50 Year Low US Interest Rates?
As the stage is set for serious problems among U.S. auto makers and a terrible retail season this Christmas, it's hard to see any indication of where and when these shark infested waters are going to calm down. Until then, here's another week in review.
Starting at home
There was a lot of major news in the U.S. this week. The Empire Manufacturing report was released, and is shoed a record low reading of a -25.4 from -24.6, to reach its lowest level ever. The huge cut back in manufacturing as occurred in line with a general economic downturn and a huge downturn in consumer demand. The dour outlooks for holiday spending and massive amounts of monthly job cuts suggest this won't get better anytime soon.
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The USD Net Long-term TIC Flows report was released, showing a large infusion of cash into the economy, but this was mostly ignored as most of this money was already figured into the economy since it came from the $700 billion bail out.
The Consumer Price Index (CPI) was also released this week, and showed a rare drop in consumer prices the past month of a staggering 1%. Plummeting oil prices have been the main catalyst in this, although the hard economy and massive lay-offs have forced many retailers to slash prices, as well. For the Year over Year, prices are still 3.7% higher than last year, but as further drops are expected, this could disappear, as well. This is the largest consumer price drop in over 61 years and now brings fear of deflation.
The USD Housing Starts showed 11,000 more new houses being built than expected, but in the current economy this isn't going to move the market until there are enough people who can afford to buy them.
The Big 3 automakers went to Washington D.C. to ask for billions in hand outs, and were put through the crucible. While it's hard to believe some type of assistance won't eventually be given, the message was clear at the meetings: the public's general hatred towards CEOs of large companies has become a political currency, and without huge changes and an actual plan to fix things, the "free money" is going to dry up.
As justified as that is on some level, as the American auto industry has been poorly mismanaged for years and dug themselves into their own hole, to have even one of those three companies fail would have huge repercussions on the economy.
The minutes of the Federal Reserve meeting show that rates may be slashed to 50 year lows, as the suggestion of a near zero interest rate policy came up if the current economy continued to worsen at such an alarming pace. There hasn't been a sub 1.0% interest rate in nearly 50 years.
The U.S. economy contracted -0.3% in the third quarter confirming recession, and as unemployment rising rapidly, it almost goes without saying that interest rates will continue to drop. The only question is: how far?
The stock markets continue to plunge. It's hard to believe the stock market was considered way down at 12,000 back in May, but the Dow has plunged to levels that haven't been seen since March 2003, and the S&P is faring even worse. The scariest part? If some automakers fail this could go much lower.
All in all, not a very good week on the American front.
A little to the North
Canada released a couple of important reports this week, as well. The CAD Leading Indicators came out for October, showing a decline of -0.4%, twice as bad as expecting. So for anyone hoping for good news on things to come in Canada, it's not there in the short term.
The Canadian Consumer Price Index (CPI) was also released, showing a 1% drop in consumer prices for the month, showing the same decline many other economies are seeing as fuel prices plummet. This still keeps the overall YoY CPI at 2.6%, a pleasant .5% better for consumers than expected, although deflation now becomes a legitimate worry.
Across the pond to the Queen
The British CPI report was released, showing that the UK pulled back from record high inflation. Inflation here is falling at its fastest pace since recordkeeping began back in 1997, as consumers saw slight relief in a .7% decline in inflation. Many investors thought this could give the Bank of England the ability to cut interest rates and try to help stimulate a slumping economy already in recession, and they were correct.
The Bank of England minutes were released on Wednesday and showed the voted was 9-0 to cut the interest rates 150 base points from 4.50% to 3.00%, and signaling that more cuts might be on the way. The hope with further comments about interest rate cuts is that there will be enough signs of recessionary pressures easing to encourage the BOE to stimulate growth and maybe even turn things around.
At least in the short term, however, this seems unlikely. Retail spending in the UK fell 0.1%, which is the second straight month with a drop. However, a drop of 0.9% was predicted, making a mere -0.1% actually a pretty strong showing. By the same token, employment opportunities are drying up, indicating that recession or stagnation are still very real possibilities.
