Sunday, February 22, 2009

EMU Economic Indicators Preview

(Week of 23 February to 1 March 2009)

German ifo business climate (February): more or less unchanged
EMU industrial confidence and economic sentiment (February): down
German adjusted unemployment (February): sharp rise
German CPI (February): unchanged at 0.9% yoy
M3 growth (December): private sector loans curbed

The ifo business climate for Germany might have remained more or less unchanged in February; business expectations could have improved, but the current assessment will probably have deteriorated. The German ZEW economic sentiment and the US ISM manufacturing index went up in February. The German yield spread has improved, because short-term interest rates have continued declining, while long-term rates have been fluctuating at low levels. The euro has depreciated and the crude oil price seems to have stabilised at its present low level. However, the DAX has been fluctuating at low levels too.

For similar reasons, Italian business confidence could have remained the same too, whereas French and Italian consumer confidence and Belgian business confidence could have suffered setbacks in February. The German GfK consumer confidence for February is likely to have deteriorated. Thus, EMU economic sentiment and EMU industrial confidence will probably have declined.

Due to the sharp economic downturn, the positive trend on the German labour market came to an end in November, and since then, adjusted unemployment has increased by 93,000. In February 2009, adjusted German unemployment could have risen by 65,000, as, in addition to the recession, very cold temperatures will have had a noticeable effect on outdoor jobs. The figures would be even worse if the government had not extended the entitlement period for short-time work allowances to 18 months.

The harmonized EMU unemployment rate could have gone up to at least 8.1% in January. In many European countries, particularly Spain, unemployment has been rising since spring 2008, and now it is increasing in Germany too.

A significant revision of German GDP in Q4 2008 is unlikely. The detailed breakdown of the components will show that investment in machinery and equipment has been a drag on overall GDP growth. Net exports have dampened GDP too, with exports decreasing more than imports. Furthermore, Destatis (the German Federal Statistical Office) has already said that private consumption has declined, but that changes in inventories have increased.

French consumer spending is likely to have remained stable in January, as French consumer confidence improved. EMU industrial new orders are expected to have decreased further in December, just as German industrial new orders did. The EMU trade balance improved in December, and the EMU current account is likely to have done so too.

The preliminary results for national German CPI for February are due to be released on Thursday at the latest. We expect German consumer prices to have risen by 0.4% mom; the annual rate would remain unchanged at 0.9%. Prices for accommodation services and package tours are expected to have increased. There are mixed signals for energy products: Heating oil prices have gone down compared to January, whereas gasoline prices have increased. Many utilities announced higher electricity prices as from February as well. But on the other hand, gas prices are expected to have gone down further. Food prices could have continued falling. After the significant discounts last month, clothing prices could have recovered again. Final HICP inflation in the eurozone will probably be confirmed at 1.1% in January, which would correspond with a monthly inflation rate of -0.8%. Eurostat will also publish the new country weights following Slovakia's entry into the eurozone on 1 January2009.

EMU money supply M3 rose by €122bn (M1 by €111bn) in October, more than twice the average of the previous 12 months. Since then, the monetary expansion has faded away. We expect the situation to have normalized somewhat in January, with M3 expanding moderately by about €30bn mom. Thus the annual rate would decline from 7.3 to 6.8%. Credit growth, however, is likely to have remained depressed. As the financial crisis deepened after the Lehman default, banks became much more reluctant to provide loans. Moreover, banks removed significant amounts of loans from their balance sheets through sales or securitisation. In December, loans to the domestic private non-bank sector fell by €47bn, the monthly flow turned negative for the first time. We expect the downward trend to have persisted in January, albeit less sharply. Against this background, the growth rate of loans could have fallen from 5.8 to 4.9% yoy.

BHF-BANK http://www.bhf-bank.com

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Weekly Economic and Financial Commentary

U.S. Review

Is There A Silver Lining?

This week saw another run of rotten economic news. Housing starts plummeted, industrial production fell sharply, the Philadelphia Fed index hit its lowest level in more than 18 years, and first-time unemployment claims increased. Even the Fed minutes had a weaker tone. With this much crummy news, we wonder if there is a silver lining somewhere.

An apparent bright spot was a rise in the index of leading economic indicators. Though January marks the second consecutive monthly rise for the LEI, it does not likely mark a turn. Most of the improvement in recent months has come from the money supply and interest rate spread. Consumer expectations also improved in January. Expectations turned back down in February, however, and many other indicators also look like they will decline this month as well.

The January price data are both good and bad news. Both rose more than expected in January. Larger-than-expected rises in both indices would normally be bad news. But with so many folks worried about deflation, a little more heat in the PPI and CPI is not all that bad.

Neither Deflation Nor Inflation Will Be A Problem In 2009

January’s slightly larger-than-expected rise in the PPI and CPI does not impact our inflation outlook at all. The PPI for total finished goods rose 0.8 percent in January and prices excluding food and energy rose 0.4 percent. Most of the increase in the headline index was due to sharply higher gasoline prices, which rose 15 percent in January, following twenty percent plus plunges in each of the three previous months. The bounce back in energy prices is not that surprising given how sharply they declined last fall. Energy prices are expected to remain low for the foreseeable future, which should lead to further declines in the year-to-year PPI figures.

Prices outside the energy sector also perked up a bit, with wholesale prices for consumer goods rising 1.0 percent. Here too, prices had declined for some time and a bounce back is not totally unexpected. Consumer goods prices fell 2.5 percent in December and were down 3.2 percent in November. Even with January’s increase, prices are down at a startling 17.7 percent annual rate over the past three months. Moreover, prices continue to tumble further back in the production pipeline. Prices for intermediate goods and services fell 0.7 percent in January and are down at a 31.5 percent annual rate over the past three months. Core intermediate goods prices, which have historically shown the strongest relationship to the CPI, fell 1.1 percent in January and are down at a 22.2 percent pace over the past three months.

The Consumer Price Index rose 0.3 percent in January, which was right in line with expectations. As with the PPI, rising gasoline prices accounted for most of the increase. Prices excluding food and energy items rose a larger-than-expected 0.2 percent. The increase was broad based but once again, most of the categories posting increases had been down sharply in recent months. Rent of primary residence and owners’ equivalent rent both rose 0.3 percent. The increases seem to fly in the face of the obvious oversupply of housing present throughout the country. The Census Bureau’s quarterly survey shows rental vacancy rates at 10.1 percent nationwide. High and rising vacancy rates, along with growing competition from single-family homes and condominiums now being put out for rent, should be driving rents lower.

January’s rise in rent of primary residence may be a statistical fluke. Many rental agreements include utilities. Since rents are usually fixed for one year terms, a drop in utility costs actually raises the computed rent. This seems to have been the case in January, when prices for fuel oil and other fuels declined 2.7 percent and prices for gas and electricity declined 0.8 percent.

U.S. Outlook

Consumer Confidence • Tuesday

Consumer confidence, as measured by the Conference Board, fell to a new all-time low for the third time in four months. Consumers are grappling with rising unemployment, plunging home prices and a continued credit crunch.

This particular measure of consumer confidence has historically had a significant correlation with the health of the labor market. Employment losses have deepened considerably in recent months, and total job losses are now over 3.5 million since employment peak in December 2007. We expect deterioration in the labor market to continue with the unemployment rate topping out above 9.5 percent in 2010. Given that the labor market will remain severely challenged for all of 2009, we expect consumer confidence will remain depressed for the foreseeable future. This will put considerable downward pressure on economic growth prospects.

Previous: 37.7 Wachovia: 31.2 Consensus: 36.0

Existing Home Sales • Wednesday

Existing home sales ended 2008 on an upswing, 6.5 percent higher in December. While sales moved higher, they still remained below the range that had held for more than a year through October. The National Association of Realtors noted that the sales figures continued to be bolstered by foreclosure sales, which they estimate accounted for 45 percent of December’s total.

Existing homes sales should slip to a 4.60 million annual pace in January. Sales may be volatile in coming months as foreclosure mitigation programs gain a foothold. With nearly half of all sales being driven by foreclosure activity, median prices will likely be pushed lower for the seventh consecutive month.

Previous: 4.74M Wachovia: 4.60M Consensus: 4.81M

Durable Goods • Thursday

Durable goods orders for the month of December fell 2.6 percent. It was the fourth decline in five months, and orders were led lower by significant declines in computer & electronics products and primary metals. Businesses are cutting back drastically to survive the recession.

Driven by slowing business and consumer demand, orders for durable goods could fall 7.8 percent in January. Vehicles and parts will likely continue to post significant declines. With corporate profits weakening and credit conditions exceptionally tight, business fixed investment will decline in the coming quarters.

