Stocks Back in the Tank; Investors Throwing in the Towels

Investors didn't need any more news to tell them to sell. They should have been selling all along. Some just got the memo today that, a) the economy is faltering, b) the US dollar continues to lose value in comparison to other currencies, c) gas prices are through the roof, d) food prices are following gas prices, e) the economy is headed for a deep recession, f) the Fed rate cuts don't matter, g) corporate profits have been slowing for the past six months, etc., etc.

Why go on? The news has been nothing but bad. In fact, it's worse. The news has been horrible with mentions of worst since 1981, largest drop in two decades, and the like.

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So it should come as no surprise to anyone that stocks dropped like rocks over the past two days. We have thieves running Wall Street and imbeciles running the government.

Dow 12,266.39 -315.79; NASDAQ 2,271.48 -60.09; S&P 500 1,330.63 -37.05; NYSE Composite 8,962.46 -259.42

The decline today was not limited to any particular niche. All kinds of stocks were hit across all sectors. Declining issues beat advancers, 5206-1103, that's nearly a 5-to-1 ratio. New lows continued their dominance over new highs, 420-77, completing four straight months with new lows winning every day (except for two days in November).

There has not been a single day in 2008 in which there were more new highs than new lows. Get used to it, because things aren't going to get any better any time soon.

Oil priced a bit lower today, down a whole 71 cents to close the week at $101.84. Gold and silver hit new record highs again, at $975.00 and $19.92, respectively.

With the markets having taken another downturn, the next move should be to plumb the depths of January 22-23. The Dow closed today less than 300 points above the most recent closing low, though it is still 800 points above the intraday lows. Both could, and probably will, be tested within the next two weeks.

And by the way, did anyone see the rescue plan for Ambac Financial, the announcement of which sparked a 225-point rally on Friday? No? Really! I said previously that the announcement was bogus as is the supposed plan, along with S&P continuing to rate the company's debt at AAA. It was nothing but a sleazy, insider trick and the jig is up. The phony rally is over.

Wise words to follow: Gambling is the act of creating risk where there is none; investing is managing risk that exists. There's certainly plenty of downside risk to go around. Anybody buying now is engaging in gambling.

NYSE Volume 4,354,759,000
NASDAQ Volume 2,516,537,500

Economic Outlook: Will Trichet Charge the Gun?

This week's highlights

No, we do not believe that he will do that at the monetary-policy meeting next week. But he is carefully considering whether he needs to pull out the drawer with the cartridge or the interestrate weapon. The growth scenario in Europe has become more uncertain and the risk that American growth caves in - with a spill-over effect on the European economy - has increased over the past month after a string of very weak economic indicators.

We therefore expect the ECB to change its estimates when it presents new growth and inflation projections. With respect to growth, this means that the picture has become more negative and we therefore expect the ECB to cut 0.2-0.4 percentage point off its current growth estimate for 2008 which is 2.0%, i.e. growth will fall below the potential growth rate.

This is a growth scenario which matches our own growth estimate at the moment, but also a growth estimate which is currently under pressure by the weak American indicators. We still expect growth around 1.75% this year when growth will be weakest in the first six months but rise slowly in the last six months given that inflation falls and thus contributes to lifting the purchasing power of consumers, which will boost consumer spending a little.

With respect to inflation, the ECB is likely to revise up its inflation estimate from the current 2.5% to about 2.7%. This is a growing concern at the ECB. A current rate of inflation at 3.2% is much too high to the liking of the ECB. And it is the highest rise in the history of the ECB's monetary-policy.

Although the ECB may see and also say that a very large part of the high rate of inflation can be ascribed to temporary factors - high energy and food prices - the bank's concern is not removed with a stroke of the pen. The reason is that it fears that the high rate of inflation will lead to second-round effects, including that the current inflation rate will give the German unions another alibi in the on-going collective bargaining - in addition to sharply falling unemployment - to demand high wage increases.

This fear means that the ECB will be somewhat hesitant to cut interest rates although we assess that the high rate of inflation in the first six months of 2008 will fall towards 2% at the end of the year. However, a somewhat weaker growth picture than the current may prompt the ECB to react - also because slower growth puts a damper on the inflationary pressure - although the market forces are not always known to dampen prices and wages in all European countries due to rigid structures in the labour market. This means that if the growth scenario deteriorates and thus also the ECB's assessment of the growth scenario, the first interest-rate cuts may come already in the last six months. We still expect unchanged ECB rates for the rest of the year.

This week's other highlights

- The US: employment report and ISM for both the manufacturing industry and the service sector
- Japan: monetary-policy meeting at the Bank of Japan
- The UK: monetary-policy meeting at the Bank of England and PMIs

Monday

The US: ISM Manufacturing - February

ISM is the nationwide sentiment indicator for the manufacturing industry and gives a good indication of the development in industrial production and GDP. ISM may also signal whether the manufacturing industry has been hit by the financial crisis and the slowdown in the housing market. Moreover, it indicates how close the US is to a recession. Usually, ISM must fall to around 42 before the US is in recession.

The regional indices announced over the past few weeks - NY Empire State and Philly Fed - are both pointing towards a weak ISM number for February. Moreover, the leading indicators of the ISM Index: order intake, order books and stocks also point towards a weaker ISM overall.

Since the last announcement, the negative view has been strengthened by weak data about consumer confidence, the struggling housing market and a weak development in employment. We therefore expect ISM to fall after its rise in January, when it rose from 48.4 to 50.7.

In addition to the index, focus will be on new orders, production, employment and the price index.

The UK: PMI manufacturing - February

For the past couple of months, PMI Manufacturing has been falling, and in January it was 50.6 against 53.9 in November 2007. This means that the index is now at its lowest level since August 2005.. The order index pulled down overall PMI, falling in January to 49.7 which (since it is below 50), indicates a fall in new orders. It has not happened since 2005. This is partly due to export orders - the index of export orders fell to 47.6 from 55.3 in November 2007. Expecting slower growth in the UK as well as the important business partners the US and the euro zone - particularly during the first six months of the year - we find it likely that PMI will remain low or fall further in February.

Wednesday

The US: ISM Service - February

Moreover, the sentiment indicator ISM for the service sector, is important since it accounts for about 80% of the economy. The financial sector is part of the service sector. This is thus one of the indices where any consequences of the financial crisis are reflected. ISM for the service sector has so far been represented in the form of a production index, but as from January the ISM was calculated as a weighted index as is the case for the manufacturing industry. This will undoubtedly increase the interest in the ISM for the service sector, since it is expected to make the index more representative and less volatile.

The service sector index plunged in January to 44.6 from 53.2 (our calculation based on the indices included in the aggregate index). Although the growth situation has deteriorated in recent months and there was a certain degree of unrest in the financial markets in January, it is hard to see that the situation should have deteriorated this much in such a short time. We therefore expect ISM Service to stage a small come-back in February, albeit remaining at a low level. For instance, the order index fell sharply, and the order book thinned slightly in January. Overall, it does not point towards great activity in February.

The US: ADP employment - February

The ADP employment report gives an indication of the rise in employment in February (job report to be released on Friday). The survey covers only the private sector and is based on reports from the agency which manages wage payments to about 24 million employees (ADP). It corresponds to a little more than 20% of the overall staff in the US private sector. As it refers only to the private sector, the trend growth in public-sector employment of just over 21,000 a month should be added to the aggregate number of employees.

However, ADP is not always the best indicator of employment growth. For instance, ADP greatly overestimated growth in January when ADP reported a rise of 130,000 persons, whereas the overall employment fell by 17,000, and employment in the private sector rose by a mere 1,000 persons. This means that ADP's estimate is likely to be regarded with scepticism.

The UK: PMI service - February

PMI service rose marginally in the past two months after a sharp fall during the period September-November. The index is now at 52.5 against 51.9 in November 2007 - the lowest level since May 2003. In August 2007 PMI service was 57.6. We expect that PMI service will fall slightly again as a result of slower-thanexpected growth - not least in consumer spending - a slowdown in the housing market and continued financial turbulence.

