European releases overnight:
 
Q4                                                 Forecast           Actual
U.K. GDP                            (QoQ)     +0.6%           +0.6%
U.K. GDP                             (YoY)     +2.9%           +2.9%

January
Euro-zone M3 Money Supply (3MoY)     11.8%           11.8%
Euro-zone M3 Money Supply (YoY)       11.3%           11.5%

February
Italian Retailers’ Confidence General     108.3 (prior)  110.4     
Italian Services Survey                             12 (prior)      0.0

European numbers were neutral overall although the Italian retailers’ confidence improved while the services survey saw a rather alarming drop. Volatility is evident in European numbers and tends to come at the top of a cycle.

It is timely then that the ECB are to publish amended forecasts for 2008 growth next week. Smaghi noted that the current assessment is that “that growth risks are to the downside but inflation risks are on the upside.”

Not a problem says Wellink who insisted that a weaker global economy will bring an easing in inflation. Quid per quo interest rates should ease. This may well be true in normal economic cycles but what we have just seen is an extraordinary period of growth boosted by investment in globalization.

The elastic band twangs and the fallout will be a stronger than expected pullback but oil prices are unlikely to ease which will keep food prices high so an easing in inflation is less of a certainty.

U.S. releases overnight:

January                                            Forecast     Actual
U.S. Durable Goods Orders                   - 4.0%     - 5.3%
U.S. Durable Goods Orders ex transp     - 1.3%     - 4.7%
U.S. New Home Sales             (MoM)     - 0.7%     - 2.8%
U.S. New Home Sales                             600K        588K

And the bad numbers keep on coming from the States… Durable goods orders saw a much stronger than expected decline to more reverse the growth in the final two months of last year.
The numbers confirm the weak orders component of the ISM manufacturing index and provide no joy for any expectations of a recovery in the States in Q2. This will increase the case for a recession being confirmed by the end of H1.

New home sales also fell for the 3rd month in a row to the slowest pace since February 1995 and bringing the average price of a home in the States to 6,000 which is down 4.3% from December.

With home foreclosures soaring the number of homes on the market is increasing taking the inventory to 9.9 months which is the longest period in 26 years. No surprise then that analysts are forecasting further price declines.

And Bernanke who was testifying to Congress advised that the trend in house prices is likely to continue into next year by which time rising income would eventually cause a rebound. However, he also noted that the Fed’s rate cuts have not had the impact on mortgage rates as he would have liked. The problem lies in the credit crisis and the widening of spreads which has offset the decline in rates. 

But he did hint of further cuts when the Fed next meets on March 18th as the economy had continued to deteriorate over the past few months. The market now discounting a 50bp cut which would take the base rate to just 3%.

He insisted however that there was no evidence of foreign investors are shedding dollars. He did acknowledge the potential inflationary implication of a lower Dollar and that the Fed is watching the value of the Dollar carefully. He said there is no target rate for the Dollar.

So unsurprisingly again the Dollar woke up with a hangover for which there is no cure… Its session high at 1.5142 will be a record high that will not stand for long while the 1.0609 low against the Swiss Franc has plumbed new historic depths and below levels where central banks grouped together to intervene.

At this point there is little risk this will happen again unless they feel that the decline will cause markets further damage and volatility. The Euro has a few long term resistance areas. The first is at 1.5268, then at 1.5659 and strong at 1.5797.

This will probably equate to a test around parity against the Swiss Franc and to the long term lows around 100-101 against the Japanese Yen. The only question is whether it occurs directly or whether there will be a breathing space in between.

The bulk of the influential releases are from Europe today, the retail PMI’s being the most closely observed. However, there is also the second release of the U.S. Q4 GDP but with recent releases quite so bad the chance of even a better number than the +0.8% forecast would unlikely provide any breathing room for the beleaguered currency.

The following are due to be released from Asia:

Australia
Q4 Private Capital Expenditure
December Conference Board Leading Index

Japan – January
Industrial Production (P)      (MoM)    - 0.8%
Industrial Production (P)       (YoY)    +3.8%
Retail Sales                       (MoM)     +1.8%
Retail Sales                        (YoY)    - 0.1%
Large Retailers’ Sales          (YoY)     - 1.4%
Vehicle Production               (YoY) 

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