Weekly US Economy and Currency

Weekly US Economy Update

There was a significant shift in investor attitudes during the week with at least a temporary shift in the trends that have dominated for the past few weeks. The dollar secured relief from stronger than expected US economic data while there was renewed selling pressure on low-yield, defensive currencies.

Following the latest FOMC meeting, the Federal Reserve cut the Fed Funds rate by a further 0.25% to 4.25% . The discount rate was also cut by 0.25% to 4.75%.In the statement accompanying the decision, the Fed stated that uncertainty over growth and inflation had increased. There were also comments that consumer spending and business investment and shown signs of weakening slightly while the housing adjustment was intensifying.
Core inflation was described as under control, but there was still unease over potential pressures and the inflation data was a cocnern. Headline producer prices also rose very strongly by 3.2% in November, the highest increase for over 30 years as energy costs increased, although the underlying increase was held to 0.4% for the month. The consumer inflation data was also higher than expected with a 0.8% headline increase and a 0.3% core increase.

As credit conditions remained very tight, the Federal Reserve announced a series of fresh liquidity injections. A wider range of collateral would be accepted and the interest rates would not be set at penal rate in an attempt to free up the credit markets.

Retail sales rose strongly by 1.2% in November while there was a 1.8% underlying increase. Although sales were boosted by a strong rise in gasoline sales, there was still a solid underlying increase which boosted confidence over spending trends.

The US trade deficit increased slightly to US$57.8bn for October after a revised US$57.1bn the previous month as higher oil prices put upward pressure on imports.

Weekly Currency Update

The German ZEW index weakened to the lowest level since 1993 at -37.2 while ZEW institute warned that the strong Euro was having a damaging impact with growth faltering.
The dollar weakened to lows near 1.4750 against the Euro, but then strengthened sharply to test important Euro support levels in the 1.45 region on Friday.

The Japanese Tankan index for major manufacturers fell to +19 in December from +23 the previous month which undermined confidence in the economy, although capital spending plans were revised up.

The yen hit selling pressure beyond the 111.0 level against the dollar and weakened to lows near 113.0 as carry trades found renewed buying support.

The Swiss National Bank left interest rates unchanged at 2.75% following the latest quarterly meeting, the first time rates had been left on hold for two years.

The bank upgraded its inflation forecast for 2008 slightly, although the bank expressed no urgency over the inflation situation. Bank chairman Roth also warned that the banking difficulties would have some negative economic impact.

A renewed interest in carry trades pushed the franc to lows beyond 1.67 against the Euro while the Swiss currency also weakened to 1.15 against the dollar.

The UK housing data remained weak with the RICS index recording a further drop to -40.6% in November from -23.4% previously which was the weakest reading for over two years as underlying confidence in the housing sector continued to deteriorate.

The labour-market data was firmer with unemployment falling by a further 11,000 for November. Headline earnings growth remained under control with a decline to 4.0% in the year to October from 4.1%.

Wider inflation fears were still a significant factor with inflation expectations rising to a nine-year high while headline output producer prices inflation was also at a 5-year high, although the core data was more favourable with a 2.1% annual increase.


Sterling secured further support weaker than 0.72 against the Euro over the week while general dollar strength pushed the UK currency back to lows around 2.0250 against the US currency from a peak above 2.05.

Weekly Expected Economic Data
Week of December 17 - December 21
Date IST ET Release For Consensus Prior
Dec-17 19:00 9:30 Current Account Q3 -$183.0B -$190.8B
Dec-17 19:00 9:30 NY Empire State Index Dec 21 27.4
Dec-17 19:30 10:00 Net Foreign Purchases Oct -$26.4B
Dec-18 19:00 9:30 Housing Starts Nov 1190K 1229K
Dec-18 19:00 9:30 Building Permits Nov 1150K 1170K
Dec-19 21:00 11:30 Crude Inventories Dec-14 NA -722K
Dec-20 19:00 9:30 GDP-Final Q3 4.90% 4.90%
Dec-20 19:00 9:30 Chain Deflator-Final Q3 0.90% 0.90%
Dec-20 19:00 9:30 Initial Claims Dec-15 NA 333K
Dec-20 20:30 11:00 Leading Indicators Nov -0.10% -0.50%
Dec-20 22:30 13:00 Philadelphia Fed Dec 8 8.2
Dec-21 19:00 9:30 Personal Income Nov 0.50% 0.20%
Dec-21 19:00 9:30 Personal Spending Nov 0.50% 0.20%
Dec-21 19:00 9:30 Core PCE Inflation Nov 0.20% 0.20%
Dec-21 20:30 11:00 Mich Sentiment-Rev. Dec 74.3 74.5

FOMC Meeting

Regarding the FOMC meeting, we expect a 25 basis points cut of the FF target rate, most likely accompanied by a bigger 50 basis points rate cut of the discount rate. The market has trimmed back its expectations for a 50 basis points cut, that were still rated more than even at the start of last week. Currently, the market discounts still a 30% chance on a 50 basis points rate cut. Two weeks ago, it looked that a clash between markets, desperately looking for lower rates, and the Fed hinting that no immediate rate cut was needed (October Minutes, talk of some governors like Plosser) was imminent. However, at that time, the top of the brass band (Kohn & Bernanke) stepped in, saying that financial conditions had worsened sharply since the previous meeting and hinting the Fed would act to contain the stress. It clearly improved sentiment (equities rebounded) and suggested to some in the markets that the Fed might go for a 50 basis points cut to get ahead of the curve (especially re-garding the credit problems). However, Bernanke, very much looking for a broad consensus, will probably try to build consensus for a 25 basis points in an attempt to keep most governors on board. This was the main reason we stick to our 25 basis points call. Recent eco data, payrolls-ISM, do not point either to the need for a big shot. Money market strains and difficulties at some big US banks on the other hand suggest that a bigger cut in the discount rate would be appropriate (even a 50 basis points cut in the FF would from this angle be not so silly). Also Kohn hinted that the previous cut of the discount rate had not had the expected result and so we might see the Fed making the discount window facility more attractive by narrowing the spread with the FF rate. If the Fed goes 25, we suspect that the statement will leave the possibility of more easing open, without going so far as to hint for another rate cut. With signs that credit