Thursday

The US: pending home sales - January

The number of pending home sales is a relatively good leading indicator of home sales. Pending home sales cover only about 20% of all home sales but are nevertheless a good indication of home sales in the following two months.

After two months of increases in pending home sales, we saw a fall in the past two months and they have therefore stabilised in the past four months just below index 90 (85.9 in December). However, home sales are still falling, though at a more measured pace than in Q3 2007.

Interest rates and house prices have fallen, and consumers' disposable income for home purchases has risen by more than 17% since July 2007, pointing to an improvement in the housing market. On the other hand, the number of mortgage loan applications indicates falling home sales, and the combination of a large volume of homes for sales and falling house prices makes it less attractive for the speculative buyer to enter the market.

We expect the number of pending home sales to remain at the low level below 90 in January. This is an indication that we do not expect any decisive turn in home sales in coming months.

The UK: monetary-policy meeting at the BoE

We expect the Bank of England to leave interest rates unchanged at 5.25% following a quarterpoint cut at the meeting in February. Since the last meeting, the inflation report with updated inflation and growth forecasts from the BoE has been announced. The report indicated that the BoE will not lower interest rates so much as market participants had expected at some time, but the report still emphasised that lower interest rates are necessary. The monetarypolicy committee (MPC) is currently faced with an expected sharp slowdown in growth combined with rising inflation in the short term.

Inflation was above the BoE's target of 2% y/y in January, and several indicators signal that it will rise further in coming months. The majority of the large gas and electricity suppliers have announced that they will increase prices in January and February, and a new calculation method for the consumer price index as of February will mean that these increases will affect inflation immediately (previously it took four months before such price changes were reflected in the inflation rates).

With respect to growth, retail sales delivered a surprise with a significant increase in January, but there are many indications that they were driven by an unusual level of sales in January, and the CBI survey of retail sales in fact indicated that retail sales will decline again in February. Furthermore, figures from the housing market still indicate signs of weakness, which will also contribute to slower growth in future.

Hence, nothing much has changed compared to the picture given by the BoE in the inflation report from the last monetary-policy meeting. The MPC is still facing an important decision since it has to weigh the risk that a significant decline in growth will pull inflation down below the target against the risk that rising inflation and high inflation expectations will result in a more lasting high inflation rate above the target in the longer term. We therefore expect interest-rate cuts from the BoE will take place gradually, i.e. we expect interest rates to remain unchanged over the next two months and then we expect an additional quarter-point cut to 5% in May.

Japan: monetary-policy meeting at the BoJ

The Bank of Japan has left interest rates unchanged at 0.5% since February last year, and we do not expect changes within the near future. According to the monthly report from February, the BoJ still expects moderate economic progress although growth seems to be slowing down. The BoJ also expects headline inflation to rise due to rising energy and food prices for the short term and higher growth for the long term. Core inflation (exclusive of food and energy) was still below zero in December.

Few economic indicators have been released since the latest meeting at the BoJ on 14 February. Figures for the industrial production in January have been released. The industrial production has fluctuated quite a lot since mid- 2007 and declined in January by 2% m/m, the largest fall since the same month the year before. However, in y/y terms, it is still at a fair level around 2½%. The manufacturers also expect the production to fall by an additional 2.9% in February followed by a rise of 2.8% in March. This means that the production will fall by 2½% in Q1, which will then be the largest fall since Q4 2001.

Given the prospects of slower growth in Japan and in the global markets, we do not expect the BoJ to raise interest rates again within the next months. A hike will not be mentioned again until core inflation (exclusive of food and energy) will start to show a convincing positive trend. Uncertainty about the development in the global economy increases the probability of slower-than-expected growth in Japan, which will keep the BoJ from raising interest rates in the short term. Therefore, we do not expect interest rates to be raised until late 2008.

Germany: industrial orders - January

New orders have been solid, and they are an important indicator since they indicate the future development of the industrial production. On the basis of the development in PMI new orders for Germany - this index has been below the long-term average in the past four months - we assess that new orders will now also be affected. We therefore expect a weak order intake in January.

Friday

The US: job report - February

As usual the job report is a very important economic indicator from the US. And focus on the job report has only grown after the surprising data in January when employment declined by 17,000 - the first fall in employment since August 2003. The employment indices for manufacturing and service for January indicate that a significant upward revision of the employment data in January should not be expected. Thus employment as indicated by ISM service declined from 51.8 to 43.9 (the lowest level since February 2002), and employment as indicated by ISM manufacturing declined from 48.7 to 47.1 (the lowest level since September 2003). After a sharp increase in unemployment in December to 5% from 4.7% unemployment declined slightly in January to 4.9%.

More important employment indicators for February will be announced next week - e.g. the ISM employment index and ADP. However, other economic indicators have been released which indicate that the labour market continues to weaken:

The number of jobless claims has been quite high in recent weeks. The four-week moving average was 360,500 in week 7, which is the highest level for the average since 2005. In February Conference Board Consumer Confidence stated that it has become increasingly difficult to get a new job (the jobshard- to-get index rose) and furthermore, there are not so many vacant jobs any longer (the jobs plentiful index declined).

With respect to the regional business indicators, the index of the Empire State dipped below zero for the first time since 2003, while the corresponding Philly Fed index increased in February.

Focus will also be on the wage development in the job report. Following significant wage growth in December of 0.4% m/m, average wages rose at a more moderate pace in January by 0.2% m/m. The annual rate of increase in wages has declined slightly in recent months to 3.7% y/y in January from. 4.1% in September. We also expect moderate wage growth in February.

Germany: industrial production - January

For December, the industrial production increased by 0.8%. This happened after two months of small declines in the industrial production, and with an average monthly increase of 0.4% over the past six months, the industrial production has shown quite a solid development and perhaps a better development than that of PMI manufacturing. The increase in orders in recent months - in spite of the fall in December - points to an increase in January. For the period ahead, a fall in the number of new orders is expected, which is also expected to spill over into the industrial production.

Jyske Markets - FX Research

FX Briefing: Divergent Monetary Policies Lift Euro Over 1.50

Highlights

- EUR-USD hits new all-time high of 1.5240, USD-JPY approaches 104
- Fed representatives indicate further monetary policy easing
- Diminishing growth momentum in EMU makes interest rate cuts likely

Divergent Monetary Policies Lift Euro Over 1.50

It took the euro three months to break its previous record of 1.4968. Many people had no longer believed that this could happen. But this week, EUR-USD sailed past the 1.50 mark for the first time ever. The European single currency is currently quoted at 1.52, and the new all-time high is now 1.5240. The yen was also boosted by the dollar's weakness. Supported by favourable Japanese economic data, USD-JPY is close to 104 at the end of the week. This is the strongest the yen has been since the end of 2004/beginning of 2005.

The move above 1.50 was triggered by a slight improvement in the ifo business climate index, and a steep drop in US consumer confidence. But the real reason is more deeply rooted: it lies in market participants' impression that the European and US economies, and their monetary policies, are drifting apart.

That diverging monetary policies in two regions trigger exchange rate adjustments is nothing new. By January at the latest, the Fed had abandoned its reservations concerning inflation risks and has been pursuing a clearly expansionary policy since then. Various Fed members, including Ben Bernanke, have explained that particularly aggressive monetary policy action is advisable to guard against “financial accelerator” effects. At the same time, the latest economic indicators confirm that the slowdown in the US is now well underway:

- In the fourth quarter, GDP growth in the US slowed to an annualised 0.6% qoq, and there was actually a drop in domestic demand.
- Existing and new home sales, and declining prices, show that the housing market contraction is still ongoing.
- The January labour market report and the indicators available for February, particularly initial jobless claims, prove that the downswing has started to affect the labour market.
- Consumer confidence has now slumped to levels usually associated with the onset of a recession, and retail sales and personal spending are, at best, stagnating, if the price effects are excluded.
- Rising prices, especially for energy and food, are curbing purchasing power.
- For the last few months, industrial production has been more or less stagnant, in fact it is actually trending down: the February surveys for the manufacturing sector have deteriorated markedly.

