls survey week. These factors point to ongoing payrolls job losses - perhaps a little steeper than trend this month given the recent extra weakness in most partial data since mid June.
• We see unemployment at 6% later this year but June may see a temporary dip back to 5.3% as the May teenager factor reverses.

US jobs market

Westpac Institutional Bank
http://www.westpac.com.au

Disclaimer

All customers please note that this information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. Australian customers can obtain Westpac's financial services guide by calling +612 9284 8372, visiting www.westpac.com.au or visiting any Westpac Branch. The information may contain material provided directly by third parties, and while such material is published with permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any inaccuracy which may become apparent at a later date. Westpac Banking Corporation is regulated for the conduct of investment business in the United Kingdom by the Financial Services Authority. © 2004 Westpac Banking Corporation. Past performance is not a reliable indicator of future performance. The forecasts given in this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts.

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Economic Calendar

Eco Data 6/30/08

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
23:01	GBP	U.K. Gfk Consumer Confidence Jun		-31	-29
23:15	JPY	Japan Manufacturing PMI Jun		N/A	47.7
05:00	JPY	Japan Housing starts Y/Y May		-3.70%	-8.70%
05:00	JPY	Japan Housing starts May		1.11M	1.15M
05:00	JPY	Japan Construction orders May		N/A	-8.40%
09:00	EUR	Eurozone CPI est. Y/Y Jun		3.90%	3.60%
12:30	CAD	Canada GDP M/M Apr		0.30%	-0.20%
13:45	USD	U.S. Chicago PMI Jun		48.4	49.1

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Persian Gulf Shares Fall, Led by Tabreed, Emirates Telecom

By Matthew Brown

June 29 (Bloomberg) -- Persian Gulf shares retreated, led by National Central Cooling Co., known as Tabreed, and Emirates Telecommunications Co., tracking declines in the U.S. and Europe.

Tabreed dropped after announcing plans to form an asset holding company. Emirates Telecommunications, also known as Etisalat, fell the most in two weeks. National Bank of Oman Ltd. lost for a fifth day.

``Declines globally are pushing sentiment lower in the Gulf,'' said Julian Bruce, director of institutional sales at EFG-Hermes Holding SAE, Egypt's largest investment bank, in an e-mail. ``Local interest has dissipated, volumes are low and there doesn't seem to be a catalyst before the summer.''

The Dubai Financial Market General Index retreated 0.5 percent to 5,406.02. The Abu Dhabi Securities Exchange General Index lost 1.1 percent, while Oman's Muscat Securities Market 30 Index fell 1 percent.

U.S. stocks slumped last week, pushing the Dow Jones Industrial Average to the brink of a bear market, on mounting concern that writedowns and record oil prices will keep eroding profit and economic growth. In Europe, the Dow Jones Stoxx 600 declined 2.6 percent for the week.

About 141 million shares traded in Dubai's index today, 60 percent less than the six-month daily average. In Abu Dhabi volume fell 23 percent, compared with the six-month average.

Saudi Shares Gain

Tabreed lost 1.6 percent to 2.41 dirhams. The United Arab Emirates-based refrigeration company plans to form an asset holding company in a bid to boost profitability.

Etisalat, the second-largest Arab phone company by market value, dropped 1.5 percent, the biggest decline since June 15, to 19.5 dirhams. National Bank of Oman, the country's second- largest bank by market value, retreated 1.5 percent to 0.746 rial, bringing the five-day slump to 6.5 percent.

Saudi Arabia's Tadawul All Shares Index gained 0.1 percent to 9,324.36. The Bahrain All Share Index added less than 0.1 percent. The Kuwait Stock Exchange Index declined 0.5 percent. In Qatar, the Doha Securities Market Index dropped for a fourth day, losing 1.1 percent.

Doha Bank fell 1.2 percent to 82.5 riyals. Qatar's third- biggest bank by assets said second-quarter profit growth will probably match the 23 percent rise reported in the first three months of the year.

To contact the reporter on this story: Matthew Brown in Dubai at mbrown42@bloomberg.net



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Dodd, Shelby Tell Fed, SEC to Hold Off on Securities Agreement

By Jesse Westbrook and Craig Torres

June 28 (Bloomberg) -- The Senate's top banking legislators told the Federal Reserve and Securities and Exchange Commission to hold off on enacting a deal to oversee Wall Street, concerned that regulators are proceeding without consulting Congress.