To Mainland Europe
While several minor reports were released, there was only one major report from the European Union, as well as one from the Swiss. The Euro-Zone trade balance was released for September, showing a trade deficit of 5.6 billion EUR, which was less than the 6.0 billion deficit predicted.
The Swiss released their trade reports, as well, and had a surprise as Switzerland's trade surplus greatly surprised people by widening as import demands faltered. This caused the trade surplus to widen from 1.46 billion CHF to 1.84 billion CHF. This was due to a 5.5% decline in imports.
On the worrisome side for the Swiss, demands for exports fell 4.6%, and the Euro-Zone, Switzerland's biggest trading partner, has slipped into recession. This continues the trend of what looks like a spreading global recession, but for now the Swiss can only wait and see.
To the land of the Yen
Japan's economy contracted even more than economists expected, contracting 0.4% in the third quarter. -0.4% is far worse than the +0.1% many economists were predicting, and confirms that Japan is in recession.
The Tertiary Industry Index showed that Japan's service demand fell in August as consumers cut spending, showing an overall drop of 1.4%. Household confidence is near a record low, and Japan's Nikkei has lost over a quarter of its value. That's a lot of bad news for the world's second largest economy.
The Leading Index for Japan had a score of 89.4, which was exactly as it was predicted, making at least one major report that didn't dump some unexpected bad news onto the already recession ladled economy.
The trade balance report wasn't so kind. Japan's exports declined at the fastest pace in almost seven years in October, falling 7.7% from a year earlier, the biggest one month drop since December 2001. This is a reflection on the world wide state of the economy, and will most likely continue to dampen reports in the months to come.
The Bank of Japan met and decided to keep the key rate at 0.3%, but the report comes out that they will consider injecting more money into the financial system to help prop up an economy that fell into recession.
Finishing with the Aussies
Australian retail sales actually rose 0.1%, which was less than forecast. While this is better than many other nations who are actually seeing declines, this still signals an economic slowdown but it did open the door to cutting interest rates. The Australian central bank cut borrowing costs again, down to 5.25%, a cut of three quarters of a point. The hope here is to keep Australia from falling into a recession while the rest of the world weathers out the storm.
In Conclusion
In conclusion, we're seeing a lot of confirmation on what we expected. Many of the world's economies are falling into recession, and there aren't a lot of really positive signs that anything is going to change in the short term. In some ways, this makes trading the Forex an even better deal because there have to be winners - while no one can tell anything with money markets and stocks right now.
Hopefully this turns out not to be as dire as many economists are beginning to fear. Do your homework, check the trends, and hang in there.
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Market Sentiment
In this section, we will try to gain further insight into the Forex market. We will do this by looking at a poll of market participates and what I call global strength.
Currency Poll
Polls are used to measure the sentiment of market participants. The results are used as a contrarian indicator because they express optimism at market tops and pessimism at market bottoms. Therefore, a high percentage of votes can be used as an indication that the market will do the opposite.
Our poll is only concerned with how the four major pairs will close the next week: up, down, or even. The results are below.
Poll Results:
EUR/USD
Close Up: 44%
Close Down: 49%
Close Even: 7%
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USD/JPY
Close UP: 37%
Close Down: 52%
Close Even: 12%
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GBP/USD
Close UP: 35%
Close Down: 62%
Close Even: 3%
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USD/CHF
Close UP: 59%
Close Down: 33%
Close Even: 8%
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Global Strength
Global strength looks at the individual currencies to determine how they are doing globally on a year to date basis. My hope is that this will give you a view of the market typically not view, thereby; giving you an edge. We will look at the following currencies: USD, EUR, GBP, CHF, JPY, CAD, AUD, and the NZD. We will compare each currency separately and then we will compare them all together. The currencies are shown in number of pips up or down on a year to date basis across the pairs shown. (Note: Just click on the picture to view.)
USD
EUR
JPY
GBP
CHF
CAD
AUD
NZD
All Currencies
Good trading,
Jason Fielder
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