The ECB, on the other hand, seems to be showing little inclination to follow the Fed's example. Although it is expecting growth to weaken, it is hoping that private consumption and foreign demand, especially from buoyant emerging markets, will keep the economy going. In this growth scenario, and in view of higher cost pressure due to increased commodity prices and wage agreements, the ECB is still emphasizing the inflation risks. Indeed, Bundesbank president Axel Weber has remarked on more than one occasion, that the markets' rate cut expectations are not in line with a stability-oriented monetary policy.

Diverging monetary policy expectations and the (expected) widening of the interest rate gap as a result, have been largely responsible for EURUSD breaching the 1.50 mark. However, with regard to the impending ECB governing council meeting, there is a risk of a market correction. At the beginning of February, the ECB refrained from propagating a growth rate close to potential, and deliberately so, in our opinion. Instead, it is now only talking of “ongoing growth”. At the same time, the ECB underlined the particular macroeconomic uncertainty in connection with the credit crisis.

At the meeting next Thursday, the ECB will introduce its latest staff projections. We are expecting the inflation forecast to be raised both for this year (middle of the range 2.6-2.7%) and for 2009 (to about 2.0%). However, we are also expecting the growth projections to be cut to around 1.6% for this year and 1.9-2.0% for 2009. The uncertainty of the forecast is likely to be indicated by a spread that is wider than the ± 0.4 percentage points usually projected in March. We could envisage a range of 1.0 to 2.2% for 2008.

We regard the lower half of the range as realistic; the growth risks in the euro area have increased rather than decreased over the last few weeks: firstly, higher energy and commodity costs are squeezing companies' margins and households' purchasing power. Secondly, the appreciation of the euro is hurting companies' price competitiveness. Exports from the eurozone have already been losing momentum significantly over the past few months. Moreover, exchange rate developments seem to be increasingly affecting location and thus investment decisions. Thirdly, higher credit costs, tighter lending conditions and economic uncertainty will probably dampen investment activities. This will be particularly noticeable in residential construction, but is also likely to have an impact on investment in machinery and equipment.

Economic sentiment is constantly declining in the euro area, and the ECB Council will have to take this into account. We forecast that in the next few weeks, its monetary policy stance will shift further towards interest rate cuts. This will cap the euro's rally.

BHF-BANK

Weekly Market Commentary

Overview

Big moves and lots of records tumbling as many are belatedly forced round to our way of thinking. Centre stage was a rapidly shrinking US dollar: $1.5240 to the Euro, CHF 1.0425, down to Yen 104.00 and even weaker against some Eastern European currencies. Sterling did not keep up and dropped to £0.7678to the Euro. All sorts of commodity futures, priced in dollars of course, saw new record highs and the CRB Index hit a new record 413.78. Best performer this month was LME Palladium up 50%, then Platinum up 25%, as were Oats and Wheat. The latter saw frantic gyrations on the CBOT as another 'rogue trader' racked up a $142M loss on his personal account. He has been sacked. The Egyptian Hermes Index is the only one to post a new high (99,643). All other indices tried to rally but have ended mostly down on the week. Interest rate futures are higher, and Treasury yields lower, as systemic problems widen; index-linked yields are lot lower. In his semi-annual testimony to the House Financial Services Committee Fed Chairman Bernanke spoke of their preference to alter rates at FOMC meetings and of the possibility of small banks collapsing. Traders are now assuming a 50 basis point cut to 2.50% for the Fed Funds target on the 18th March. Two-year TNote yields dropped to 1.71%, the lowest since April 2004.

Political and Economic Developments

Great 'white hopes' to solve the US's woes are coming and going at an increasingly alarming pace. Government cheques to all; a three billion dollar cash injection (from those who stand to benefit most) and no downgrade in credit ratings has apparently not sorted out the bond insurers; OFHEO lifting the cap on mortgage lending at Fannie Mae and Freddie Mac may have also come unstuck within the week. The Fed's willingness to slash rates is now perhaps perceived as a cast-iron lifebelt. Regulators and the authorities' increasingly desperate searches for quick fixes are just that. Band-Aid.

Underlying Themes

How long will it take stock markets to put two and two together? Chronic US dollar weakness, soaring raw material prices and relatively high borrowing costs are a toxic combination – as bad as 'sub-prime'. Much has been made of Nymex Crude Oil hitting a record $103.05 per barrel this week. According to figures from BP, the previous inflation-adjusted record high was $90.50 in April 1980. Adjusted for FX rates as well, prices are as follows: £51.00 today vs £42.00 in 1980; €67.00 today vs €90.00 then; Yen 10,750 today vs 22,625. If we also adjust for greater efficiency, the numbers are not nearly as shocking (except for US SUV owners).

What to watch for next week

Leap day today and Anglo Saxon superstition says single women may propose to unmarried men. Gents, you have been warned! Sunday March 2nd Russian Presidential election. Monday Japan January Labour Cash Earnings, US Construction Spending, February Manufacturing PMI's for various European countries and the US, EZ15 CPI, EU Finance Ministers meet in Brussels and US Vehicle Sales late in the day. Tuesday Eurozone January PPI and Q4 GDP, Japan February Money Supply and the Bank of Canada decides on rates (expect a cut of 25 to 50 basis points from 4.00%). The Reserve Bank of Australia also meets to set interest rates (expected +25 basis points to a record 7.25%). Wednesday UK February Nationwide Consumer Confidence, European and US Services PMI's, Challenger Layoffs, ADP Employment, Eurozone January Retail Sales, US Factory Orders and then the Fed's Beige Book. The Reserve Bank of New Zealand meets to set the OCR rate (expected unchanged at 8.25%). Thursday Japan January Leading and Coincident Indices, February Machine Tool Orders and the Bank of Japan starts a two-day rate-setting meeting (unanimously expected unchanged at 0.50%). Then German January Factory Orders, the Bank of England decides on rates (expected unchanged at 5.25%), as does the ECB (unanimously expected unchanged 4.00%) and US January Pending Home Sales. Friday German January Industrial Production, US February Non-Farm Payrolls and Unemployment. Saturday Malta and Malaysia hold general elections, Spain on Sunday March 9th when US clocks go forward one hour; Europe's change on the 30th.

Positioning and Technical Analysis

The unwinding of the 'carry trade', in its many guises, started again following February's much-needed corrective bounce. This ended with small 'spike highs' on many charts this week. During March equity indices and Yen crosses should trade lower and moves might pick up speed if banks write down more sub-prime and/or if other businesses start writing down asset-backed securities. We expect the US dollar to weaken further against most currencies (the South African rand an exception) with regular bouts of consolidation along the way. The only problem is that many did not expect this and have yet to sort themselves out. A stampede out of the greenback might ensue. Base and Precious Metals should remain well bid, likewise the Energy Group, but Grains, Oilseeds, and Softs could do with a bout of consolidation. Again the problem will be the speed of the US dollar's decline which we may have underestimated because predicted this so many years ago. We will not become complacent.

Mizuho Corporate Bank

Foreign Exchange Market Daily Update

The US dollar weakened against a basket of currencies. The Chicago Purchasing Managers Data came in at 44.5 versus the expected 50 for February, which is the worst since December 2001. With expectations of aggressive rate cuts to come, the dollar came under pressure as concerns over the health of the US economy was highlighted. Yesterday's surprising increase in US jobless claims and affirmation that the world's biggest economy barely grew in the final quarter of 2007 fueled worries of recession. At the next FOMC meeting in March, markets are now pricing in a 50 basis point rate cut, and giving a more than 1-in-3 chance of a 75-basis point rate cut.

The Euro continues to maintain its strength against the dollar, even after euro-zone economic sentiment deteriorated. A data showed euro-zone economic sentiment decreased to 100.1 in February from 101.7 in January, which was a slightly steeper fall than the forecasted decline to 101.2.

The British pound weakened slightly against the dollar, as sagging consumer sentiment and falling house prices boosted expectation for the Bank of England to cut rates in the near future. A survey showed British consumer morale fell to its lowest in more than 13 years in February and Nationwide Building Society reported that British house prices fell for the fourth month running in February. With economic concerns looming over the UK, the market is pricing in a 50-50 chance BoE will cut rates by June.