OPEC to keep production steady

OPEC to keep production steady

OPEC has decided to keep output ceilings steady, Libya's chief oil official said Wednesday. Other delegates said the 13-nation group will meet again in January to review that decision.

The announcement by Shokri Ghanem appeared to reflect OPEC concerns that it would be counterproductive to raise production ceilings at a time when prices have retreated about 10 percent from recent record highs.

There was no immediate formal confirmation. But just hours before Ghanem's comments, a three-nation OPEC advisory panel foreshadowed such a decision by recommending maintaining the status quo.

Reduced demand growth forecasts from both OPEC and the International Energy Agency have pushed prices down recently, along with the extra oil reaching markets from the last OPEC production increase and expectations of increased output from the United Arab Emirates.

A new U.S. intelligence report concluding that Iran halted its nuclear weapons development program in 2003 is also helping to keep a lid on the market. While oil prices are still up nearly $40 from the start of the year, they are down about 10 percent from the record near $100-a-barrel levels established last month.

Source: Bloomberg

Crude Oil - Opec Meeting

Petroleum markets brace for OPEC meeting –

The petroleum markets are nervously awaiting tomorrow’s OPEC meeting in Abu Dhabi. The market seems to be roughly split on the question of whether OPEC will raise its production. The reality is that Saudi Arabia is the only country with any significant excess capacity, which means OPEC’s decision as usual hinges mostly on what Saudi Arabia wants to do. The Saudi oil minister said last Friday that, “There is absolutely ample supply. The price movement has nothing to do with the fundamentals of the market.” That suggested that Saudi Arabia is not in favor of raising production since according to the Saudi oil minister’s view, supply is not the problem. OPEC as a whole is also concerned that the global economy may be on the brink of a downturn, which would mean that a sudden glut of oil could emerge if OPEC were to increase production at the same time as the global economy and oil demand turn lower. Since posting a record h igh of $99.29 two weeks ago, crude oil futures have sold off by a total of about $12 per barrel.

The market has moved lower on technical long liquidation pressure and increased concern about lower oil demand from high oil prices and weaker global economic growth. Oil prices also moved lower on the possibility that OPEC tomorrow might decide to raise production a notch. OPEC at their last meeting in September decided to increase their official production quota by 500,000 bpd. In fact, OPEC production (excluding Iraq) rose by +305,000 bpd in October from the previous month, with 100,000 bpd of that increase coming from Saudi Arabia. Since OPEC has yet to fully implement their previously announced 500,000 bpd increase, OPEC members may believe it is premature to announce another hike.
Source - Bloomberg

Copper – Fundamentals Remain Bearish : Kamlesh Jogi

Copper – Fundamentals Remain Bearish

We have seen a short covering in Copper prices last week and market pushed down as Contract rollover and expiry settlements are over in International and national exchange.
I personally expect market to remain bearish in Short run and expect market to touch Rs. 220 per kg in MCX feb 2008 Contract.

Fundamentals:

· Copper fell in London, tracking stock markets lower, on concern slowing U.S. economic growth will curb demand for industrial metals. Nickel and zinc also dropped.

· The MSCI World Index of stocks fell 0.2 percent. Federal Reserve Bank of Boston President Eric Rosengren said yesterday U.S. expansion will be ``well below'' its long-term pace for two quarters. The U.S. is the world's second-largest user of copper and aluminum after China.

· Copper, which tends to track movements in global growth, is poised for the smallest gain in six years as bad debts in the U.S. housing market have slowed bank lending and curbed consumption in the world's largest economy.

· Japanese manufacturing orders, driven by residential and office construction, may drop 17 percent in a year because of declining housing starts, said Takashi Ishizawa, a real-estate analyst at Mizuho Securities Co.

· A housing slump will probably erode demand for industrial metals, including copper and nickel, according to the Japanese Electric Wire and Cable Makers' Association and the Japan Stainless Steel Association.

· Copper stockpiles monitored by the LME declined 1,325 tons, or 0.7 percent, to 188,175 tons, it said in a daily report, the biggest one-day drop since Sept. 17. They have jumped 44 percent since the end of September.

Technical Levels:

MCX Feb 2008 contract is having major resistance level at 272.90 and 283.10 while major support is seen at 259.10 and on the break of the same market may test the level of 242 and 220.

Recommendation;

Traders are advised to create short position on small pullback, market may give small up side correction/Short covering, can be used as Selling opportunity. Traders should become more cautious if market breaks major resistance levels.



Author:

Kamlesh Jogi
Commodities research Analyst

Mail me at: kamleshjogi@gmail.com


Disclaimer: Keep reasonable stop loss levels, follow them very strictly and keep trailing the stop loss. The information contained in this article is collected from reliable sources and believed to be true. Opinions expressed are those of the individual, and readers are urged to exercise their own judgment in trading.