Democrat Christopher Dodd and Republican Richard Shelby, the Senate Banking Committee's top lawmakers, delivered their warning in a letter yesterday as Bernanke and Cox met to wrap up a memorandum of understanding. The SEC plans to provide information on securities firms' trading positions, capital and leverage, according to two government officials.

``Congress wants to have its say,'' said David Becker, a former SEC general counsel now in private practice at Cleary Gottlieb Steen & Hamilton LLP in Washington. ``Reshuffling who has information could have a significant impact on the distribution of regulatory influence.''


Congress is asserting its primacy over how financial markets should be regulated as federal supervisors wrestle with the yearlong credit rout. Regulators are debating how to strengthen oversight of investment banks after the Fed started emergency lending to securities firms in March.

``We ask that no action'' be taken before legislators can decide it's in the economy's ``best interests,'' Dodd, the Connecticut senator who chairs the banking panel, and Shelby of Alabama said in the letter. It was addressed to Bernanke, Cox and Treasury Secretary Henry Paulson.

Sharing Data

The Fed will share data with the SEC on repurchase agreements, which are short-term loans provided by commercial banks that clear trades and hold collateral for securities firms, said the officials, who declined to be identified because the agreement isn't final.

Cox offered to brief Dodd and Shelby on the SEC's talks with the Fed. The memorandum is ``intended to facilitate our agencies' ongoing, day-to-day cooperation,'' he said in a letter responding to the two. ``It is the role of Congress to decide whether, and if so how, to alter the existing regulatory structure.''

Fed officials in March rescued Bear Stearns Cos. from bankruptcy with $30 billion of financing to secure its takeover by JPMorgan Chase & Co. They also introduced the Primary Dealer Credit Facility, giving securities firms access to loans from the central bank at the same rate as commercial banks. It was intended to last ``at least six months,'' the Fed said March 16.

Some officials have expressed concern about any perception that the Fed's actions would only spur greater risk taking.

Treasury's Ryan

``We don't want to encourage dependence upon the Federal Reserve as a backstop,'' Assistant U.S. Treasury Secretary Anthony Ryan said in a June 24 interview with Bloomberg Television.

Dodd and Shelby flagged in their letter that Congress hasn't given the Fed permanent authority to lend to securities dealers.

The information sharing between the Fed and SEC will continue even if the central bank stops providing the financing, officials said, citing the draft memorandum. Securities dealers are currently overseen by the SEC. The Fed has introduced its own supervisors at the firms since it started lending to them.

``The only reason for the Fed'' to ``have an interest in how investment banks are doing is if it intends to step in and provide access to the discount window in more normal times,'' said Peter Wallison, a former Treasury general counsel. ``Once that idea gets established then market discipline essentially disappears.''

Hearings Planned

Congress plans to start hold hearings on financial regulation next month.

``We look forward to continuing to work with Congress on these important issues,'' said Fed spokeswoman Michelle Smith in Washington.

Cox urged his staff June 23 to not ``engage in turf wars among federal regulators,'' according to an e-mail the SEC provided to Bloomberg News. He added it's ``inconceivable to me'' that under any overhaul approved by the Congress, ``the role of the SEC will not be strengthened and expanded.''

Central bankers are debating whether to extend the PDCF beyond September, amid signs of continued stress in financial markets. They may make a decision before their Sept. 16 meeting, when traders anticipate they will announce the first interest- rate increase since 2006.

Concern about rising loan losses has sent the Standard & Poor's 500 Banks Index into a 22 percent dive this month, putting it on course for its worst monthly return in almost a decade.

Fed Vice Chairman Donald Kohn told lawmakers June 19 that policy makers are ``studying a range of options'' for the PDCF. Fed governors and district-bank presidents June 25 heard from supervisors working with investment banks.

Clear Rules

Philadelphia Fed President Charles Plosser and Richmond Fed chief Jeffrey Lacker have urged setting clear ground rules for access to central bank funds. They also warned this month that the lending risks provoking future crises by causing moral hazard, or encouraging firms to take on more risk in the anticipation of Fed aid in case their bets go wrong.