The Japanese yen hit a three-year high against the dollar, as Japanese data showed a surprising increase in consumer spending. Bernanke's warning on the health of small US banks on Thursday, coupled with economic woes, brought carry trades to the forefront as investor risk appetite was whetted.

The Canadian dollar strengthened against the US dollar after Bernanke's comments on Thursday that some smaller US banks may fail due to housing slumps and unemployment may increase. The loonie maintained its strength against the greenback even after a report showed Canada's international trade fell into deficit for the first time since 1999 in the 4th quarter.

The Australian and New Zealand dollars maintained its strength over the US dollar. As commodity prices climb, analysts are now saying the Aussie dollar may soon rise to equal the US dollar in value. Analysts speculate that the Reserve Bank of Australia will probably raise its interest rates at their next meeting on March 4th to curb inflation.

Union Bank of California
The Bank of Tokyo-Mitsubishi Group

U.S. Market Update

- Dow -208 S&P -23.4 NASDAQ 39

Indices are sliding on continued disappointing economic data and concerns regarding the financial sector. A worrisome Q4 earnings report from AIG got the ball rolling in the wrong direction again. Downgrades in BCS and RBS overnight along with news a UBS analyst increased estimates for worldwide losses related to the financial crisis only added to the pressure heading toward the US open. Inflation continues to remain a concern with the Y/Y PCE Deflator coming in at 3.7% and monthly raw materials prices rising 3.4%, but it is clear growth concerns remain the focus. The Feb Chicago Purchasing Managers Index had its lowest reading since late 2001. The weakness in equity markets has again coincided with a flight to quality in the bond market. The 2-year yield has fallen below 1.7% and the 10-year hovers around 3.56%. Expectations for a more aggressive Fed have crept into the Fed fund futures market. The April contract is now projecting roughly 60% odds of a 75 basis point cut at the next meeting, while the July contract is now pricing in a 40% chance the fed funds rate drops below 2% by this summer. Names being hit post earnings reports include: DELL -2% AIG -7.5% DECK -10% HANS -6% BGFV -15% MENT -9% LIZ -4% VIA.B -4% MYE -13% The run-up in commodity prices is taking a hiatus with crude, gasoline, and copper futures trading slightly lower while silver, gold, and heating oil manage marginal gains.

In currencies the theme of risk aversion maintained to influence the price action as continued jitters within the financial sector is causing a new wave of unwinding of carry-related pairs. The monoline insures added fuel to the fire that started with the AIG earnings reports, after press reports that the Ambac bailout has encountered a "significant snag" over last couple days, while MBIA noted that it sees added material mark-to-market losses in January. The iTraxx Crossover index inched back above the 600 bps level to re-approach its all-time high of 615bps. ECB's Gonzalez-Paramo reiterated the view that it could take some time before the liquidity crisis disappears completely. EUR/CHF is lower by 100 pips at 1.5865 during the session. Overall, the USD remains on the defensive as February ends, but off its worst levels for the session. Oil and gold are both are off their all-time highs seen during the Asian session. EUR/USD hit fresh all-time highs above the 1.5239, while USD/CHF tested the 1.0425 level. USD/JPY tested near three-year lows of 103.63, but the USD was able to gain against the GBP as recent UK economic data points to a BOE rate cut at its March MPC meeting. EUR/GBP tested all-time highs at 0.7679 during the European morning. European equity market near session lows while fixed-income instruments were firmer. March gilts +86 ticks at 110.25, March bunds at 117.00 +95 ticks. Euro Stoxx 50 -1.8% at 3,715, FTSE 100 index -1.3% at 5,888, CAC 40 index -1.5% at 4,790 and DAX -2.1% at 6,716

Trade The News Staff
Trade The News, Inc.

Daily Report: Dollar Remains Weak, Yen Surges on Carry Trade Unwinding

The trend continues as the week is close to an end. While dollar remains generally weak across the board, the strength in yen is rather impressive, with yen crosses topping the occupying the highest spots in the top movers chart. Markets are seen scaling back high risk investments after Fed Bernanke mentioned yesterday that "there probably will be some bank failures." Weakness in the US and Asian stock markets prompted carry trade unwinding, which is evident in the rally in yen as well as the strength in Swiss Franc comparing to other European majors. Technically speaking, today's break of 104.96 in USD/JPY indicates that the whole down trend from 124.13 has already resumed, now targeting 101.22/65 long term support level.

Economic data released so far today saw Japan national CPI unchanged at 0.8% yoy in Jan. Unemployment rate was also unchanged at 3.8%. Housing starts dropped -5.7% yoy in Jan, better than expectation of -12.3%.Construction orders fell -2.5%. Sterling remains the weakest one among European majors, as seen in EUR/GBP and GBPCHF crosses, on the view that UK is most affected by US's subprime mortgages problems. Nationwide house prices fell -0.5% mom in Feb, worse than expectation of 0.0%. Yoy rate was down from 4.2% to 2.7% vs consensus of 3.6%.

On the other hand, Euro remain supported by solid data from Germany. Feb was unchanged at 2.8% yoy though HICP was down from 3.1% yoy to 2.9% yoy. Retail sales report in Germany was solid, showing 1.6% mom growth pushing yoy rate back to positive territory at 0.8%.

Focus will turn to Eurozone HICP, which is expected to be up from 3.1% to 3.2%. Unemployment rate is expected to drop further from 7.2% to 7.1% in Jan. Sentiments indicators are expected to show only mild deterioration. Other data to be released in European session include UK Gfk consumer sentiment and Swiss KOF leading indicator.

From US, markets will look into the personal income and spending report today which are both expected to show 0.2% growth in Jan only. Headline PCE and core PCE are both expected to slow slightly to 2.1% and 3.4% yoy respectively. Chicago PMI is expected to dive below 50 to 49.7.

Will U.S. Data Confirm A Recession, And End The Debate?

FEB 29

US Personal Spending (13:30 GMT; 08:30 EST)
Expected: 0.2%
Previous: 0.2%

US Personal Income (13:30 GMT; 08:30 EST)
Expected: 0.2%
Previous: 0.5%

What Are The Markets Facing?

Yesterday, Ben Bernanke testified that the Fed still sees considerable downside risks to the U.S economy and signaled that future rate cuts are forthcoming. The upcoming personal spending and income numbers may confirm those concerns and end any debate that the U.S. is in a recession. Personal spending is expected to maintain its weakest pace since June printing at 0.2% for the second consecutive month, as U.S. consumers are feeling the affects of their declining wealth due to the housing slump. If the recent decline in retail sales- confirmed by Sears reporting today that their revenues declined 47%- is any indicator, we may see a weaker number than expected. Consumer spending power which has been sapped by record oil prices and rising inflation is expected to be weighed down further as personal income is expected to slow to 0.2% from 0.5% the month prior. After equity markets were uninspired by the prospect of future cuts, it is very clear that investors have come to the conclusion that the U.S. is in a recession. Additionally, there is growing fear that the Fed's breakneck pace of rate cuts will lead to stagflation.

Bonds - 10-Year Treasury Note Futures

Treasuries are forming a falling wedge and may break out with upside potential to 118.00. After Fed Chairman Bernanke signaled that future rate cuts are in store treasuries should see the contract bid up. Declining personal Income and spending will only bolster this case. However, a surprise to the upside of the U.S. data may be enough to derail the potential rally and send bonds lower.

FX - EUR/USD

The Euro has continued to make fresh all time highs after Fed Chairman Bernanke's testimony yesterday signaled more rate cuts are in store. The pair broke the mythical 1.50 barrier after Vice chairman Kohn first signaled the Fed's dovish stance and continues to rally setting an all time high of 1.5148 this morning. Two reports due out Friday are expected to fuel Euro bull sentiment as personal income and spending are expected to show that considerable downside risk remains to the U.S economy. The statistical mix of slow wage growth and falling home prices have taken a toll on consumers, and any further deterioration in these indicators will signal the U.S. is already in a recession. Although traders may look to take profits after the latest rally, Jamie Saettele's latest report on the EUR/USD pair sees near-term support at 1.4981 and “plenty of upside potential.” The Fed will be closely monitoring all fundamental indicators and stronger than expected consumer data may lesson their zeal to cut rates and reverse the current dollar rally.