Previous: -2.6% Wachovia: -7.8% Consensus: -2.3%

Global Review

Global GDP Tanked Last Quarter

GDP data for foreign economies have trickled in over the past few weeks, and the outturns have been universally bad. As we reported previously, the British and the Euro-zone economies each contracted roughly six percent (annualized rate) in the fourth quarter. It was Asia’s turn this week and the news was even worse. As shown in the chart at the left, real GDP in Japan plunged at an annualized rate of 12.7 percent. Moreover, the 4.6 percent year-over-over contraction in Japanese GDP in the fourth quarter was the sharpest decline since records began in 1955. Japan appears to be in its worst downturn since the end of the Second World War.

The sharp drop in Japanese economic activity in the fourth quarter was due at least in part to the eye-popping 45 percent decline in exports. Japan is an important supplier of capital goods to the rest of the world, especially to other Asian economies, and the global recession that is underway is clearly having a very negative effect on the Japanese economy. Domestic spending in Japan is very weak as well. Personal consumption expenditures declined 1.6 percent at an annualized rate in the fourth quarter, and fixed investment spending dropped 11.3 percent.

Taiwan did not fare much better last quarter. As shown in the top chart, Taiwanese GDP in the fourth quarter fell 8.4 percent on a year-over-year basis, surpassing the previous record decline that was set during the “tech” collapse in 2001. As in the case of Japan, the rest of the world contributed to the weakness in the Taiwanese economy. As shown in the middle chart, the volume of exports nosedived in the fourth quarter. However, domestic demand in Taiwan, which hasn’t been very strong over the past few years, weakened even further in the fourth quarter.

Unfortunately, it appears that global economy has continued to contract at a sharp rate thus far in the first quarter. As shown in the bottom chart, the manufacturing and service sector PMIs in the Euro-zone, which both edged higher in January, set new lows in February. Manufacturing indices in the United States also weakened further in February.

Although there is not much good news at present, there are a number of forces that sooner or later will stabilize global economic activity and eventually lead to recovery. First, short-term interest rates in most countries have declined significantly. Although the usual channels of monetary transmission may be impaired somewhat at present, lower interest rates should eventually help. Most countries have also announced fiscal stimulus plans that will kick in over the course of the year. In addition, lower energy prices will help. If oil prices average $50/barrel this year (WTI is below $40/barrel at present), then roughly $1.5 trillion worth of purchasing power will be transferred from oil-producing nations, which tend to have relatively high propensities to save, to oil-consuming nations, which tend to have higher propensities to consume. This transfer of purchasing power should help to eventually stabilize global economic activity. In the meantime, however, the global economy remains mired in a very deep slump.

Global Outlook

Canadian Retail Sales • Monday

The Canadian economy, which has been showing signs of weakness for the last few month appears to have deteriorated further in recent weeks. Manufacturing shipments for December, announced last week, declined 8.0 percent. This was more than the 5.3 percent that had been expected and a particularly troubling sign for Canada’s export-driven economy.

Retail sales for December will be reported on Monday and we suspect that will show the third consecutive month of declines for Canadian consumer spending. The employment report for January revealed a jaw-dropping loss of 129,000 jobs. Given Canada’s smaller population, this would be roughly comparable to a monthly loss of more than one million jobs in the United States. As the unemployment rate climbs toward eight percent we expect consumer spending will likely remain constrained in coming months as well.

Previous: -2.4% Consensus: -2.7%

German Ifo Index • Tuesday

The plunge in German industrial production that has occurred over the past few months was foreshadowed by the collapse in the Ifo index of business sentiment. Therefore, it will be interesting to see how sentiment among German businesses is holding up in February. Even if sentiment remains essentially unchanged, which the consensus forecast anticipates, investors will infer that the German economy remains mired in deep recession. Indeed, the Euro-zone PMIs for January that were mentioned in the main body of this report, set a new low in February.

Speaking of the Euro-zone, the economic confidence indicator for February will print on Thursday. Friday sees the release of January data on CPI inflation, which is expected to recede, and unemployment, which is expected to rise.

Previous: 83.0 Consensus: 83.1

Japanese Industrial Production • Friday

Next week sees the usual end-of-month barrage of Japanese economic statistics. Perhaps of most interest will be data on industrial production in January. IP plunged in the fourth quarter as global trade tanked. Unfortunately, the consensus forecast anticipates that IP dropped another 10 percent in January relative to the previous month. If realized, industrial production in January would be down an unprecedented 29 percent relative to the same month last year. Can you say “depression”?

Data on retail trade and housing starts in January, which are also slated for release on Friday, are expected to post further declines. The jobless rate, which stood at 4.4 percent in December, is expected to rise to 4.6 percent in January.

Previous: -9.8% (month-over-month change) Consensus: -10%

Point of View

Interest Rate Watch

Comments from the 2009 Banking Industry Outlook Conference

Banks reflect the economic fundamentals that drive consumer spending and economic growth. Our outlook is for continued recession and weakness in jobs and consumer spending, which presents challenges. Delinquencies for both prime and sub-prime mortgages continue to rise. Also, vacancy rates for commercial properties continue to rise. The loss of jobs is consistent with the rising vacancy rates for office space.

Financial stability and economic recovery continue to be the primary intermediate-term policy targets for the Fed. In addition, the Fed is committing to a continued expansion of its balance sheet to support financial markets. However, the Fed cannot be everywhere. The Fed is like a policeman that stands on one corner and the crime rate goes down on that corner. Yet, at a corner that the policeman is not present, crime continues. Over the last three months, the Fed’s efforts to provide liquidity to short-term markets, commercial paper and mortgage back securities have lowered rates and improved liquidity. Yet in markets where the Fed is not present, corporate high yield and CMBS markets, spreads remain wide and liquidity minimal.

We maintain our expectation that the federal funds rate will remain in the 0.00 - 0.25 percent range for the rest of this year. Our concern, however, is that yields on longer-dated debt instruments will drift upward as inflation concerns rise and the flight-to-safety trade falls away. In addition, dollar weakness may reappear as this year ages and this will add to our inflation concerns.

Topic of the Week

Housing Should Find a Bottom in '09

After three years of declining sales and construction, we expect housing to finally bottom out in 2009. Merely finding a bottom will not mark the end of troubles in the housing industry. The absolute level of sales is expected to remain very low and price declines and rising foreclosures will likely carry over into 2010. A bottom in sales and construction will mark the beginning of the end of the housing bust and will go a long way toward providing visibility in solving the more intractable problems facing the industry.

As bad as things are in the housing market, conditions are beginning to improve. While we admit it is hard to see much sign of improvement, you just have to dig a little deeper beneath the surface to find the evidence. On the surface sales are plummeting, prices are tumbling and foreclosures are skyrocketing. Beneath the surface, however, inventories are declining, affordability has largely been restored and population growth is steadily building up demand.

Home sales are likely to weaken during the first part of 2009, reflecting the dramatic weakening in the labor market, where we expect another 1.5 million jobs to be eliminated during the next three months. We believe the bottom for both new and existing home sales will occur in the first half of 2009. Sales will not bounce much off of that bottom but they should improve during the second half of the year, when lower prices, lower mortgages rates and stabilizing home prices in many key housing markets should boost demand. A strong recovery in the housing market, however, will not likely take hold until 2011 for sales and 2012 for new construction. Click here to see our latest housing chartbook.

Wachovia Corporation http://www.wachovia.com

Disclaimer: The information and opinions herein are for general information use only. Wachovia Corporation and its affiliates, including Wachovia Bank, N.A., do not guarantee their accuracy or completeness, nor does Wachovia Corporation or any of its affiliates, including Wachovia Bank, N.A., assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or any foreign exchange transaction, or as personalized investment advice. Securities and foreign exchange transactions are not FDIC-insured, are not bank-guaranteed, and may lose value.

Weekly Market Wrap Up

Markets opened in the US for trade on Tuesday forced even lower by pessimism over the US auto industry bailout, Eastern European currency chaos and President Obama's signing of a contentious stimulus bill into law (market were close on Monday for the President's Day holiday). Obama's "three legs of the stool"-stimulus, housing and banking rescue plans-were all addressed this week in one way or another. Obama signed the $787B stimulus package on Tuesday, announced a detailed plan on stemming home foreclosures on Wednesday, and on Friday chatter circulated that details of the bank plan may be forthcoming sooner rather than later. On Thursday the weekly continuing jobless claims came in just shy of 5 million, for yet another all-time record high, while on Wednesday the FOMC minutes failed to shed more light on possible plans to buy Treasuries and gave further downward revisions on 2009 GDP forecasts. Investors fleeing for cover in gold kept the yellow metal just shy of the $1,000/oz level all week, making 11-month highs on Friday. The DJIA flirted with November lows on Tuesday and Wednesday, finally breaking the 7,449 level on Thursday afternoon, a level last seen back on Nov 21st at the height of the credit crunch. Things only got worse on Friday as bank nationalization rumors beat the stuffing out of the major US indices, with the DJIA hitting its lowest mark since October 2002 before doubling witching volatility and the rumor mill helped rally stocks, with CNBC reporting that Treasury sources told them some details of the banking rescue plan would be announced next week. For the week, the DJIA lost 6.2%, the Nasdaq Composite dropped 6.1%, and the S&P500 fell 6.9%.