``We are in a transitional regime,'' said Laurence Meyer, vice chairman at Macroeconomic Advisers LLC and a former Fed governor. Shelby and Dodd ``are saying the situation on the ground has changed, the regulatory framework is already evolving, and we haven't been involved.''

To contact the reporter on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net; Craig Torres in Washington at ctorres3@bloomberg.net
Last Updated: June 28, 2008 00:01 EDT




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EUR/USD: Euro-zone CPI May Set the Stage for an Imminent ECB Rate Hike

Daily Forex Fundamentals | Written by DailyFX | Jun 28 08 00:09 GMT |

What Are The Markets Facing?

On Monday, Eurostat estimates for Euro-zone CPI are expected to show that inflation accelerated at an ever faster clip of 3.9 percent in June. If CPI is indeed confirmed at this pace, the figure would match the 16-year high. While much of the rise in price pressures for Europe, and for that matter, much of the other world's economies, are due to rocketing energy and food costs, the news would only underpin European Central Bank President Jean-Claude Trichet's already hawkish bias. Indeed, Mr. Trichet, whose primary mandate is to maintain price stability, said after the most recent policy meeting that they would consider hiking rates the following month, and that some policy makers had actually wanted to tighten monetary policy in June. As a result, the ECB is widely expected to hike rates by 25 basis points to 4.25 percent at their next meeting on Thursday. However, a weaker-than-expected reading could lead speculation of an imminent hike cool, as the news would give Mr. Trichet leeway to put off increasing rates until later in the summer.

Bonds - 10-Year German Bund Futures

Bund futures have recovered quite a bit from the June 2007 low of 109.66, as market-wide risk aversion leads government debt higher. Looking ahead to next week, Euro-zone CPI estimates for June are expected to show yet another sharp rise, which could weigh Bunds back below 111.00 as the markets anticipate a rate hike by the European Central Bank on Thursday. However, if traders continue to flee risky assets in favor of save havens like government bonds, Bunds could continue to climb to target trendline resistance at 112.00.

FX - EUR/USD

From a long-term perspective, EUR/USD continues to trade within a wide range of 1.5350 - 1.5800, as the US dollar consolidates across the majors. However, the pair remains very much within an uptrend, as EUR/USD bounced from trendline and 100 SMA support just a few weeks ago. Looking ahead to Monday, Euro-zone CPI is expected to rise 3.9 percent in June from a year earlier, which could help EUR/USD break above resistance at 1.5800. Indeed, this data is especially important ahead of the European Central Bank's rate decision on Thursday, when ECB President Jean-Claude Trichet is anticipated to hike rates to 4.25 percent. However, lower than expected CPI figures would shift the market's focus to the Euro-zone's clear economic slowdown and may lessen speculation of an imminent rate increase, which would lead the pair to tumble toward the 1.5630 support level.

Equities - Xetra DAX Index

Germany's Xetra DAX index experienced a slow day on Friday as uncertainty clouded the markets and inflation worries persist, as crude oil rocketed to a fresh record above $142/bbl on Friday. In addition, participants await a much anticipated rate hike by the European Central Bank, which could sap confidence in the economy as many view monetary policy as already being restrictive. Looking ahead, Monday's Euro-zone CPI release could add additional volatility in the markets, as initial estimates are expected to show that the index increased 3.9 percent from a year earlier. If figures are released in line with or more than expected, the index could pull back toward the January lows of 6,384. However, a softer-than-anticipated release could help the index consolidate above 6,400.

DailyFX

Disclaimer

Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.

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Big Week Ahead for the US Dollar