Equities - Dow Jones Industrial Average

A daily chart of the Dow Jones Industrial Average shows that it has run into resistance at the 12,725 level. Friday's release of US personal Income and personal sending could weigh on the Dow as consumers are feeling the pinch. Fed Reserve Chairman Ben Bernanke's testimony Wednesday proved that the Fed would maintain a dovish posture as economic weakness persists, but it didn't inspire investors as the market closed relatively unchanged. Despite the fact, that further liquidity in the market could enhance growth prospects for many on Wall St and perhaps lend support to falling home prices as mortgages are at the heart of the credit crisis. The Office of Federal Housing Enterprise Oversight, the regulator of Fannie Mae and Freddie Mac, said it would move ahead with a plan to remove the cap on the value of mortgages they could buy. The move is anticipated to increase liquidity in the housing industry. Reports of the plan sparked a rally in financials and homebuilders yet fears about the overall health of the economy capped continued strength. Weak consumer spending and income data may spark an equity sell off, as the U.S consumer has been carrying the economy in light of all its problems. Stronger than expected data may reignite the belief that the U.S. consumer is resilient enough to keep the economy afloat until the recent and expected rate cuts have their intended affect, and rally equities through resistance.

DailyFX

Foreign Exchange Market Daily Update

The US dollar remained weak against a basket of currencies after meager US data were released today. US economic growth was unrevised at an annual pace of 0.6 % in the 4th quarter which was weaker than the forecasted 0.7 % due to subsiding home sales and slumping inventories. GDP grew 2.2 % for all of 2007, which was the slowest since 2002. Furthermore, US workers applying for unemployment benefits rose 19,000 last week, which increased to a seasonally adjusted 373,000 in the week ending February 23rd. Investors point to the GDP and jobless claims data as further evidence that the US is falling into recession.

The Euro continued to strengthen against the dollar with signs of a weakening US labor market pointing to further rate cuts by the Fed. Analysts forecast euro momentum to continue unless weak Euro-Zone data is reported.

The British sterling remained steady against the dollar. Sterling gains were capped with ongoing concerns over UK banking sectors. Royal Bank of Scotland posted in-line earnings and raised its dividend, but also raised its writedowns on assets to GBP 2.13 billion (approximately $4.2 billion). Central bank deputy governor John Gieve indicated that the development of inflation will be the key driver to whether the BoE would be cutting rates.

The Japanese yen strengthened against the dollar after meek US data was reported. Bank of Japan board member Atsushi Mizuno expressed concern about the side effects than the merits of any interest rate cuts, and speculated that bringing Japan’s low rates to normal levels would be necessary in the long run.

The Canadian dollar strengthened against the US dollar after weak US data was reported. Furthermore, crude oil and gold traded near record levels. Commodities account for nearly half of Canada’s exports.

The Australian and New Zealand dollars continued to trade at record highs against the US dollar. With weak GDP and increase in jobless claims in the US, the greenback continues to weaken against the Aussie and the kiwi.

Union Bank of California
The Bank of Tokyo-Mitsubishi Group

Bernanke Mentions Bank Failures, Market Swoons

Ben Bernanke, in his second day of testimony to the House Financial Services Committee, finally let the cat out of the bag, saying, "I expect there will be some failures," referring to smaller, regional banks which got in over their heads in mortgage financing.

Pointing out that the larger, money center banks had sufficient capital ratios, Bernanke made it clear that he didn't anticipate "any serious problems of that sort," with larger banking interests.

The only problem with the Chairman's statement is that the bigger banks are the ones with the serious problems, a few of which, including Citigroup, Merrill Lynch, JP Morgan (Chase), have had to scurry to raise funds from foreign governments in so-called "sovereign Funds" from countries such as Abu Dhabi, Kuwait, Singapore, and Dubai.

Smaller, regional banks are generally more circumspect and conservative in their financing and investing operations.

Bernanke's words stunned the markets, but he used a velvet hammer to deliver them, knowing full well that the larger banks are teetering on the brink of insolvency and, so serious are their liquidity and confidence problems, that they are loathe to lend to anyone but those customers with perfect credit portfolios.

Stocks were down across the board, with some of the hardest hit in the banking and financial sector. The Dow ended its streak of four straight positive gains with a pullback from resistance above the 12,725 area.

Dow 12,582.18 -112.10; NASDAQ 2,331.57 -22.21; S&P 500 1,367.68 -12.34; NYSE Composite 9,221.88 -71.01

Those calling for a bottom or resumption of the bull market (HA!) should likely take this as a warning that the January 22-23 lows are there to be retested and likely broken to the downside.

Corporate earnings have by and largely been uninspiring, new unemployment claims were up sharply this week (+19,000) and the banking crisis is hiding behind the housing slump, which only seems to worsen with each passing day.

A couple of notes about housing are worth mentioning. Some estimates put the value of all US households at around $20 million. Thus, if prices dropped 9%, as recently reported, that's a $1.8 TRILLION loss in perceived value. That has a sting.

Secondly, realtors mention that the slump has hut most in large cities, and especially in Florida and California. 2nd and 3rd tier metropolitan areas (cities under 300,000) and many rural communities never experienced the dramatic rise in real estate values and thus are not witnessing severe discounting in prices.

Overall, the action on Thursday was decidedly negative. Losing issues beat gainers by a hearty 5-2 margin, 4323-1944. New lows continued to hold the upper hand on new highs, 233-135, a condition which has now persisted for some four months.

Oil priced at a new record of $102.60, up a whopping $2.95 on the day. Gold gained $6.50 to close at another record high of $967.50. Silver continued to skyrocket, up another 38 cents to $19.71.

Those guys who were telling you to buy gold last year, the year before and the year before that? They were right. And, judging from the looks of things, it's still not too late. Many experts are expecting the precious shiny stuff to easily reach $1500 over the next 18-24 months.

NYSE Volume 3,814,476,250
NASDAQ Volume 2,017,081,000

Euro/Usd is at Key Resistance Levels again

As the Euro is again targeting key resistance levels against the U.S. dollar, inflation in the United States appears to be manifesting the same cyclical path shown during past recessionary periods. Europe, in the mean time, awaits the European Central Bank (ECB) meeting of next week.

Inflation is always inflation

Inflation picked up again in the United States, supported by energy and food prices. In January, the Consumer Price Index (CPI) rose 0.4% (+0.3% expected) month over month, matching December numbers and it increased 4.3% on an annual basis. Core inflation rose 0.3% month over month and is now 2.5% versus December's 2.4%. The economic slowdown might be beneficial over the medium term, as a contraction of consumer spending could temper the increase in core consumer prices. In fact, in the past, inflation had usually followed the business cycle. During the recession of 2001, core inflation increased to almost 3.00% and fell near 2.0% during the first year of the recovery. In 1990/1991, core inflation moved up above 5.0% to then decline slightly below 4.0% in the first year of recovery.

Despite inflations aggressively pushing higher, the Federal Reserve will remain focus on the economic slowdown and should cut rates again in the first part of 2008. The labor market is under pressure with stocks still struggling and housing declining. In January, the Federal Reserve Bank of Philadelphia's index, which tracks the manufacturing activity in the Philadelphia region, slid to -24 from -20.9, the lowest level of the past seven years. In reality, for the first time in many months, housing starts doubled expectations and increased 0.8% in January. The multiple components rose 22.3% while single houses fell 5.2%. However, the situation remains critical with inventory at a highest level and permits declining 3% on the top of December's fall of 7.1%. In fact, during the week ending February 15h, the Mortgage Bankers Association's (MBA) mortgage application index, which surveys the mortgage lending trends among various financial institutions, slumped almost 23%.