The specter of bank nationalization has stalked markets for quite some time, but fears of heavy-handed government intervention jumped into overdrive in the wake of Treasury Secretary Geithner's vague bailout plans last week. This week investor blowback slammed into the financials, with Citigroup and Bank of America the primary victims. Shares of the two banks, which have been called technically insolvent by more than one commentator, stabbed downwards precipitously all week long, with things getting really dicey on Friday. Press reports overnight on Thursday prompted Friday's panic selling-newspapers wrote that some US banks have been holding talks with regulators to provide them with more capital but stop short of outright nationalization, naming Citi and BoA in particular. Citi came out with a half hearted denial by mid morning on Friday, asserting that the bank has "a very strong capital base." BoA's CEO was more forceful, asserting his bank does not need any more assistance and reportedly telling his senior executives that US government officials have assured him that nationalization is not an option. Nevertheless, various government takeover rumors made the rounds, with some commentators reading the tea leaves from Fed Chairman Bernanke's comments on Wednesday, highlighting his statement that the administration is strongly committed to keeping banks private or "quickly returning them to private hands." By Friday afternoon, Citi found a floor at $1.60 and BoA hit the brakes at $2.60 after the White House reiterated its "strong belief" that a privately held banking system is "the right way to go," with shares in banks bouncing back somewhat ahead of the close.

On Wednesday, as the January housing starts and building permits data registered fresh record lows, the Obama administration announced its $75B housing relief plan. The plan represents an attempt to put a floor under home prices and arrest the damaging spiral of declining prices by helping 4 to 5 million "responsible homeowners" refinance mortgages and protecting another 3 to 4 million homeowners by lowering the risk of imminent default. In addition, the plan seeks to boost the loan portfolios of Freddie Mac and Fannie Mae by $50B a piece, injecting fresh funds into the two GSEs via preferred stock purchases. The FDIC's Bair called the plan the "missing link" in rescue effort, noting that it should begin having an effect on markets by March. Not everyone has been so enthusiastic, as Rick Santelli's epic rant on CNBC demonstrates.

General Motors and Chrysler handed their viability plans to the administration on Tuesday, as required by the terms of their emergency loan packages from back in December. Both companies increased their total loan requests: GM said it would need $9.1B-$16.6B in additional loans to complete its restructuring (in addition to the $13.4B it got in December), while Chrysler asked for another $2B for a total request of $9B. In addition, GM said it would run out of funds in March without government assistance, warning that a bankruptcy could cost as much as $100B. Chrysler said it would need $20-25B in the event of bankruptcy. The administration said that the "auto industry task force," led by Treasury Secretary Geithner and advisor Larry Summers, would meet on Friday to consider the plans (note that the idea of naming a "car czar" seems to have been abandoned). The New York Times quoted an administration official as saying that President Obama was reserving for himself any decision on the viability of GM and Chrysler and that the administration had not ruled out government-backed bankruptcy plans. Senate Banking Committee Chairman Dodd said on Friday that he does not want to see pre-packaged bankruptcy for the auto industry, but stated it could be a solution.

Earnings reports in the week provided a look at which corporations might conceivably soldier through the recession without too much damage, if not outright growth. Retailing giants Wal-Mart and CVS reported solid fourth-quarter earnings, although Wal-Mart's forecast for the coming quarter and full year were tilted a bit below par. CVS's CEO bluntly stated that his company was "immune" to the recession. Cable operator Comcast had a good quarter and even raised its dividend, evidently expecting even more people to be staying home to watch cable TV. And speaking of recession-proof, spam manufacturer Hormel beat earnings estimates and reiterated its 2009 forecast. Dow component Hewlett-Packard's revenues lagged estimates by nearly 10% and its earnings guidance was strikingly weak. HP's CFO warned that the company expects to see more inventory reductions to deal with ever slowing demand. Deere and Goodyear offered very weak earnings and Goodyear said it would cut 7% of its workforce. The CEO of Deere said he expects double-digit y/y declines in commercial and construction sales.

Government bond markets continue to wrestle with two competing forces. First there are concerns surrounding the big increases in supply needed to fund government relief programs, concerns which have kept upward pressure on yields. These concerns are frequently offset by waves of flight to safety trades that emerge when equity and currency markets come under increased pressure stemming from the crisis. It was these risk aversion trades that sent the US benchmark yield down some 25 basis points over the week's first two sessions. By mid-week traders were looking past the turmoil in equity and currency markets, selling government bonds after the US Treasury announced $94B in fresh 2-, 5-, and 7-year note supply would come to market next week. Bond prices were rallying once again later in the week as major equity indices tested or approached the November lows. For the week Treasury prices improved pushing the bench mark back yield back below 2.75% and the long bond towards 3.5%.

In currencies, Eastern Europe and widening EU spreads were in tight focus throughout the week, making traders wonder whether Germany and France could be forced to bailout entire nations rather than just individual banks. Concerns died down somewhat after Eastern European currencies recovered a bit later in week, providing some covering in related risk-aversion trades (gold, fixed income and equities). Poland sold a helping of EU grants due to the "attractive" EUR/PLN exchange rate, which held around the 4.80 area, below the Polish prime minister's "line-in-the-sand" level of 5.0. The focus on the CEE4 currencies of Eastern Europe is prompted in part by the $1.7T the countries have borrowed abroad, of which at least $400B is due to be refinanced in 2009. Some market participants have noted that as much as 60% of Polish mortgages are denominated in CHF. And according to one report, Russia "has held 36% of its foreign reserves since August defending the ruble" in what amounts to the largest run on a currency in history.

All in all, the Eastern European fracas has hurt the euro, and traders are speculating about the possible impact on the Western European banking sector. Moody's warned this week that weakness in East European banks could spill over into their Western financial parents. EUR/USD started the week breaking below its recent 1.27-1.31 consolidation range in the aftermath of the G7 summit. Dealer chatter circulated about big April 1.2000 and June 1.1000 euro put options were being place as the 1.2730 level was unable to be retaken on a weekly close basis. Germany said it would host the leaders of Britain, France, Italy, Spain, Netherlands, Czech Republic and Luxembourg over the weekend to prepare a common European stance ahead of the G20 summit, although there is little hope that the meeting will develop concrete measures designed to address market concerns.

In Britain the BoE's minutes from the Feb 5th MPC meeting included the phrase many have been waiting for: quantitative easing. The BoE's King confirmed that he has asked Chancellor Darling for permission to undertake various quantitative easing schemes, which could include buying commercial paper, corporate bonds and a range of other assets. The GBP was under some pressure following a report in the UK Telegraph that Britain's AAA credit rating is under threat from the sheer scale of the nation's bank bail-out. GBP/USD tested below 1.41 before rebounding toward 1.44 as the week ended, aided by the BoE's insistence that quantitative easing operations could begin earlier than expected.

The yen was softer for the week as dismal domestic data weighed on sentiment. The Q4 Japanese annualized GDP number came in at -12.7%, the largest contraction since the 1974 oil embargo, while BoJ Chief Shirakawa said economic conditions would remain severe this quarter. Shirakawa also warned that lowering overnight rates does not always translate into lower long-term rates. The BoJ's monthly report heaped on more of the same, noting that the Japanese economy was deteriorating significantly. Japan's Topix Index fell to its lowest level since 1984.

The Swiss Franc remained subdued throughout the week, hampered by concerns that Swiss banking secrecy laws have been compromised by UBS's settlement with the IRS, which may force it to reveal names of clients who the agency sees as tax evaders. Concerns also surfaced about CHF-denominated Eastern European debt, adding pressure to the currency. USD/CHF tested above the 1.1880 level while EUR/CHF cross held the 1.47 level.

Trade The News Staff Trade The News, Inc.

