The Fed is talking — here’s how that impacts today’s markets
US Dollar
After the releases of existing home sales
yesterday, traders turned their focus to Fed speeches. There were four Federal
Reserve officials speaking yesterday, not counting a speech by Treasury
Secretary John Snow and one by President Bush. As we expected, Fed Presidents
Bies and Moskow both downplayed the impact of the recent Hurricanes and talked
up the resilience of the US economy to the recent temporary†setbacks. The
market was looking for hints on what the Fed may do in November and Moskow, who
is a voting member of the FOMC provided as straight of a response as we could
hope. He said that the economic fundamentals in the US are “still strong†and
that “there’s still excess capacity in the US economy.†In the world of the Fed,
excess capacity is synonymous with having additional room to cut rates.
The dollar held onto its gains for most of the
morning, but once oil prices began rebounding right before lunch time, the
dollar began to lose ground against the Euro. Oil prices first began rallying
when President Bush said he that he wasn’t sure how much damage was done to the
refineries in Rita’s path, but the rise accelerated after the release of reports
that the refineries in both Texas and Louisiana may remain closed for a longer
period of time due to some extensive electrical damage from Hurricane Rita.
Close to a third of US refining capacity has been affected by the Hurricanes
along with two key ports in Houston and Louisiana.
To cap off the announcements, in his speech
Greenspan focused his comments on the housing and mortgage market. He painted a
gloomy picture by warning that households with exotic loans such as interest
only loans could face significant losses. As he had noted before, he believes
that the rise in home prices has been driven purely by speculation. Real estate
broker Corcoran just released their 2005 mid-year report and although on an
average basis, condo prices are up 26%, 1 bedroom condos in midtown east are up
a whopping 50% from last year. When you have the prices of homes increasing that
much in an environment where the population has not changed significantly,
coming to the conclusion that speculators have been spurring the price increase
is hardly surprising. Yet despite the persistent warnings by everyone including
Fed officials and bank analysts, the housing market continues to move forward.
Yesterday, we saw existing home sales increase 2% in the month of August.
Today’s consumer confidence report should not be as lucky as today’s existing
home sales. We doubt that confidence managed to escape the impact of the
Hurricanes.
Euro
Growing inflation pressures in Europe has the ECB
once again caught in difficult position. German consumer prices grew by 0.4% in
the month of September as a result of higher oil prices and a tobacco tax hike.
The annualized CPI growth jumped from 1.9% in August to 2.5% in September, which
is the highest in 4 years and far above the central bank’s 2% target. ECB Weber
warned that the central bank needs to remain vigilant. However, highlighting the
difficult situation that they are currently facing, he added that on the
economic side, they still need to take action if necessary. Oil prices are
having a very significant impact on both growth and inflation, so this leaves
the Fed at the same place they have been over the past 2 years, which is in wait
and see mode. In terms of politics, things seem to be improving in Germany, but
worsening in Italy. Merkel and Schroeder are moving closer to a “grand
coalition,†which may finally bring an end to their political stalemate. In
Italy, Prime Minister Berlusconi’s approval ratings have collapsed to the lowest
levels since 2001 which may make it difficult to push forward reforms. Adding
salt to the wound was a warning by rating agency Fitch that Italy may face a
ratings downgrade if fiscal stability is not restored. Even though Italy the was
worst performing major economy within the Eurozone this year, the former finance
minister Siniscalo’s determination to tackle Italy’s economic problems provided
a glimmer of hope.
British Pound
The British pound fell to a seven week low on the
session before rebounding with no economic data to justify the dip. However,
what has become apparent is the concern of many traders that interest rate
differentials between the United States and the British economy are likely to
narrow by yearend. With a bottom finally forming in the housing market and
rising consumer interest potential, considerations of further interest rate cuts
may be contemplated in order to get that final push over the recessionary hump.
However, still remaining to be seen are inflationary pressures. Known for years
to be notorious hawks, Governor Mervyn King and his fellow policy makers have
already stated that the current state of inflationary affairs remains temporary
as the economy can weather such shocks. But what if the already high pressures
remain intact? Mostly attributed to higher energy costs, inflationary pressures
may remain in the economy as we approach the winter season. Known for its spikes
in energy prices, the winter snap may prove to be the undoing. In this case
further hikes or “no-action†verdicts would be most applicable, with the latter
being most probable. Ultimately, little dovish consideration looks to beset the
board as we enter the fall season.
Japanese Yen
Surprise, surprise, more conflicting data in the
world’s second largest economy. Although today’s BSI report states a pick up in
large manufacturers’ confidence for the three months up to September, there
remains continued confirmation of a consumer slowdown. According to today’s
report, stronger export and domestic demand assisted in pushing the release
higher to a 6.4 figure compared with a previous minus 2.4 print. However, once
again, sales figures ended up on the downside as has been for the past couple of
releases. Compared against a 1.1 percent rise in the month of July, department
store sales dipped 0.7 percent in the month of August, according to Japan
Department Stores Association. Considered to be underpinning the economic
recovery, consumption still remains weak with no significant increases in any of
the consumer sales reports. Until that day, questions still remain over the
viability of the its current run, in light of a soaring equity benchmark.
Kathy Lien
Kathy Lien is the Chief Currency Strategist at
Forex Capital Markets. Kathy is responsible for providing research and analysis
for DailyFX, including technical and fundamental research reports, market
commentaries and trading strategies. A seasoned FX analyst and trader, prior to
joining FXCM, Kathy was an Associate at JPMorgan Chase where she worked in Cross
Markets and Foreign Exchange Trading. Kathy has vast experience within the
interbank market using both technical and fundamental analysis to trade FX spot
and options. She also has experience trading a number of products outside of FX,
including interest rate derivatives, bonds, equities, and futures. She has a
Bachelors degree in Finance from New York University. Kathy has written for
Stocks and Commodities, CBS Market Watch, ActiveTrader, Futures and SFO
Magazine. She is frequently quoted on Bloomberg and Reuters and has taught
seminars across the country. She has also hosted trader chats on EliteTrader,
eSignal, and FXStreet, sharing her expertise in both technical and fundamental
analysis.