Daily Forex Fundamentals | Written by DailyFX | Jun 28 08 00:05 GMT |

ECB to Raise Rates in July, but then What?
British Pound On its Way to 2.0

The US dollar continued to sell-off for the third consecutive trading as the Fed's disappointment hangs over the market. Personal income and personal spending both increased more than expected thanks to stimulus rebate checks. However apparently the BEA included the tax rebates in the personal income calculation which means that it could easily reverse in the coming months. The PCE inflation numbers confirm the existence of high inflation pressures even though they were slightly weaker than the market expected. In the coming week, the dollar should remain weak. It will be a shortened trading week with US traders off for the Independence Day Holiday, but that does not mean that there will not be volatility. With non-farm payrolls, service and manufacturing sector ISM numbers due for release, expect some decent action in the US dollar. Based upon the recent layoff announcements and cutbacks by companies across the nation in response to higher energy prices, job losses will continue. Not only will non-farm payrolls drop for the sixth month in a row, but we believe that the market's -55K forecast is overly optimistic. Although the Federal Reserve has grown more hawkish, with more than 1 month before the next FOMC meeting, currency traders know that nothing will happen between and now and then. Therefore the central focus will be on the comparative hawkishness of other central banks such as the European Central Bank and the Reserve Bank of Australia, who both have monetary policy meetings next week.

ECB to Raise Rates in July, but then What?

The European Central Bank has a monetary policy decision next week that stands to challenge the market moving potential of the US non-farm payrolls report. Due to the shortened trading week, NFPs will actually be released on Thursday instead of Friday, right around the time that ECB President Trichet begins his post meeting press conference. A quarter point rate hike has been completely discounted by the market but what traders haven't figured out is what will happen next. ECB officials have tried to warn everyone that the July rate hike will be one-off, but judging from the recent price action in the Euro, it appears that currency traders are hoping for more. With inflation skyrocketing, Euro bulls hope that the ECB not only raise rates but hint that rates will be increased again before the end of the year. Although another tightening may not come in August, rates could rise in September or October. Before the ECB meeting, we are expecting consumer spending and employment numbers from Germany along with Eurozone producer prices.

British Pound On its Way to 2.0

The British pound rose to a 2 month high as the current account deficit narrowed from -GBP12.2B to -GBP8.4B in the first quarter. The improvement was hardly surprising given the better trade balance reports for the first three months of the year, but the detail of the report indicate that it was largely to due a decline in net overseas income. First quarter GDP was revised downwards due to weaker consumer spending and lower services output. These numbers are in line with the Bank of England's projections for slower growth and are what the central bank hopes will bring down inflation. In the week ahead, housing market indicators, service and manufacturing PMI reports are due for release. Given the rebound in the CBI industrial trends survey, manufacturing conditions may have actually improved this month. Activity in the service sector on the other hand should deteriorate if consumer confidence does not hold up. Retail sales last month were strong, but the CBI distributive trades survey is still negative, pointing to underlying weakness. Either way, with the GBP/USD trading above 1.99, there is a strong chance that we will see a retest of 2.0.

Australian, New Zealand and Canadian Dollars Extend Gains

The Australian, New Zealand and Canadian dollars extended their gains against the greenback largely due to dollar weakness as both Australian and New Zealand economic data fell short of expectations. Australian quarterly wage agreements dropped from 3.8 to 3.7 while GDP growth in New Zealand contracted by 0.3 percent in the first quarter. Taking a look at the price action of these currencies, it is clear that the numbers seem to matter little to currency traders who are focused on dollar weakness. In the week ahead, there is a lot of economic data due for release from Australia and Canada. The most significant of which will be the Reserve Bank of Australia monetary policy meeting. Even though interest rates are expected to remain unchanged at 7.25 percent, it will be interesting to see if the central bank grows even more hawkish, moving themselves closer to raising interest rates. In addition, Australian has retail sales, service and manufacturing PMI numbers due for release while Canada will be releasing their IVEY purchasing managers index.

Yen Crosses Weighed Down by Further

The Japanese Yen crosses continued to crumble under the weight of the Dow. On Thursday, stocks were down more than 300 points and on Friday, it added another 100 points to the losses. None of the yen crosses managed to escape unscathed. Japanese economic data was mixed with household spending dropping more than expected while consumer prices and industrial production improved. Next week, the Quarterly Tankan report is due for release. This index of business sentiment has in the past been very market moving, but these days it is far less so. Nonetheless, if business sentiment deteriorates materially, it could add some downside pressure to the Japanese Yen.

DailyFX

Disclaimer

Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.

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Greenback's Decline Continues

Daily Forex Fundamentals | Written by DailyFX | Jun 28 08 00:05 GMT |

The dollar traded lower against major currencies Friday as equity sell-offs continued and oil prices hit new highs. The yen and Swiss franc rose as increased risk aversion sparked new carry-trade unwinding. The Australian and Canadian dollars advanced on rising commodity prices. Sterling continued its ascent following yesterday's technical breakout.