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This Week's Market Outlook

Highlights

Don't look now, but the worst for markets may be over
More JPY weakness likely as data worsens
The bullion bull-run continues, for now
Key data and events to watch next week

Don't look now, but the worst for markets may be over

This week saw all the key risk aversion indicators continue to gain ground, indicating eroding sentiment, but by the end of the week many of them had seen potentially significant reversals, suggesting an improved risk environment may lie ahead. The USD pressed higher for most of the week on ostensible safe haven buying, with the USD index nearly reaching the November 2008 high at 88.45, only to reverse course sharply on Friday. As a result, the weekly candlestick formed a shooting star, complete with a gap open higher, a strong reversal pattern after an advance, with confirmation coming from further declines next week. The high at 88.25 effectively leaves a potential double top at 88.25/45, providing another possible reversal pattern. In EUR/USD, the 1.2500/50 area proved resilient, and the breakdown below 1.2720/30 that started the week was negated by the weekly close back above 1.28, which also saw EUR/USD close above the Tenkan line at 1.2794, the initial signal of a directional reversal.

The JPY-crosses also delivered a subtle signal that risk aversion was likely abating. Even as global stock markets plumbed the lows, the JPY-crosses gained ground and finished out the week nearer to their highs for the year. EUR/JPY is set to close above both the Tenkan and Kijun lines at 117.63 and 117.14, respectively, while GBP/JPY tested the bottom of it cloud several time and finished out above its Tenkan and Kijun lines. Elsewhere, gold continued to gain ground on safe haven buying, testing above the $1000/oz on Friday, but failed to hold on a closing basis. (See more on gold below.) In stocks, the S&P 500 based out above its low from last November, potentially setting the stage for a double bottom from around 750, while the Nasdaq managed to close nearly flat on the day. WTI crude oil prices have now tried three times to break below the $32/33/bbl level, only to rebound again.

With the fundamental outlooks still bleak globally, any rebound in risky assets is likely to be sentiment driven and thus inherently fragile. However, within the recent ranges I think we have room for the USD to weaken in coming weeks against all but the JPY. In EUR/USD, strength over 1.2950 opens up potential to the 1.33-1.35 area. GBP/USD gains over 1.4500/20 suggest potential back up to the 1.5000 area. USD/CHF may see lower toward the 1.1330/50 area. USD/JPY maintains upside potential while it holds above the key 92.50/75 break level, but needs to overcome resistance between 94.50-95.00 to signal likely gains higher. A daily close over the 94.65 high from January would constitute a break of the neckline in a potential double bottom formation and target gains to the 102.00 area. Between a steady to higher USD/JPY rate and likely advances in non-JPY dollar pairs, the JPY-crosses also have further upside potential.

More JPY weakness likely as data worsens

Economic data out of Japan next week is likely to be closely watched as market participants attempt to gauge the future direction of JPY, which we believe is discernibly weaker. The most important of these is the trade balance due up on Tuesday. The market is looking for continued deterioration in January to -¥1179.5 from -¥320.7B prior. This would take out the January 2006 record low of -¥353.5B when USD/JPY was trading at around the 120 mark. Looking at the relationship between annual returns in JPY and Japanese trade suggests USD/JPY could be on its way up there once again.

Apart from the obvious headwinds to trade the country faces from the overvalued currency, the economic situation continues to worsen. Indeed, the government of Japan downgraded its growth assessment for the fifth consecutive month just this week. Leading indicators look bleak with employee overtime hours down near 2002 levels. Hours lead bodies when it comes to employment and this metric suggests the jobs situation is about to get a lot worse. The ultra important Tankan index really did tank in 4Q to -24 and is also at 2002 levels now, suggesting business confidence is in the dumps.

Now a lot of the recent rally in JPY has been attributed to the notion that the yen is a safe haven trade. Frankly though, I don't see how a country that holds more than 170% of GDP in gross debt and has a mere AA credit rating from two of the three major rating agencies can be considered the ultimate destination for risk aversion. In fact, the rally in JPY can ultimately be attributed to the MASSIVE unwind in the carry trade as global equity markets melted down in the second half of 2008 along with huge repatriation from Japanese investors as global yields collapsed. With the carry now virtually nonexistent as global rates continue to converge, it looks like the top in JPY has been reached - that weekly double bottom in USD/JPY by 87 comes to mind. In the next few sessions, we would look for a break above 95 to trigger some decent near-term strength here.

The bullion bull-run continues, for now

Gold made another monumental move higher this week and took out the psychologically important 1000 barrier briefly. Global risk aversion continued to push prices for what is now being called the world's second reserve currency into fresh highs. With equities melting down across the world and demand for physical Gold at all time highs, it is no wonder that the trend for this precious commodity remains up. Indeed, demand has increased to such an extent that it was recently reported that US and European investors scooped up nearly 150 tons of gold in 4Q 2008 - a more than 800% increase from 4Q 2007. Do an internet search for physical gold and you are met with multiple websites where coins and bars are "out of stock". Indeed it now looks as if we have entered the euphoric phase of this bull-run. That said, asset bubbles only really become obvious in hindsight and thus we will look to technical levels for guidance.

Perhaps the most obvious bearish indicator is the potential double-top we are setting up right near the 1000 mark. Failure to break above here in earnest should take some of the luster off the rally in the near-term. The support zone we'd like to keep in mind the most over the next few trading sessions is the 935/930 area. This is trendline support drawn from the 15-Jan and 10-Feb lows and also looks like the short-term pivot that initiated the move higher back on 12-Feb. A break below here over the next few sessions should solidify the double-top near 1000/oz. We would look for a break of major daily trendline support which lurks by 875 currently to indicate that the current up trend has come to an end. In terms of the upside, resistance comes in at the 2008 intraday highs by 1030/35 and we would expect good option interest in that area. Above there we are really entering uncharted waters and would look for barriers at $25 intervals.

Key data and events to watch next week

The US calendar has some important data and events on deck in the week ahead. Tuesday starts it off with consumer confidence and multiple home price reports. Wednesday has existing home sales and the weekly oil inventory numbers, which have led to a pickup in oil price volatility in recent weeks. Durable goods orders, initial jobless claims and new home sales highlight a busy Thursday. Friday rounds out the week with GDP, the Chicago PMI and University of Michigan consumer sentiment. Noteworthy as well is Fed Chairman Bernanke's semi-annual testimony before the Senate on Tuesday and the House on Wednesday.

The eurozone is bustling with top-tier data. French consumer spending, French housing starts, French consumer confidence, the eurozone current account, the German IFO surveys and eurozone industrial new orders all kick off the week on Tuesday. Wednesday is light with only German GDP of note. The action returns on Thursday with German GfK consumer confidence, German employment, eurozone business climate indicator, eurozone consumer confidence and German consumer prices. Eurozone consumer prices close out the week on Friday.

It is pretty light in the UK and given the poor news of late this is probably a good thing. Total business investment gets it started on Monday. Tuesday has GDP on deck and Thursday sees nationwide home prices. Also look for a speech by the Bank of England's Blanchflower on Wednesday. He is arguably the most dovish member on the BOE and thus his speech should elicit some market attention.

Japan has an important week coming up with a plethora of top tier reports. On Monday look for the Bank of Japan meeting minutes. Tuesday has the crucial trade balance report (more on this above) while Wednesday sees small business confidence. Thursday is busy with manufacturing PMI, employment, household spending and consumer prices all due. Friday ends the week with housing starts and construction orders.

Canada's calendar is ultra light. Retail sales are the highlight on Monday and then we wait until Friday to close out the week with the current account and industrial product prices. In other words, look for the moves in USD/CAD to be mostly driven by the USD side of things.

The action down under is also characteristically light. New Zealand credit card spending starts it off on Monday. Wednesday has Australian wage costs and the New Zealand trade balance due up. Thursday closes out the week with New Zealand business confidence, New Zealand building permits and Australian private capital expenditures.

Brian Dolan, Chief Currency Strategist Jacob Oubina, Currency Strategist Forex.com http://www.forex.com

DISCLAIMER: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

The Weekly Bottom Line

HIGHLIGHTS

Inflation continues to decelerate in the U.S. and Canada
Details continue to emerge in U.S. recovery plans

While the Best Picture award will be decided this weekend, for financial markets and the global economy, the concern remains around the Big Picture. The data this week for the U.S. and Canada, and globally for that matter, was generally downbeat. The pace of U.S. housing starts reached a new post-war low in January, and early manufacturing indicators are pointing toward a lower reading for the February ISM report. Canadian wholesale sales in December fell the most since the August 2003 blackout, while the 8% m/m decline in manufacturing shipments was the largest decline on record. But, we already knew the pace of economic activity in North America was abysmal at the end of 2008 and the kickoff to 2009. That’s one of the reasons CPI data for January showed ongoing decelerations in the rate of headline and core inflation in both the U.S. and Canada. The big picture still revolves around U.S. plans to recapitalize the banking sector, provide economic stimulus through tax cuts and government spending, and forestall mortgage foreclosures. The extent to which these programs are successful will determine the extent to which U.S. consumers start spending and U.S. housing reaches a bottom and begins a sustainable recovery. And ultimately, no amount of government spending in Canada will replace the stimulative impact of a reinvigorated U.S. economy.