Awaiting ECB meeting

Like elsewhere, inflations stays a constant menace to the European's economy and will make it difficult for the European Central Bank (ECB) to cut rates in the nearest future. In January, the German Producer Price Index (PPI) for goods was 3.3% (2.8% expected), much higher than December's 2.5%. Excluding the volatile energy sector, prices were up 2.5% year over year. ECB cut its economic growth forecast to 1.8% this year, while it increased inflation prospective to 2.6%. Unit labor costs are probably the greatest cause of inflation and workers in Germany are already demanding higher pay to balance the increase of commodity prices. As an example, IG Metall, the largest labor union in Germany, won a 5.2% wage increase last week to March 2009. Nonetheless, as growth is softening globally, cutting rates could become a reality over the medium term. For now, however, the European economy still gives signs of vitality. In fact, after falling 2.5 points to 50.6 month over month in January, the Eurozone PMI for the services sector flash estimate increased to 52.3 in February. At the contrary, the PMI manufacturing was practically unchanged at 52.3 from 52.8 in January. Spending has remained overall strong, while exports remained overall supportive. Nevertheless, capital flows appear to be tempering its support to the Euro. In December, the current account registered a deficit of Euro 10.3 billion, as direct investments showed another important decline.

Eur/Usd is again at key resistance levels

EUR/USD reached again the key resistance at 1.4850/1.4950. It is at the conjunction of various long term trendlines and the higher Bollinger band. It should be overcome with decision for higher prices. A swing above 1.5070 would reinvigorate the long term bullish trend and lift the European currency to 1.5150, 1.53. A move below 1.4350 could instead quickly target 1.4300, eventually, 1.41/1.38, if 1.4260 is overcome.

GBP/USD is consolidating between the support at 1.93/1.94 and the resistance at 1.98/1.99. They are both at the conjunction of various support/resistance lines putting the short term trend in a more neutral stance. A breakout above 1.9950 could lift the British Pound to 2.0010/2.0150. A decline below 1.9260 would instead let the British Pound to slip to 1.9210/1.9150.

USD/JPY is dancing at the important support area at 105.00/104.70, where various trendlines and the lower Bollinger band meet. It must be overcome with decision for lower prices. A move below 104.40 could target 103.80, 103.0. A breakout failure could take the U.S. dollar into higher levels, considering the large divergence between the Rsi indicator and the pattern on the daily and weekly charts. The resistance line at 109.00 is on target. A move above 109.80 is nevertheless requested for 110.60, eventually 111.50.

Angelo Airaghi
MG Financial Group

Economics Weekly: Array of UK, US and Euro Zone Data; Bernanke Testifies

Key UK events this week include updates on consumer confidence, house prices, the second estimate of Q4 gdp and speeches by two BoE MPC members. Data including employment and retail sales have surprised to the upside over the last two weeks, forcing futures markets to make further revisions to their expectations of substantial rate cuts this year. However, dovish speeches by MPC hawks Besley and Sentance last week made clear the BoE is likely to cut rates below 5.25% if downside risks to the economy materialise.

In the US, Fed chairman Bernanke will testify on the economy on Wednesday. The Fed last week scaled back its 2008 estimate of gdp growth to 1.6% but revised up its inflation forecast to 2.1%. Bernanke may elaborate on how he Fed balances the diverging paths for these two principal drivers of monetary policy, and he is expected to reaffirm that the Fed is ready to take further action to prevent a worsening of the housing and economic downturn. Revised Q4 gdp data, house prices and new and existing home sales will be released during the course of the week.

The next ECB meeting is still two weeks away and this means that markets will concentrate on interim data, like leading activity indicators and inflation. The latest German IFO survey and the EC confidence indicators will give detail on how businesses and consumers are reacting to financial market events and rising commodity prices. There are very few signs that inflation will abate in the near term especially after the latest spike in oil and food prices. Euro zone inflation data for January is due on Friday.

Economic data from the UK last week reaffirmed the resilience of the economy and defied the more pessimistic forecasts based on the impact from the financial market turmoil and the higher cost of funding. Whether it is reflected in lower house prices or tighter access to credit, to date it has not caused a dramatic slowdown in consumer spending. Retail sales rose in January at the fastest rate in 11 months. Prospective weakness in household spending was cited last week by MPC members Besley and Sentance, two of the BoE's most prominent rate hawks, for expecting weaker UK economic growth. Overall, the comments signalled the level of alert on the MPC to a challenging backdrop for growth that could justify another cut in interest rates. With this in mind, markets will this week focus on updates by the CBI on retail turnover on Tuesday and on consumer confidence and mortgage activity on Friday. In between, the 2nd estimate of Q4 2007 gdp is forecast to be confirmed on Wednesday at 0.6% q/q, with slightly stronger household spending potentially mitigating a greater drag from net trade. The Nationwide will publish the results of its February house price survey. MPC members Lomax and Gieve may add to the dovish BoE chorus during their respective speeches on the economy on Tuesday ad Wednesday.

A busy week of US data releases will be dominated by Fed chairman Bernanke's testimony to Congress on Wednesday (repeated on Thursday). The Fed last week published its updated 2008 and 2009 staff estimates for growth and inflation and it is primarily in this context that markets will judge the likelihood of more US rate cuts as the central bank tries to stave off a more severe economic downturn at the expense of higher inflation. House prices are due on Tuesday, and existing and new housing inventories data on Monday and Tuesday may give some indication about future levels of residential construction. The second estimate of Q4 2007 gdp is due on Thursday and may show an upward revision from the advance 0.6% estimate due to a lower trade deficit in December. Personal income and spending data for January complete the data releases on Friday.

A stronger than forecast rebound in the euro zone services PMI last Friday cemented the outlook of no change in ECB interest rates in March. With the revised ECB estimates of 2008 growth and inflation looming in two weeks time, markets will judge this week's German IFO survey, the EC confidence surveys and euro zone inflation data in the light of a possible shift towards an easing bias.

Chart 1: Even after the latest spike, inflation adjusted prices of gold and oil are some way off their all-time highs



Chart 2: UK mortgage activity data is due this week and may offer some indication of future house prices



Wage inflation is the key to further UK rate cuts

Can wage inflation stay low if price inflation accelerates?

UK price inflation is heading back up again, yet the central bank has cut interest rates twice in three months. How can it justify this when its inflation target is 2% and the actual rate of inflation is above this level and likely to rise even further in the months ahead? The answer, of course, is that the central bank is looking for economic growth to slow such that inflation falls in the medium term.

The Monetary Policy Committee (MPC) noted in the minutes of the February meeting that 'the central projection suggested that there was most likely to be some spare capacity in the economy, even if interest rates followed the path implied by market yields. That would therefore help to ensure that inflation returned to the 2% target in the medium term'. This is illustrated in chart a, which assumed Bank rate would be cut to 4.5% in 2008 and stay there and that UK economic growth falls to well below 2% by the middle of 2008 before recovering back to trend in 2009. But the MPC was still very worried about inflation and also said in the February minutes: 'the Committee expected that higher energy and food prices would raise inflation, possibly quite sharply, in the coming months. Producer input and output prices were already rising rapidly and the decline in the sterling ERI would boost import costs further.'

Chart a: MPC expects below trend gdp growth to add spare capacity and keep inflation low...



Further, the MPC went on to say that: 'measures of inflation expectations had not fallen in line with actual CPI inflation following its peak during 2007. There was a risk that above-target CPI inflation in the near term would affect inflation expectations, and hence have some tendency to persist in the medium term.' The MPC is clearly worried therefore that the rise in price inflation will feed through into wage inflation and so into widespread inflation pressure in the economy as a whole, which would be very costly to reverse.

Latest data show that price inflation is accelerating...

So what does the actual recent evidence show? Is inflation accelerating and is the economy slowing? Chart b shows that producer output price inflation is at its highest since 1992 (producer input price inflation is at an 18 year high) and consumer and retail price inflation is accelerating. Worryingly for the MPC, survey data also show that household inflation expectations are at their highest since they began to be recorded in 1995 and have not fallen back in line with the fall in CPI in the second half of 2007.