The EUR/USD was higher but unable to penetrate the 1.58-handle resistance as US personal income and personal consumption were higher than expected while European sentiment continued to deteriorate. The pair is supported by the lax US monetary policy; however, slowing economic growth in the EMU and particularly in the PIGS countries (Portugal, Italy, Greece and Spain) has kept the EUR/USD flat for many weeks. If the Fed realizes that its negative real interest rate policy is counterproductive (as it causes commodity inflation) and if the Fed raises its interest rates moderately, the EUR/USD will fall. The pair has strong support at the 1.54- handle and resistance in the 1.60-area. We expect the pair to trade in this range until the Fed hikes rates or US recessionary conditions worsen.

Financial and Economic News and Comments

US & Canada

US personal consumption expenditures (PCE) increased $77.4 billion, or 0.8% m/m in May, the biggest gain since 1.0% m/m in November 2007 and slightly beating consensus expectations, fed by rising inflation and the round of income-tax rebates, following an upwardly revised 0.4% m/m increase in April, data from the Commerce Department showed. PCE rose 5.4% y/y.

US personal income increased $225.7 billion, or 1.9% m/m in May, the largest gain since 3.2% m/m in September 2005 and far outpacing consensus expectations, following an upwardly revised 0.3% m/m increase in April. Personal income rose 6.4% y/y. Disposable personal income (income after taxes) increased $600.3 billion, or 5.7% m/m, in May. DPI rose 10.7% y/y.

The overall PCE deflator (consumer inflation) rose 0.4% m/m in May, up 3.1% y/y. The core PCE deflator, which excludes food and energy, increased 0.1% m/m in May. The core PCE deflator rose 2.1% y/y, above the Fed's inflation comfort zone of 1.5%-2.0%. After adjusting for inflation, real consumption increased 0.4% m/m in May, up 2.2% y/y.

US consumer confidence dropped to a 28-year low on energy costs and rising unemployment. The Reuters/University of Michigan final index of US consumer sentiment fell to 56.4 in June, the weakest level since May 1980, from 59.8 in May. The measure averaged 85.6 in 2007.

Europe

The UK Q1 GDP rose 0.3% q/q, the least in three years and lower than the 0.4% q/q reported on May 23, weighed down by the weakest services expansion in 12 years, final data from the Office for National Statistics showed. The economy expanded 2.3% y/y.

The European Commission euro-area sentiment index fell more than forecast to 94.9 in June, the lowest since May 2005, from 97.6 in May, according to data from the European Commission. The index peaked at 111.6 in May 2007.

Asia-Pacific

Japan's household spending fell 3.2% y/y, the most since September 2006, the statistics bureau said. Job vacancies declined to a 3-year low with the ratio of jobs for each applicant sliding to 0.92. Core consumerprice index, which excludes fresh food, rose 1.5% y/y in May after rising 0.9% y/y in April. Core CPI for Tokyo rose 1.3% y/y in June. Overall, the figures show increased recessionary risks with accelerating inflation in Japan.

Japan's industrial production rose 2.9% m/m in May, the first increase in three months, on increasing demand for passenger cars and mobile phones, the Ministry of Economy, Trade and Industry said. Despite the recovery, the METI downgraded its assessment of industrial output for the first time since December, saying it “remains at the same level but on a weak note.”

FX Strategy Update

	EUR/USD	USD/JPY	GBP/USD	USD/CHF	USD/CAD	AUD/USD	EUR/JPY
Primary Trend	Positive	Negative	Negative	Negative	Negative	Positive	Positive
Secondary Trend	Neutral	Neutral	Neutral	Neutral	Neutral	Neutral	Positive
Outlook	Neutral	Neutral	Neutral	Neutral	Neutral	Neutral	Neutral
Action	Sell	None	None	None	None	None	None
Current	1.5786	106.15	1.9943	1.0182	1.0106	0.9600	167.60
Start Position	1.5661	N/A	N/A	N/A	N/A	N/A	N/A
Objective	1.5405	N/A	N/A	N/A	N/A	N/A	N/A
Stop	1.5860	N/A	N/A	N/A	N/A	N/A	N/A
Support	1.5400	105.50	1.9400	1.0180	1.0000	0.9450	166.50
	1.4900	104.00	1.9200	1.0000	0.9800	0.9200	162.00
Resistance	1.5800	108.20	2.0000	1.0500	1.0300	0.9700	169.00
	1.6020	110.00	2.0300	1.0600	1.0400	0.9900	172.00