The Hottie and the Nottie

Unfortunately, the U.S. stimulus programs announced to date seem more likely to be candidates for a Razzie than an Oscar. We do expect the fiscal stimulus measures announced to date will have a positive impact on economic growth in the United States. But if the banking sector is not put back into order first, all this spending will be for naught. If you give a man a dollar, he spends it today. But if he can’t get a job or a loan, his spending will go away. (and the award for Worst Attempt at Poetry in an Economic Publication goes to…)

The banking sector plans announced by the Treasury are not bad, just short of details beyond the vague 3-step outline provided. First, they will determine which banks are illiquid but still solvent and which are both illiquid and insolvent. Many in the latter category will likely need major restructurings or bankruptcy, while the former can be helped through targeted capital injections. That brings the Treasury’s second part of the plan to try and use federal money as a teaser to bring in much more private sector financing. And this is crucial. Because without a substantial new appropriation from Congress, the Treasury is trying to fill a hole in the aggregate balance sheet of U.S. banks that is estimated at over $2 trillion with just $350 billion in remaining TARP money. But in the meanwhile, credit is needed to help finance new car purchases, student loans, mortgages, etc. This is why the current TALF program, in which government loans directly finance securitized products in these areas, was broadened. Credit needs to flow to these sectors now, and at least on the auto and credit card side, this effort has seemed to improve the spreads on these products.

Slumdog Thousandaire

No one is going to become a millionaire from the U.S. stimulus spending, but it will help. Nevertheless, there are still legitimate questions over the extent and timing of the stimulus spending signed into law this week by President Obama. While our expectations can be found in the TD Economics Special Report A Primer on Fiscal Stimulus, the big picture is this. The $787 billion dollar plan portends to spend $584 billion between the current fiscal year and the next, with about $245 billion in tax cuts and $339 billion in spending. However, included in those tax cuts are $85 billion in extension of the AMT (Alternative Minimum Tax) credit, something which Congress has provided every year. The AMT fix is not stimulus for the economy, but simply prevents more of a drag. Likewise on the spending side, there is about $150 billion of funding which either allow states to retain jobs or programs they already have in place or allow those already collecting unemployment or low-income medical benefits from reaching the proscribed time limit for receiving this assistance. All told, this means about 40% of both the tax cuts and spending provisions for the first two years are not new stimulus, but simply maintain the status quo.

The infrastructure spending will still be a significant positive boost for the economy, but most of this will come in 2010 and beyond. The tax cuts will still help, but a large percent of these will be saved, and much will not reach taxpayers until the end of this year and early into 2010. This is one reason we expect the stimulus to raise 2009 GDP growth by only 0.6 percentage points in 2009 but by 1.5 percentage points in 2010. However, the world of fiscal stimulus can be a tangled web. Take the new homebuyer tax credit, for example. Anyone who buys a home this year, who has not owned a home in the last three years, will receive an $8000 tax credit from the government. Several important questions when looking at this are what is the cost to the government, and will it help the housing market. On the cost, while the federal government will pay the $8,000 credit, each home bought will provide additional revenue to the states in the form of property taxes. The average national property tax in the U.S. is 1.1%, and the average home price is $200,000, so each government credit of $8,000 will on average bring in $2,200 in revenue for the state. Moreover, each one percentage point decline in U.S. home prices leads to a $2.5 billion loss in property tax revenues nationally (based on the existing U.S. housing stock). So any influence on moderating the decline in home prices will mean less lost revenue for the states. But, some of these homes would have been sold anyway, so the tax credit in these cases is free money for the home buyer.

The Curious Case of Mortgage Foreclosures

The most important point to keep in mind when it comes to the U.S. housing market is that income and interest rates are still important drivers in the decision to buy a home. U.S. mortgage rates are now at an all-time low, but some of this stimulus will be offset by the hit to incomes from lost jobs, slower wage growth, and more conservative buying habits. While the above homebuyer tax credit can help mitigate some of those short-term income concerns for a potential homebuyer, the big detractor in the housing market remains the large and increasing inventories of vacant and foreclosed homes that are driving down prices. Tax credits will not make the monthly payments of mortgages that have reset any cheaper. Nor, can the credits augment household income forever. Government money to help lower the principal or extend the term of otherwise unaffordable mortgages will help to reduce the pressure on home prices feeding back into the banking sector problems and lack of credit getting to businesses and consumers. And like the homebuyer tax credit, there will be leakages, as some mortgages will be renegotiated which would have otherwise still been paid, or will nevertheless still go into foreclosure. But, leakage is a two-way street since in those cases, you have more disposable income that can go to spending in the economy. Ultimately, job and income losses in recessions lead to rising foreclosures. In the current environment of banking sector fragility, to ignore this area of stress would be to invite more problems for U.S. banks and households. And that would certainly not be an Oscar-worthy performance.

UPCOMING KEY ECONOMIC RELEASES

Canadian Retail Sales - December

Release Date: February 23/09 November Result: total -2.4%% M/M; ex-autos -2.3% M/M TD Forecast: total -3.0% M/M; ex-autos -2.5% M/M Consensus: total -2.7% M/M; ex-autos -2.0% M/M

The wheels have clearly fallen off the Canadian retail trade sector as consumers tightened the grip on their pocketbooks in recent months, in the face of the worse global financial and economic crises since the Great Depression. Indeed, with the Canadian labour market turning bellyup in December and the economy appearing to have entered a rather deep recession in the last few months of 2008, it is no wonder why Canadian consumers are being increasingly cautious with their spending. For December, our call is for retail sales to fall by a further 3.0% M/M, following the 2.4% M/M drop the month before. Much of the decline will come from slumping auto sales and lower gasoline prices, while sales excluding autos are expected to fall by an equally disappointing 2.5% M/M. Real retail sales, however, are likely to perform slightly better as the aggressive discounting by retailers during the month should mean that the volume of sales will likely fall by less. In the months ahead, we expect retail sales to remain fairly soft, as Canadian consumers ease spending even further, though January may provide a brief positive interlude based on available data.

U.S. Durable Goods Orders - January

Release Date: February 26/09 November Result: total -3.0% M/M; ex-transportation -3.9% M/M TD Forecast: total -2.5% M/M; ex-transportation -2.0% M/M Consensus: total -2.3% M/M; ex-transportation -2.0% M/M

With the U.S. economy well into what is expected to be its longest lasting and most intense economic recession since the Great Depression, the continued retrenchment in capital expenditures by U.S. businesses in not entirely surprising. Indeed, new durable goods orders have declined in every month since August, and there is every indication that this trend will continue for more months to come as businesses scale back on big-ticket purchase in the face of softening consumer demand. For January, we expect the unprecedented decline in durable goods orders to continue for the sixth consecutive month, with a further 2.5% M/M drop. Excluding transportation equipment, the decline should be a more modest 2.0% M/M. In the coming months, we expect new orders to decline even further as the impact of the continuing U.S. economic recession gains traction.

TD Bank Financial Group

The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

Weekly Focus: Pressures Mount in Eastern Europe

Focus in the financial crisis shifted to Central and Eastern Europe (CEE) during the past week - and to the large bank exposure to the region for Euroland banks. The CEE countries are caught in a very negative spiral of deleveraging, heavy amounts of foreign debt and economic crisis. With little room for manoeuvre in economic policy to underpin the economies, the economic outlook has turned increasingly gloomy. Ukraine, with a population of 45m, could be on the verge of defaulting. Austria's finance minister warned last week of the risk of an economic ‘catastrophe' triggering a ‘domino effect' of problems further west. Ukraine is arguing with IMF over budgetary policies in order to get a second tranche of USD16.4bn due this weekend. A compromise will probably be found and the money released but tensions are running very high.

Attention returned to European bank exposure to CEE after a Moody's report said that western European banks with subsidiaries in CEE were at risk of being downgraded. Austrian banks in particular have significant exposure in CEE with loans to this area as high as 55% of Austrian GDP. The turmoil hit European bonds where spreads widened to Euroland -and Austrian bonds were hit particularly hard. The euro also weakened on the news.

About half the loans in CEE come from European banks which expanded markedly during the boom years. This now creates the risk of a very hard credit crunch in CEE as European banks are likely to focus more on lo-cal markets and are under pressure from local gov-ernments to increase domestic lending as govern-ments are helping banks with capital and loans. At the end of the week the president of the World Bank, Robert Zoellick, called for the EU to help CEE countries. He said the World Bank is working with IMF and other institutions to help the region but needed more backing from the EU. Hopefully they get it soon.

