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