Hans Nilsson
Capital Market Services, L.L.C.
www.cmsfx.com

©C2004-2005 Globicus International, Inc. and Capital Market Services, L.L.C. Any information in this report is based on data obtained from sources considered to be reliable, but no representations or guarantees are made by Capital Market Services, L.L.C. with regard to the accuracy of the data. The opinions and estimates contained herein constitute our best judgment at this date and time, and are subject to change without notice. Capital Market Services, L.L.C. accepts no responsibility or liability whatsoever for any expense, loss or damages arising out of, or in any way connected with, the use of all or any part of this report. No part of this report may be reproduced or distributed in any manner without the permission of Capital Market Services, L.L.C.

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Economic Calendar

Sunday, Jun 29, 2008

GMT	Ccy	Events	Consensus	Previous
--	AUD	HIA New Home Sales (MoM) (MAY)	--	0.1%
22:45	NZD	Building Permits (MoM) (MAY)	--	82.1%
23:01	GBP	GfK Consumer Confidence Survey (JUN)	-31	-29
23:15	JPY	Nomura/JMMA Manufacturing Purchasing Manager Index (JUN)	--	47.7

Monday, Jun 30, 2008

GMT	Ccy	Events	Consensus	Previous
0:30	AUD	TD Securities Inflation (MoM) (JUN)	--	0.3%
0:30	AUD	TD Securities Inflation (YoY) (JUN)	--	4.5%
1:30	AUD	Private Sector Credit (MoM) (MAY)	0.6%	0.4%
1:30	AUD	Private Sector Credit (YoY) (MAY)	13.4%	14.1%
3:00	NZD	NBNZ Business Confidence (JUN)	--	-49.7
5:00	JPY	Housing Starts (YoY) (MAY)	-3.7%	-8.7%
5:00	JPY	Annualized Housing Starts (MAY)	1.113M	1.151M
5:00	JPY	Construction Orders (YoY) (MAY)	--	-8.4%
8:00	EUR	Italian Producer Price Index (MoM) (MAY)	0.9%	0.4%
8:00	EUR	Italian Producer Price Index (YoY) (MAY)	6.8%	6.3%
8:30	GBP	M4 Money Supply (MoM) (MAY F)	--	0.4%
8:30	GBP	M4 Money Supply (YoY) (MAY F)	--	10.0%
8:30	GBP	M4 Sterling Lending (British pounds) (MAY F)	--	4.8B
8:30	GBP	Net Consumer Credit (British pounds) (MAY)	1.0B	0.9B
8:30	GBP	Net Lending Sec. on Dwellings (British pounds) (MAY)	6.0B	6.4B
8:30	GBP	Mortgage Approvals (MAY)	51K	58K
8:30	GBP	Index of Services (3Mo3M) (APR)	0.3%	0.5%
9:00	EUR	Italian Consumer Price Index (NIC incl. tobacco) (MoM) (JUN P)	0.3%	0.5%
9:00	EUR	Italian Consumer Price Index (NIC incl. tobacco) (YoY) (JUN P)	3.6%	3.6%
9:00	EUR	Italian Consumer Price Index - EU Harmonized (MoM) (JUN P)	0.3%	0.6%
9:00	EUR	Italian Consumer Price Index - EU Harmonized (YoY) (JUN P)	3.8%	3.7%
9:00	EUR	Euro-Zone Consumer Price Index Estimate (YoY) (JUN)	3.9%	3.6%
12:30	CAD	Gross Domestic Product (MoM) (APR)	0.3%	-0.2%
13:45	USD	Chicago Purchasing Manager (JUN)	48.4	49.1
14:00	USD	NAPM-Milwaukee (JUN)	--	45
23:30	AUD	AiG Performance of Manufacturing Index (JUN)	--	51.2
23:50	JPY	Loans & Discounts Corp (YoY) (MAY)	--	-0.3%
23:50	JPY	Tankan Large Manufacturers Index (2Q)	3	11
23:50	JPY	Tankan Large Manufacturers Outlook (2Q)	2	7
23:50	JPY	Tankan Non-Manufacturing (2Q)	8	12
23:50	JPY	Tankan Non-Manufacturing Outlook (2Q)	7	13
23:50	JPY	Tankan Large All Industry Capex (2Q)	2.0%	-1.6%