Euroland: PMI data weaker than expected

The Flash PMI for Euroland disappointed in February as the slight improvement seen in January was re-versed. PMI manufacturing fell to at 33.6 from 34.4 (Consensus 35) and service PMI fell to 38.9 from 42.2 (Consensus 42.5). Both indices fell to new all-time lows. The data point to continued weakness in GDP in Q1.

The weakness in February PMI for Euroland is similar to the pattern seen in US regional surveys with de-clines in both Empire and Philly Fed indices. We still believe we are in a bottoming process in the PMI data, but these data indicate that it may take longer than indicated by the January numbers. The case for more ECB cuts is intensifying and this supports our expectations of a 50 basis point cut in March.

New orders fell slightly in February following a small increase in January. Inventories have been adjusted strongly during the autumn and the adjustment continues. The order-investment balance points to a re-bound soon - or at least stabilisation.

Flash PMI in Germany was overall weaker than expected. German manufacturing PMI rose slightly, but German manufacturing PMI did not rise last month, as in most other countries, so the rise in February may be a delayed reaction to what was seen elsewhere in January. The German service PMI was very weak and fell to a new all-time low. The German exposure to eastern Europe is turning into a big disadvantage at the moment and the intensification of the crisis there may weigh further on Germany in coming months. Next week the German Ifo is published, which is expected to stabilise, although the Ifo expectations may fall slightly.

Key events of the week ahead

Tuesday: German Ifo will be key event for the week. We look for an unchanged number at 83. Expectations may fall back, as indicated by PMI.
Other data of significance will be M3 Thursday, consumer confidence, final inflation numbers and German unem-ployment.

Switzerland: Still great uncertainty about the bank sector

Two stories dominated the news flow from Switzerland during the week: the settlement between Swiss banking giant UBS and the US authorities, and the uncertainty about Swiss banks' exposure to the particu-larly hard-hit countries of central and eastern Europe (CEE). While both stories have the potential to un-dermine the Swiss franc, the currency actually strengthened at the beginning of the week, briefly nudging up towards 5.07 against the Danish krone before falling again due to euro strengthening.

UBS stands accused by the US financial and tax authorities of having conspired with a large number of US customers in tax evasion and tax fraud, and agreed to a settlement on Wednesday - whereby the bank will pay fines of USD780m and provide details of certain customers. The disclosure of customer information is particularly controversial and there has been speculation about whether this is the beginning of less strin-gent bank laws in Switzerland and potentially the undermining of the Swiss bank sector. There is a particu-lar fear that customers of Swiss banks will reduce their deposits if uncertainty about the future of bank se-crecy increases. However, the Swiss government has stated that bank secrecy is still assured, and that it has only permitted the release of information on individuals guilty of fraud, which, unlike tax evasion, is a crime in Switzerland. Uncertainty about the application of the country's bank laws nevertheless put pres-sure on the Swiss franc, although we put most of Thursday's slide in the CHF/DKK down to a correction in the pricing of the euro, as the EUR/USD climbed sharply at the same time.

Another topic that has been very much in focus is uncertainty about Swiss banks' exposure to the crisis-stricken CEE countries. The CEE economies have been hit by the credit crunch and global recession, just like the rest of the global economy, but are particularly feeling the squeeze due to heavy borrowing in the region in recent years and the resulting external imbalances that have built up. Based on BIS data for bank lending to CEE countries, as shown in the following chart, the Swiss banks are not particularly heavily ex-posed. Less than 2% of total foreign lending has gone to CEE countries, which is well below the Austrian banks' exposure of 36% of total lending. Germany also has considerable exposure, but this accounts for a smaller share of GDP because the financial sector makes up a much smaller part of the economy than in Switzerland. We do not therefore believe that direct exposure to the CEE countries is the greatest element of uncertainty in the Swiss financial sector. We also need to remember that a large part of the borrowing in the region is denominated in Swiss francs, so further deleveraging in the region would actually boost the Swiss franc deleveraging of Swiss franc loans, which has been the most important driver behind the cur-rency's strong appreciation in 2008.

Key events of the week ahead

Tuesday, 09.15 CET: Q4 employment data.
Tuesday, 10.00 CET: Consumption indicator for January.
Friday, 11.30 CET: KOF leading indicator for Feb-ruary. We anticipate further deterioration in this important indicator despite improvement in most European PMIs in January.

UK: BoE preparing to print money - but may not reach zero interest rate

There were two particularly interesting points in the minutes from the latest Bank of England meeting out this week. First BoE made it clear that it saw it necessary to embark on quantitative easing in order to get inflation back towards the target in the medium term: "It seemed unlikely that the inflation target could be met solely by cutting the Bank Rate". BoE prefers increasing money through buying credit assets rather than government bonds as this will help the economy more directly: "In the present environment, where par-ticular credit markets are not functioning normally, it is appropriate to consider increasing the supply of central bank money by more unconventional types of asset purchases. Buying private sector assets in such markets …. would encourage the flow of credit to companies…The Committee unanimously agreed that the Governor should write on its behalf to the Chancellor to seek authority to conduct purchases of government and other securities, financed by the creation of central bank money…". We believe this letter could be pub-lished any day and that quantitative easing will commence in the very near future.

The second important takeaway from the meeting was that BoE is no longer likely to cut rates all the way down to zero. The members had a lengthy discussion of the disadvantages of zero rates, which might hurt banks' profitability and hence obstruct more lending. Since bank deposit rates are normally below the Bank Rate, a zero rate would be a disadvantage as deposit rates could not be lowered below zero. Instead, banks could not lower lending rates as much, but in some cases the banks were contractually obliged to do so and this would hurt their profitability. So where is the lower bound? Actually it was mentioned that one member (Blanchflower) wanted to go to the lower bound already at the February meeting. Since he voted for a cut of 100bp that would imply that they see the lower bound as 0.5%. We therefore no longer expect BoE to cut all the way down to zero but instead to cut to 0.5% in March and stop there.

GBP has been trading more or less sideways against EUR this week around 0.89. We believe that the quan-titative easing will give a push towards a weaker GBP and hence see a move to 0.93 on a three month hori-zon. Bond yields are in a bottoming process and caught between the outlook for quantitative easing on the one hand and heavy bond issuance on the other. We believe 10y yields could fall further towards 3% - the low reached earlier this year.

Key events of the week ahead

Nationwide house prices out during the week. We expect a rise in line with what has been seen in HBOS and Rightmove figures.
Q4 GDP data will provide details on the advance GDP out 23 January.

USA: Support package for hard-pressed homeowners

Barack Obama unveiled the final part of his financial rescue plan on Wednesday night - a support package for US home-owners. The package has three main elements: (1) wider access to refinancing of Fannie Mae and Freddie Mac mort-gages, (2) restructuring of mortgages for homeowners at risk of default, and (3) keeping mortgage rates down through further injections of capital into Fannie Mae and Freddie Mac (see Flash Comment - USA: Obama's housing plan).

The refinancing element of the housing plan means that homeowners with Fannie Mae and Freddie Mac mortgages (which account for around half of all outstanding mortgages in the US) will be able to refinance these loans even if they exceed 80% of the value of their homes. The Obama administration estimates that 4-5 million homeowners meet all of the criteria for refinancing except for the current 80% LTV rule. Under the new rules, they will be able to refinance their loans at today's lower interest rates. The Federal Reserve and the Treasury are already making massive pur-chases of mortgage bonds to bring down mortgage rates, and we believe that it makes sense to ease the 80% rule and so ensure that more homeowners can benefit from the drop in rates. The Treasury will also be increasing its in-jections of capital into Fannie Mae and Freddie Mac in order to avoid any loss of confidence in the two institutions and the resultant increase in interest rates.

When it comes to homeowners who do not have Fannie Mae or Freddie Mac mortgages and are at risk of failing to make their monthly repayments, Obama has set aside USD 75bn from the TARP to help cover the cost of restructuring these loans. The idea is for the government and the lender to share the cost of bringing monthly repayments down to a sustain-able level, which has been set at a maximum of 31% of the homeowner's monthly income. The final guidelines on how the restructuring of loans is to proceed, including which homeowners are eligible for restructuring, will be announced on 4 March. For now, all financial institutions wishing to receive aid through the financial rescue package must comply with the guidelines, and Fannie Mae and Freddie Mac will be using them for loans that they own or guarantee.

In the coming week, attention will focus on Fed Chairman Bernanke's semi-annual monetary policy report (read more under Fixed Income).

Key events of the week ahead

Tuesday: Conference Board consumer confidence ex-pected to fall to 34.0.
Tuesday: Bernanke to present semi-annual monetary pol-icy report to Senate - Wednesday to the House.
Wednesday and Thursday: Existing home sales expected to drop to 4.73m, new home sales to rise to 333.000.
Friday: We expect a downward revision of Q4 GDP growth to -5.5% q/q AR from -3.8% q/q AR.

