Latest news on Asian Morning Update 30th April 2008
| Perception shifts begin to appear European releases overnight March Forecast Actual April
The Telegraph newspaper report that comments that the U.K. could be heading for an “avalanche of redundancies” in the coming months as economic reality finally catches up with the jobs market. It may be that the BOE’s Blanchflower reads the reads the Telegraph too as he rather dramatically commented, “Developments in the UK are starting to look eerily similar to those in the United States six months ago. There has been no decoupling of the two economies: contagion is in the air.” “We face a real risk that the UK may fall into recession, and aggressive action is required to prevent this from occurring. These risks to the downside have increased since the February Inflation Report.” On inflation he commented, “There is a real risk that inflation may undershoot the target in the medium term, and take us into letter-writing territory.” However, he clearly feels this is temporary when adding, “The medium term risks to inflation to the downside, arising due to the likely slowing of the economy, outweigh those to the upside.” I can understand the comments on the fear of recession but quite surprised at those covering inflation. Very clearly central banks worldwide have had the same view. Slowly but surely all are having to eat their words as inflation has become persistent and frankly partially de-linked from the performance of the global economy. It may just be fanciful political-speak but with OPEC warning that prices to rise as far as 0pb without the group being able to help contain the problem the potential damage to the global economy the impact could be dire. Global stagflation would incur serious consequences. It rather puts Wellink’s comment “Inflation has to come down first before a rate cut is considered” into a completely different perspective... When considered along with Deutsche Bank’s first quarterly loss in 5 years due to writing down the value of loans for leveraged buyouts and asset- backed securities by EUR 2.7 billion one must wonder what further damage an oil price shock would impart.
News from the States was fairly mild compared to that compared with Europe though still couldn’t shake the negativity that has become ingrained into expectations. Consumer confidence provided an empty bowl in that it wasn’t as bad as feared but still dropped to a 5 year low. The “hard to get jobs” component was the worst since 2004. Coupled with news from RealityTrac that foreclosure filings had doubled in the first quarter and more than doubled over the past year didn’t really offer any hopes of the bowl being filled. Furthermore RealityTrac offered no optimism in their comment, “We’re more convinced that we haven't seen the peak of foreclosure activity yet, and the wave probably won't crest until late third or fourth quarter of 2008.” It was more a story akin to traders buying at the top of a trend as the group revealed “In most of the states with the highest levels of foreclosure activity, we're still seeing the fallout from overheated home prices and people overextending themselves with risky loans to try to buy those properties.” That the S&P/Case-Shiller home price index dropped 2.6% in February didn’t help the situation. Annually the index has declined by 13.6% but February saw this trend actually accelerate. Ironically we may need to wait until house owners sell out anticipating being able to buy in at lower prices for signs that the market has bottomed. Overall the Dollar made marginal gains once again against mainland Europe while the Pound helped the process with its own weakness. However, Dollar gains weren’t uniform as it lost more strongly against the Yen. The rather disparate performance probably has more to do with pre FOMC & GDP squaring of positions, possibly seeing more risk on the downside in the Pound. In general the market has wavered between a 0.25% cut from the Fed and an unchanged policy as the market has begun to reassess both the wilting impact of lowering rates and the fact that monetary policy has limited reach when it comes to confidence. The fact that banks have been able to patch up their balance sheets with funding may have eased some fears and equity markets have not suffered as badly as feared. More attention is being paid to the next real issues – jobs are under threat and confidence is still waning which threatens the underbelly of the economy. However, this is occurring to a lesser extent globally, but made more vulnerable with oil prices showing no signs of stalling their uptrend and how this will impact on demand from the rest of the world. And within the entire equation is the uncertainty of just what impact the fiscal stimulation (in the mail) checks will have on an increasingly worried consumer. Never-the-less, the market will probably now sit quietly and wait for the outcome of both main numbers today. Reaction will depend more on perception of what a positive GDP will mean in terms of the official definition of recession (two successive quarters of negative growth) and whether there will be any assessment of these fears. As for the FOMC decision, the combination of the recognition of the fact that additional rates cuts would probably be ineffective and a possible unchanged policy may well provide the Dollar with a lift. It will be temporary since the fears over the economy will not go dissipate into thin air, but a greater acceptance of the status quo may well cause a rethink…
The following releases are due from Asia due today: Australia Japan – March Japan – April The BOJ begins a 2 day policy meeting See Also
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