Tuesday, Jul 1, 2008

GMT	Ccy	Events	Consensus	Previous
1:30	JPY	Labor Cash Earnings (YoY) (MAY)	0.7%	0.6%
4:00	USD	Total Vehicle Sales (JUN)	14.2M	14.3M
4:00	USD	Domestic Vehicle Sales (JUN)	10.3M	10.5M
4:30	AUD	Reserve Bank of Australia Rate Decision	7.25%	7.25%
5:00	JPY	Vehicle Sales (YoY) (JUN)	--	-6.1%
6:00	EUR	German Retail Sales (MoM) (MAY)	0.8%	-1.7%
6:00	EUR	German Retail Sales (YoY) (MAY)	-1.1%	-1.0%
6:00	EUR	German ILO Unemployment Rate (MAY)	7.4%	7.4%
6:00	GBP	Nationwide House Prices s.a. (MoM) (JUN)	-1.0%	-2.5%
6:00	GBP	Nationwide House Prices n.s.a. (YoY) (JUN)	-6.4%	-4.4%
6:30	AUD	Reserve Bank of Australia Commodity Index SDR (YoY) (JUN)	--	28.6%
7:30	CHF	SVME-Purchasing Managers Index (JUN)	55.0	55.7
7:45	EUR	Italian Purchasing Manager Index Manufacturing (JUN)	47.5	48.0
7:50	EUR	French Purchasing Manager Index Manufacturing (JUN F)	49.2	49.2
7:55	EUR	German Unemployment Change (JUN)	-15K	4K
7:55	EUR	German Unemployment Rate s.a (JUN)	7.9%	7.9%
8:00	EUR	German Purchasing Manager Index Manufacturing (JUN F)	52.3	52.3
8:00	EUR	Euro-Zone Purchasing Manager Index Manufacturing (JUN F)	49.1	49.1
8:30	GBP	Purchasing Manager Index Manufacturing (JUN)	49.8	50.0
9:00	EUR	Euro-Zone Unemployment Rate (MAY)	7.1%	7.1%
14:00	USD	ISM Manufacturing (JUN)	49.0	49.6
14:00	USD	ISM Prices Paid (JUN)	86.5	87.0
14:00	USD	Construction Spending (MoM) (MAY)	-0.6%	-0.4%
16:00	EUR	Italian New Car Registrations (YoY) (JUN)	--	-17.6%
17:00	EUR	Italian Budget Balance (euros) (JUN)	--	-8.0B
17:00	EUR	Italian Budget Balance (euros) (YTD) (JUN)	--	-39.3B
21:00	USD	ABC Consumer Confidence (JUN 29)	--	-43
22:00	USD	Atlanta Fed's Lockhart to Speak on Economy; Financial Turmoil	--	--
23:50	JPY	Monetary Base (YoY) (JUN)	--	-0.9%