Asia: China praised in G7 communiqué

Relations between China and the Obama administration in the US got off to a shaky start when treasury secretary Timothy Geithner accused the Chinese of exchange rate manipulation in a congressional hearing. This sparked fears of fresh trade policy tensions between China and the US, including fears that the People's Bank of China might retali-ate by scaling back its purchases of US government bonds. What was overlooked was that Geithner also said that it is currently far more important that China is stimulating domestic demand. According to press reports, which have not been officially confirmed by the Obama administration, the president subsequently contacted the Chinese and as-sured them that the new US administration would not be aggressively pursuing the exchange rate issue. Ultimately the Americans are happy with what China has delivered to date in the economic sphere, as it has eased its fiscal pol-icy markedly relative to many other countries, and there are even signs that this is beginning to have an impact. This is why we saw China being singled out for praise for the first time in a G7 communiqué following the meeting of fi-nance ministers and central bank governors in Rome last weekend. China was praised first and foremost for its rapid fiscal policy response and its assurances of a more flexible exchange rate in the longer term.

In Japan, the LDP-dominated coalition government is becoming increasingly paralysed in a situation where an ex-traordinarily weak economy is crying out for action (see Flash Comment - Japan: GDP plunge on drop in exports). The Aso government is hugely unpopular, and finance minister Shoichi Nakagawa's resignation following his controversial behaviour at the G7 meeting may very well be the final nail in the coffin. Internal tensions within the LDP are rising af-ter the still highly popular former premier Junichiro Koizumi publicly criticised prime minister Taro Aso. A rift in the LDP can no longer be ruled out, and it seems more and more certain that the LDP will lose power in the next elections, which need to be held by September this year. This political uncertainty has meant that the fiscal policy response has been relatively weak. The first stimulus package, covering fiscal year 2008/09 (which ends on 31 March), has still not made it through parliament. In the wake of the weekend's G7 meeting, the government has said that it will present a major new stimulus plan for fiscal year 2009/10, but it is extremely doubtful whether it will be able to get it through parliament. There is therefore a major burden of responsibility on the shoulders of the Bank of Japan. But with inter-est rates already close to zero, there is not much leeway here either, despite the BoJ's increased use of unconven-tional means of easing monetary policy (see Flash Comment - Japan: BoJ to start purchasing corporate bonds). It will therefore largely be up to stronger international growth to drag the Japanese economy out of the current slump.

Key events of the week ahead

In Japan, there is a busy week ahead in terms of in-coming data. Wednesday brings the trade balance for January, while Friday brings industrial produc-tion, inflation and unemployment for January and the manufacturing PMI for February.
In China, a quiet week lies ahead, the only important release being leading indicators for February.

Foreign Exchange: CEE meltdown hits EUR and SEK

The past week has seen sharp deterioration in central and eastern European (CEE) currencies. The market has begun to get serious jitters about the consequences of the economic and financial crisis engulfing these previously so successful growth markets. But the crisis has of course also affected Euroland and the CEE countries have now become a millstone around Euroland's neck, not least for many banks exposed to the region that had a nasty shock when Moody's announced during the week that it may downgrade a num-ber of Austrian and Swedish banks with CEE exposure. Exports from Euroland to CEE countries are also in virtual freefall.

The market is therefore now asking itself: who will foot the bill for the heavy debt and imbalances in CEE countries? There is no doubt that German taxpayers are beginning to fear that they will have to reach into their pockets along with the IMF. But whoever ends up with the bill, our emerging market analysts believe that the crisis in the CEE countries is set to worsen in the coming months, and liken it to the Asian crisis of the 1990s (see the article CEE: This looks like a meltdown). Besides these problems to the east, Euroland is also battling with major economic problems internally, best illustrated by the continued widening of the spread between ten-year government bond yields in Germany and economically hard-pressed countries such as Portugal, Greece, Spain and Ireland.

The consequences for the European G10 currencies were plain to see during the week. EUR/USD contin-ued to slide, hitting a new low for the year of 125.1. Even otherwise beleaguered sterling rallied against the euro, despite the Bank of England (BoE) possibly moving toward a zero interest rate and probably commenc-ing quantitative easing in March. However, one of the big losers in the FX market over the past couple of weeks has been the Swedish krona, hit by the combination of an economy exposed to global growth, banks exposed to the Baltic States, the prospect of Saab having to go it alone without assistance from GM or the Swedish government, and the Riksbank moving toward a zero interest rate, or equivalent.

So what should we expect in the weeks ahead? It is important to remember that things can change fast, es-pecially in the FX market (and politics). Should a little risk appetite emerge in global markets, EUR/SEK will fall back and the EUR/USD will rally. It is therefore likely that we will see a slight reversal of the past week's big movements due to positioning in the market, etc. But we doubt that this will make the problems in Euro-land and the CEE countries disappear. On a one-month view, we see the arrow pointing clearly downward for the EUR/USD, and the Swedish krona trading at a relatively weak level. In Sweden, we are focusing particu-larly on GDP data, which we expect to be very weak (see article on Sweden). Sterling is a little trickier. We expect the BoE to commence quantitative easing, maybe as early as March, and interest rates to come down further, and the UK economy is definitely not looking good. But the UK does have less exposure to the CEE countries than Euroland. We anticipate further sterling weakening and would therefore prefer to take a position in the "cable" (GBP/USD) or possibly even against the Norwegian krone.

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Financial Markets Review : FTSE-100 Falls 7%, Gold Near $1000

Sharp falls in global equity markets and weak economic data spurred demand for safe haven assets this week, underpinning the dollar and gold. The pound fell 0.8% to 1.43 against the dollar but strengthened above 1.13 vs the euro as fears over the exposure of euro zone banks to Eastern Europe hit confidence in the single currency. The yen and Swiss franc were unable to capitalise on risk aversion flows and were equally sold against the dollar. Emerging market currencies fell in Asia and Latin America as fears over equity market valuations led participants to shift out of risky assets. Eastern European currencies fell initially but subsequently recovered later in the week on hopes of EU assistance and speculationof central bank intervention.

A combination of weak activity data in the US and the euro zone, and fears about the stability of the financial sector sparked heavy falls in global equity markets and bolstered demand for the dollar. The US Fed revised down its forecast for 2009 gdp growth and revised up its forecast for 2010 growth. It also phased in a de facto inflation target by forecasting a ‘long run’ PCE inflation estimate of 1.7%-2%. Declines below key levels in the major benchmark equity indices - the Dow dropped below 7,800 and the FTSE-100 sank below 4,000 - sparked a rush into government bonds, gold and other precious metals. Gold touched $1000 on Friday, marking a gain of 25% since mid-January. Repatriation flows from emerging markets and worries about the exposure of the euro zone economy to banks in Eastern Europe helped to bid up the dollar.

Sterling held up relatively well, supported to some extent by stronger than expected UK January CPI and retail sales data. Annual CPI fell to only 3% in January from 3.1% in December. Retail sales rose 0.7% m/m in January (3.6% y/y), marking a second successive increase. The data was met with a degree of scepticism considering the weak anecdotal evidence of late from high street sales surveys including the BRC and CBI. The MPC minutes revealed on Wednesday that the BoE voted 8-1 to cut base rates to 1% in February. MPC member Blanchflower preferred an immediate reduction to 0.50%. The minutes also indicated that the Bank could soon move to quantitative easing in a an effort to boost money supply and support the economy.

The euro was one of the leading G7 currency decliners this week as fears intensified of another sharp contraction in euro zone gdp in Q1, after the report of a fall in the composite PMI to a new low of 36.2 in February. Concerns about losses for euro zone banks from their exposure to Eastern Europe and widening sovereign CDS spreads also weighed on the single currency. A summit is scheduled to take place this weekend in Berlin where new measures could be discussed to support the ailing economy.

In emerging markets, Asian currencies and the Russian rouble suffered heavy losses as market participants fled into safe haven assets. $/won cleared 1500 and $/rouble rose 4.5% to 36.19.

Interest rate market review - bonds, cash and swaps

Declines in major equity markets and broadly weak economic data weighed on bond yields and swap rates in the major economies over the past week. However, short-dated sterling yields were supported by economic data and the Bank of England minutes, while supply concerns next week helped push longdated US yields higher. But overall, further weakening economic prospects provided a broadly positive backdrop for bonds. In the UK, annual CPI inflation declined less than expected in January, falling to 3% from 3.1%. The RPI measure remained positive, but only just, falling to 0.1% from 0.9%. Petrol prices and air fares pushed headline CPI lower, but this was partly offset by smaller-than-usual price falls because significant discounting had already taken place in December. Nevertheless, inflation will continue to fall in the coming months. The inflationdata helped pushed 2yr bond yields off lows of 1.29%.