Chart b: ...but UK price inflation is accelerating again after falling in late 2007



This would seem to suggest that the MPC is right to be concerned about inflation pressures. And the key question is, can wage inflation stay low if consumer price inflation rises even further above the 2% target in 2008, as the MPC and most other forecasters suggest? Chart d shows that there is a close link between price and wage inflation and that wage inflation is remarkably low at the moment relative to price pressure. Our forecast for CPI inflation suggests that it will rise well above target this year, probably prompting a second open letter from the Governor of the BoE to the Chancellor in just over a year.

Chart d: Will wage inflation stay low if retail price inflation does not quickly fall?



However, the UK labour market remains benign, see chart c, with annual earnings growth of 3.8% in the year to December including bonuses, and 3.7% if bonuses are excluded. Moreover, the claimant count unemployment rate stayed at 2.5% and so there was a continuation of the low wage inflation, low unemployment rate of the last 15 years, where reduced volatility (in price inflation and economic growth) has resulted in a much better wage and unemployment mix than at any time since the 1960s. We therefore have two implied criteria from the February MPC meeting minutes that would neeed to be met before interest rates are cut any further in the months ahead. The first is that the economy must slow; the second is that wage inflation must remain low.

Chart c: Can the benign mix of low unemployment and weak earnings growth continue?



Data show UK economic growth remaining more robust than expected...

UK employment grew by 175,000 in the three months to December, and the UK's employment rate rose to 74.7%, the highest since records began in 1971. Can wage inflation stay low in this environment? Moreover, if growth in the economy remains strong - it rose 0.6% in the quarter to December - and does not slow as is suggested in chart a, can the MPC cut rates any further? Certainly, economic data in 2008 so far do not suggest that the economy is slowing as sharply as is implied in the MPC's gdp fan chart. Retail sales rose 0.8% in January, and were up by 5.6% in the year. BRC and CBI retail surveys showed a better outcome than had been expected. The housing market data seem to have stabilised, albeit at lower levels, and both the services and the manufacturing PMIs are still well in positive territory. Finally, broad M4 money supply rose by 1.4% in January, contrary to many expectations of a fall, and the annual rate accelerated to 12.9%, the fastest rate since before the credit crisis broke in August 2007. As chart f shows, economic growth and wage inflation are linked: faster growth, higher wage inflation; weaker growth, lower inflation. If the economy does not slow quite soon, then wage inflation could accelerate, removing one of the main reasons why some members on the MPC agree that there is scope to cut base rate even as consumer price inflation rises further above its 2% target.

Chart e: Will rising CPI inflation put earnings growth under upward pressure?



Chart f: Will economic growth slow before wage inflation accelerates?



...raising the risk that the MPC may not be able to cut rates, particularly if pay inflation also accelerates

As the MPC noted in the minutes of its February meeting at which Bank rate was cut 0.25% to 5.25%: 'The Committee needed to balance the risk that a sharp slowing in activity would pull inflation below the target in the medium term against the risk that elevated inflation expectations would keep inflation above target.' This is indeed a delicate task but in some ways would be easier than if the economy does not slow and inflation accelerates, then the MPC may have another problem - will it have to raise interest rates even with a credit market crisis still unfolding in global markets that could affect UK companies?

Full report here

Lloyds TSB Bank

US Economic Indicators Preview

(Week of 25 February to 2 March 2008)

- Producer price inflation could have accelerated in January
- Consumer confidence indicators are likely to have fallen significantly in February
- January durable goods orders will probably have lost most of the previous month's gains

Indicator	Date	BHF forecast	Consensus forecast	Previous
Existing home sales / Jan	Mon 25 Feb, 16:00	4.77m	4.80m	4.89m
Producer prices (PPI) / Jan	Tue 26 Feb, 14:30	0.6% mom 7.3% yoy	0.4% mom 7.2% yoy	-0.1% mom 6.3% yoy
PPI ex food & energy / Jan	Tue 26 Feb, 14:30	0.3% mom 2.3% yoy	0.2% mom 2.2% yoy	0.2% mom 2.0% yoy
Consumer confidence / Feb	Tue 26 Feb, 16:00	80.0	82.0	87.9
Durable goods orders / Jan - ex transportation	Wed 27 Feb, 14:30	-4.2% mom -1.6% mom	-4.0% mom -1.4% mom	5.0% mom 2.3% mom
New home sales / Jan	Wed 27 Feb, 16:00	600k	600k	604k
Bernanke congressional testim.	Wed 27 Feb, 16:00	Presentation of the Monetary Policy Report
GDP / Q4 (prel.) PCE core deflator / Q4	Thur 28 Feb, 14:30	0.8% qoq 2.7% qoq	0.7% qoq	4.9% qoq (Q3) 2.0% qoq (Q3)
Initial jobless claims / 23 Feb	Thur 28 Feb, 14:30	360k	350k	349k
Personal income / Jan Personal spending (PCE) / Jan	Fri 29 Feb, 14:30	0.1% mom 0.2% mom	0.2% mom 0.2% mom	0.2% mom 0.2% mom
PCE core deflator / Jan	Fri 29 Feb, 14:30	0.3% mom 2.2% yoy	0.2% mom 2.1% yoy	0.2% mom 2.2% yoy
Chicago PMI / Feb	Fri 29 Feb, 15:45	49.0	49.6	51.5
UMI consumer sent. / Feb (final)	Fri 29 Feb, 16:00	69.5	70.0	69.6 (prel.) 78.4 (Jan)

Existing home sales fell sharply by 2% mom in December and were 22 % lower than in the previous year. Pending home sales, which have a forerun of about 2 months to existing home sales, declined sharply at the end of 2007. In addition, home prices have not yet stopped declining, and falling prices are raising real financing costs, which is also likely to dampen sales. We expect January existing home sales to have fallen to 4.77m, the lowest level since 1998.

At 4.7%, the December decrease in new home sales was even more marked. The median home price plummeted by almost 11% mom, and months supply continued to rise. We forecast that new home sales will have fallen to 600k, thus remaining close to their 13-year low.

Producer prices (PPI) declined by 0.1% mom in December, but given that import prices rose significantly by 1.7% mom mainly due to energy prices, January PPI could have gone up markedly too, by 0.6% mom. The much higher price component of the ISM manufacturing and the Philadelphia Fed's prices paid index also indicate a relatively sharp increase. The annual rate would thus exceed the 7-% mark. Core PPI could have increased by 0.3% mom and 2.3% yoy.

The University of Michigan's (UMI) preliminary February consumer sentiment plummeted from 78.4 to 69.6, and the ABC consumer comfort poll dropped to the lowest level since 1993. The Conference Board's consumer confidence is likely to have followed suit and declined from 87.9 to about 80.0 in February, which would be the lowest level since September 2003. This will probably have been partly due to the fact that non-farm payrolls declined in January for the first time, and the recent rise in jobless claims. At 69.5, we are not expecting the final UMI consumer sentiment to differ much from the low preliminary result, as the most recent rise in crude oil prices could have prevented the index from recovering.

Durable goods were remarkably strong in December and rose by 5.0% mom, particularly due to aircraft orders. As Boeing aircraft orders decreased by 77 % mom and vehicle orders probably remained weak, durable goods orders are likely to have lost most of the previous month's gains, falling by 4.2% mom. Durable goods orders ex transportation also went up sharply by 2.3% mom in December, as non-defense capital goods orders ex aircraft showed a surprising gain. However, given the economic slowdown and tighter lending standards, we expect capital goods orders to have suffered a setback, and thus durable goods orders ex transportation could have fallen by 1.6% mom.

The advance estimate of GDP growth in Q4 showed a sharp slowdown from 4.9% to an annualised 0.6% qoq, mainly due to significant negative contributions from residential and inventory investment and smaller positive contributions from private consumption, corporate investment, government spending and net exports. The preliminary results will probably be a little higher: due to the noticeable improvement in the December trade balance, net exports could be revised upwards, and inventories also turned out slightly better than estimated at first. However, the revision in retail sales suggests that consumer spending was somewhat weaker. We expect the preliminary GDP to have gone up by 0.8% qoq in Q4. The PCE core deflator is likely to be confirmed at 2.7% qoq, after 2.0% in Q3.