Wednesday, Jul 2, 2008

GMT	Ccy	Events	Consensus	Previous
1:00	AUD	DEWR Skilled Vacancies (MoM) (JUN)	--	-0.1%
1:30	AUD	Retail Sales (MAY)	0.1%	-0.2%
1:30	AUD	Building Approvals (MoM) (MAY)	-3.4%	7.8%
1:30	AUD	Building Approvals (YoY) (MAY)	7.2%	5.2%
8:00	EUR	Italian Deficit to GDP (YTD) (1Q)	--	1.3%
8:30	GBP	Purchasing Manager Index Construction (JUN)	43.1	43.9
8:30	GBP	Bank of England Housing Equity Withdrawal (British pounds) (1Q)	5.3B	7.3B
9:00	EUR	Euro-Zone Producer Price Index (MoM) (MAY)	0.9%	0.8%
9:00	EUR	Euro-Zone Producer Price Index (YoY) (MAY)	6.7%	6.1%
11:00	USD	MBA Mortgage Applications (JUN 27)	--	-9.3%
11:30	USD	Challenger Job Cuts (YoY) (JUN)	--	45.6%
12:15	USD	ADP Employment Change (JUN)	-20K	40K
13:00	USD	RPX Composite 28-Day Index (APR)	--	--
13:00	USD	RPX Composite 28-Day Index (YoY) (APR)	--	--
14:00	USD	Factory Orders (MAY)	0.5%	1.1%
15:00	USD	Paulson Speaks in London About Capital Markets; Global Economy	--	--
16:00	USD	Fed's Mishkin Speaks at Conference in Israel	--	--
23:30	AUD	AiG Performance of Service Index (JUN)	--	49.7
23:50	JPY	Foreign Buying Japan Stocks (Yen) (JUN 27)	--	34.2B
23:50	JPY	Foreign Buying Japan Bonds (Yen) (JUN 27)	--	-1312.6B
23:50	JPY	Japan Buying Foreign Stocks (Yen) (JUN 27)	--	16.3B
23:50	JPY	Japan Buying Foreign Bonds (Yen) (JUN 27)	--	-217.7B

Thursday, Jul 3, 2008

GMT	Ccy	Events	Consensus	Previous
1:30	AUD	Trade Balance (MAY)	-950M	-957M
1:30	AUD	Exports (MoM) (MAY)	--	5.8%
1:30	AUD	Imports (MoM) (MAY)	--	-2.2%
3:00	NZD	ANZ Commodity Price (JUN)	--	1.0%
5:45	CHF	Consumer Price Index (MoM) (JUN)	0.3%	0.8%
5:45	CHF	Consumer Price Index (YoY) (JUN)	3.1%	2.9%
7:45	EUR	Italian Purchasing Manager Index Services (JUN)	47.8	48.1
7:50	EUR	French Purchasing Manager Index Services (JUN F)	49.2	49.2
8:00	EUR	German Purchasing Manager Index Services (JUN F)	53.3	53.3
8:00	EUR	Euro-Zone Purchasing Manager Index Services (JUN F)	49.5	49.5
8:00	EUR	Euro-Zone Purchasing Manager Index Composite (JUN F)	49.5	49.5
8:30	GBP	Bank of England Credit Conditions Survey (2Q)	--	--
8:30	GBP	Purchasing Manager Index Services (JUN)	49.5	49.8
8:30	GBP	Official Reserves (Changes) (JUN)	--	-$97M
9:00	EUR	Euro-Zone Retail Sales (MoM) (MAY)	0.5%	-0.6%
9:00	EUR	Euro-Zone Retail Sales (YoY) (MAY)	-0.7%	-2.9%
11:45	EUR	European Central Bank Rate Decision	4.25%	4.00%
12:30	EUR	ECB President Jean Claude Trichet Statement; Public Q&A	--	--
12:30	USD	Change in Nonfarm Payrolls (JUN)	-55k	-49k
12:30	USD	Unemployment Rate (JUN)	5.4%	5.5%
12:30	USD	Change in Manufacturing Payrolls (JUN)	-33K	-26K
12:30	USD	Average Hourly Earnings (MoM) (JUN)	0.3%	0.3%
12:30	USD	Average Hourly Earnings (YoY) (JUN)	--	3.5%
12:30	USD	Average Weekly Hours (JUN)	33.7	33.7
12:30	USD	Initial Jobless Claims (JUN 28)	--	384K
12:30	USD	Continuing Claims (JUN 21)	--	3139K
14:00	USD	ISM Non-Manfacturing Composite (JUN)	51.5	51.7
22:00	NZD	Tax Receipts (MAY)	--	--

Friday, Jul 4, 2008

GMT	Ccy	Events	Consensus	Previous
5:00	JPY	Leading Index (MAY P)	93.0%	92.8%
5:00	JPY	Coincident Index (MAY P)	103.4%	101.7%
6:45	EUR	French Central Government Balance (euros) (MAY)	--	-45.0B
10:00	EUR	German Factory Orders s.a. (MoM) (MAY)	0.8%	-1.8%
10:00	EUR	German Factory Orders n.s.a. (YoY) (MAY)	2.0%	15.0%
14:00	CAD	Ivey Purchasing Managers Index (JUN)	62.0	62.5

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