Further support for short-dated yields came from the Bank of England minutes, which suggested some reluctance to reduce interest rates further from the current 1% level, though Blanchflower voted for a larger rate reduction. The minutes suggested that alternative policy measures would be needed to boost money supply in the economy, including purchases of government and corporate paper. Further, official data showed an unexpected rise of 0.7% in January retail sales, supported by further discounting. On the flip side for yields, the CBI industrial trends survey pointed to further weakening of demand, with the total orders index falling to -56 in February from -48. Moreover, public finance figures for January, a month where significant tax revenues are collected, showed a surplus of only £3.3bn compared with expectations of £7bn and £13.9bn a year ago. In the financial year to date, the deficit has soared to £67.2bn compared with £23.1bn over the same period of the previous financial year. 2yr bond yields peaked at 1.64% and ended the week up 13bps at 1.46%. Further out on the curve, 10yr yields fell 14bps to 3.42% and 30yr yields were down 2bps at 4.11%. 5yr swaps edged up to 3.03% from 2.88% and 3m libor were little changed at 2.07%.

In the euro zone, economic data were mixed, but intra-euro spreads widened out again. The German ZEW survey of investors rose to -5.8 in February from -31, the highest since July 2007. This led to a modest rise in German bond yields, but the Dax equity index remained under pressure, pulling yields lower. The euro zone PMI business surveys deteriorated to record lows, with the manufacturing index falling to 33.6 and the services index declining to 38.9, arguing in favour of an ECB interest rate cut at its next meeting in March. Debt issuance this week from France and Spain received decent demand. German 2yr yields ended the week down 6bps at 1.25% and 10yr yields fell 10bps to 3.01%, but 30yr yields rose slightly to 3.72%. Euro 5yr swaps closed on Thursday at 2.74%, the lowest since September 2005, and ended the week down 7bps at 2.78%. 3m libor fell 6bps to 1.88%. Intra-euro spreads over German 10yr yields widened earlier in the week, with Spain peaking at 128bps and Greece reaching a high of 299bps.

In the US, the Philly Fed survey fell to an 18-year low of -41.3 in February, while housing starts and industrial production figures were also weaker than expected. Moreover, initial jobless claims remained above 600k and the FOMC minutes downgraded growth projections. However, downward pressure on bond yields were mitigated by a massive $94bn of issuance due next week. Moreover, unexpectedly strong producer price data also pushed yields higher. 2yr and 10yr bond yields hit 1% and 2.87%, respectively, following the PPI data, but they ended the week lower at 0.92% and 2.74%. Slightly stronger-than-expected CPI inflation provided only limited support for yields. US 5yr swaps fell 12bps to 2.41% and 3m libor rose slightly to 1.25%.

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Weekly Market Commentary

Overview

Another nasty week as equity indices drop, some through the key support levels we have been flagging, the Swiss index leading on worries over bank secrecy and tax evasion. The biggest losers have been the Eastern European ones, plus Austria, as concerns over financial stability and economic prospects there intensify. Austrian ten-year Treasury yields leapt to a record 135 basis points over Bunds as the county's banks have the biggest absolute amount and proportion of GDP in loans outstanding to the region. Currencies were obviously affected, the Polish zloty hitting a record weak point of 4.9300 to the Euro though South Korea managed an ever bigger loss taking it to 1515 to the US dollar, its weakest since the 1997/1998 Asia crisis. The Swedish krona weakened considerably to 1.2700 against its Norwegian counterpart as SAAB filed for creditor protection. In fact the US dollar has gained against every single currency this week and even so spot Gold rallied to $1000.30 and Silver to $14.55 per ounce. Interestingly the Bank of England's Mutilated Notes Department reports a 60% increase in claims for muddy and dusty bills. Some interest rates are lower, Shatz a record 1.15%, though Czech government bond yields and sovereign Irish Credit Default Swaps are sharply higher.

Political and Economic Developments

Almost five million Americans (a record 4.987M to be precise) are claiming unemployment benefit, as are 6.1 million Russians. Daily announcements of huge job cuts are beginning to lose their ability to shock and Toyota UK is one on many firms freezing wages while others are postponing agreed pay settlements. Avon, the world's largest direct seller of cosmetics, is freezing all wages and will cut the travel and entertainment budget by 35%. Others have introduced temporary plant closures and Nasdaq listed Hardinge will cut wages of those not affected by the imposition of a four-day-week. Some will be happy to hear that UK 'Magic Circle' legal firm Allen and Overy are freezing billing rates indefinitely. Companies are also suspending share buy-back programs, scrapping dividends and trimming pension contributions.

UK RPI increased just 0.10% in the year to February, the lowest since 1959's drop of 0.80%, though CPI is still a hefty +3.0%. Likewise in the US CPI 0% (with Core CPI +1.7% Y/Y), the lowest since 1955's –0.70%.

Taiwan cut rates by 25 basis points to 1.25% as Q4 GDP drops a record 8.36%.

Underlying Themes

All too many governments have got out their cheque books furiously signing away IOU money to all and sundry. We have already lost count of how much has been given away, to who, and with little idea who will oversee the spending. One can already almost see it all fleeing swiftly to offshore centres. Worse still, what this largesse has managed to do is change they way 'penny shares' are perceived. Now, instead of being cheap and a possible 'bargain' they are merely candidates for nationalisation.

What to watch for next week Carnival starts in several countries this weekend and continues with public holidays until Ash Wednesday. Monday Japanese January Supermarket Sales, German Wholesale Prices and UK Nationwide House Prices from this day. Tuesday Bank of Japan January 22nd MPC Minutes, Corporate Service Prices, UK BBA Loans and CBI Quarterly Distributive Trades, German February IFO, Eurozone December Current Account and Industrial New Orders. Then US December CaseShiller Home Price Index, February Consumer Confidence and Bernanke's Report on the economy. Wednesday Japan January Trade Balance, German Q4 final GDP, UK Q4 GDP and US January Existing Home Sales. Thursday German February Unemployment and CPI for the various states, GfK March Consumer Confidence, EZ16 January M3 Money Supply and February Business Climate Indicator, US January Durable Goods Orders and New Home Sales. Friday Japan January Jobless, Household Spending, Industrial Production, Large Retailers Sales, Retail Trade, Housing Starts, Construction Orders, Nationwide CPI and Tokyo February CPI. Then UK February GfK Consumer Confidence, EZ16 January CPI, Unemployment, US final Q4 GDP, February Chicago Purchasing Managers and University of Michigan Confidence. Saturday is the 1st March and Japanese firms start preparing for financial year-end.

Positioning and Technical Analysis

Equity indices will push each other lower gathering speed on the way down and top notch Treasury paper will continue to command a massive premium; yield curves should flatten helped along by central banks as their increasingly desperate attempts to stop the rot are probably doomed to fail. Be very careful in the FX market as this is very jittery indeed with several currencies trading at what might turn out to be unsustainable extremes. The general public, whose awareness of financial, economic and social problems is growing, will turn their focus and derision on to the inept political elite. Investors must consider very seriously exactly where and who to entrust their money as in desperate times the temptation to swindle increases.

Mizuho Corporate Bank

Disclaimer

The information contained in this paper is based on or derived from information generally available to the public from sources believed to be reliable. No representation or warranty is made or implied that it is accurate or complete. Any opinions expressed in this paper are subject to change without notice. This paper has been prepared solely for information purposes and if so decided, for private circulation and does not constitute any solicitation to buy or sell any instrument, or to engage in any trading strategy.

forex weekly analysa

Sunday, February 22, 2009

EMU Economic Indicators Preview

Weekly Economic and Financial Commentary

U.S. Outlook

Consumer Confidence • Tuesday

Existing Home Sales • Wednesday

Durable Goods • Thursday

Global Review

Global Outlook

Canadian Retail Sales • Monday

German Ifo Index • Tuesday

Japanese Industrial Production • Friday

Point of View

Interest Rate Watch

Topic of the Week

Weekly Market Wrap Up

This Week's Market Outlook

The Weekly Bottom Line

UPCOMING KEY ECONOMIC RELEASES

Canadian Retail Sales - December

U.S. Durable Goods Orders - January

Weekly Focus: Pressures Mount in Eastern Europe

Euroland: PMI data weaker than expected

Switzerland: Still great uncertainty about the bank sector

UK: BoE preparing to print money - but may not reach zero interest rate

USA: Support package for hard-pressed homeowners

Asia: China praised in G7 communiqué

Foreign Exchange: CEE meltdown hits EUR and SEK

Financial Markets Review : FTSE-100 Falls 7%, Gold Near $1000

Interest rate market review - bonds, cash and swaps

Weekly Market Commentary

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