Initial jobless claims have been trending upward recently, and the 4-week moving average has reached 360k, which is also our forecast for jobless claims in the week ending 23 February. However, the fact that the reporting week included a national holiday adds uncertainty to the forecast.

We expect personal income to have risen by a mere 0.1% mom in January, as weekly earnings declined due to a drop in working hours. We also forecast that personal spending will only have risen slightly by 0.2% mom, mainly due to higher gasoline prices. Contrary to the retail sales report, we do not expect car sales to have supported spending. As the PCE deflator will have gone up by at least 0.3% mom, real personal spending would have fallen in January. Just like core CPI, the PCE core deflator could have increased by 0.3% mom, as medical care costs seem to have gone up noticeably. The annual rate might remain at 2.2%. In its baseline scenario, the FOMC is no longer expecting the core PCE deflator to fall below 2% in 2008.

The Chicago Purchasing Manager Index already went down sharply in January, dropping from 56.4 to 51.5. Given that it is no longer a manufacturing index only, and that the ISM non-manufacturing index plummeted in January, the Chicago PMI could well have fallen to about 49.0, below the expansion threshold, in February.

Fed president Bernanke is invited to present the new Monetary Policy Report in Congress on 27 February. The revised forecasts were already included in the latest FOMC minutes (see graph on the right). Mr Bernanke is likely to forecast that economic growth will strengthen in the 2nd half of 2008 due to fiscal and monetary stimulus. But he will also emphasize the downside risks, thus leaving the door wide open for further rate cuts.

BHF-BANK

EMU Economic Indicators Preview

(Week of 25 February to 2 March 2008)

- Both the February German ifo business climate and the March GfK German consumer confidence are expected to have remained unchanged at best
- M3 growth probably accelerated to 11.6% yoy in January
- The German adjusted unemployment rate could have declined slightly to 8.0% in February
- CPI inflation in Germany is likely to have accelerated slightly to 2.8 % yoy in February
- German retail sales might have decreased again in January
- EMU industrial confidence and economic sentiment could have stabilized in February

Region	Indicator	Date	BHF forecast	Previous
GE	GDP / Q4 2007 rev	Tue 26 Feb, 8:00	0.3% qoq 1.8% yoy	0.7% qoq 2.5% yoy
IT	Business confidence / Feb	Tue 26 Feb, 9:30	91.4 -0.2% mom	91.6 -0.1% mom
GE	ifo business climate index / Feb	Tue 26 Feb, 10:00	103.4 0.0% mom	103.4 0.4% mom
GE	GfK consumer climate / Mar	Wed 27 Feb, 8:10	4.5	4.5
EMU	Money supply M3 / Jan	Wed 27 Feb, 10:00	11.6% yoy 11.8% 3ma	11.5% yoy 12.1% 3ma
FR	Consumer confidence / Feb	Thur 28 Feb, 8:45	-35 -1.0 pp mom	-34 -4.0 pp mom
GE	Unemployment / Feb (number, change, rate)	Thur 28 Feb, 9:55	3.640m (nsa) -607k yoy (nsa) 8.7% (nsa) 3.357m (sa) -55k mom (sa) 8.0% (sa)	3.659m (nsa) -626k yoy (nsa) 8.7% (nsa) 3.412m (sa) -89k mom (sa) 8.1% (sa)
GE	CPI / Feb	Fri 29 Feb	0.5% mom 2.8% yoy	-0.3% mom 2.7% yoy
GE	CPI / Jan f	Fri 29 Feb, 8:00	-0.3% mom 2.7% yoy	0.5% mom 2.8% yoy
GE	Retail sales / Jan	Fri 29 Feb, 8:00	103.7 -0.5% mom -3.2% yoy	104.2 -1.0% mom -7.0% yoy
EMU	HICP / Jan f	Fri 29 Feb, 11:00	-0.4% mom 3.2% yoy	0.4% mom 3.1% yoy
EMU	Unemployment rate / Jan	Fri 29 Feb, 11:00	7.1%	7.2%
EMU	Industrial confidence / Feb	Fri 29 Feb, 11:00	1.2 0.0 pp mom	1.2 -0.4 pp mom
EMU	Economic sentiment / Feb	Fri 29 Feb, 11:00	101.7 0.0% mom	101.7 -1.6% mom
IT	HICP / Feb p	Fri 29 Feb, 11:00	0.0% mom 3.0% yoy	-0.8% mom 3.1% yoy
IT	GDP / Q4 2007 and annual GDP 2007	Fri 29 Feb, 12:00	-0.3% qoq 0.5% yoy 1.6% yoy	0.4% qoq 1.9% yoy 1.9% yoy

M3 growth in the euro area will probably have remained strong in January. In general, the yield curve has been flat or even inverted, thus offering little incentive for longer term investments. We expect M3 to have risen at an annual rate of about 11.6%, slightly stronger than in December. This would amount to a monthly increase of about €75bn, broadly in line with the 6-month average. Around the turn of the year, investors had switched from overnight deposits into time deposits. Therefore, M1 growth declined to 3.1 % yoy. Part of this shift is likely to have been reversed in January, accounting for somewhat stronger M1 growth. Credit growth (MFI loans to domestic private non-financial sectors) is likely to have slowed from 11.1 to 10.7% yoy, mostly due to loans for house purchases.

In February, the German ifo business climate index might have remained unchanged at best, after having improved unexpectedly in January. The US ISM manufacturing index and the German ZEW economic sentiment have both recovered and the German yield spread has improved slightly, with both short-term and long-term interest rates having increased somewhat. However, the crude oil price has gone up again recently and the euro has remained strong. Last but not least, the DAX performance index plummeted in January and has been weak ever since. For similar reasons, we are expecting the March GfK German consumer confidence to remain more or less unchanged and the Italian business confidence and the French consumer confidence to have continued declining in February. Therefore, EMU industrial confidence and economic sentiment could have remained unchanged in February.

German retail sales are expected to have continued their decline in January, because retailers' business assessment and consumer confidence had deteriorated. German GDP in Q4 2007 is not expected to be revised substantially. The detailed breakdown of the components will show that net exports and investment in machinery and equipment had a favourable impact on overall GDP, with imports weaker than exports. However, private consumption, investment in buildings and changes in inventories will probably have dampened GDP growth. Italian GDP is likely to have decreased significantly in Q4, just like Italian industrial production. However, this forecast is rather uncertain, due to methodological changes.

On Thursday, the first German Länder are expected to publish state CPI data for February. Subsequently, the preliminary results for national German CPI in February will be released. We expect German inflation to have increased by 0.5% mom and 2.8% yoy. The rise in monthly inflation will have been mainly due to seasonal factors, as prices for package tours and accommodation services surged as well as clothes prices. Energy prices could have had a slightly positive effect, if any. Food prices could have gone up again. The results for consumer prices in February will take account of the base year change as well as the final results for consumer prices in January which will also be published on Friday. We would like to point out that there is a higher degree of uncertainty in our forecasts than usual due to the change of the base year. With the last base year change five years ago, yearly inflation rates tended to be slightly higher than before. HICP inflation in the EMU is likely to be confirmed at 3.2% yoy in January, although there is a risk that the rate could be slightly higher. This would correspond with a monthly inflation of - 0.4%.

Adjusted unemployment fell sharply by 89k in January, much more markedly than had been estimated. The normal weather-related negative effect on outdoor jobs was dampened by relatively mild temperatures and the relief offered by the winter short-time allowance. Thus the decline in adjusted unemployment seems to be exaggerated this winter, and there will probably be a setback in spring, particularly as economic growth is slowing down. However, in February temperatures were again higher than usual. Thus we expect adjusted unemployment to have dropped by 55k in February, although the decline in unadjusted unemployment could have been quite modest.

We expect the harmonised EMU unemployment rate to have fallen slightly again by 0.1 percentage points to 7.1% in January, as the German figures indicate an improvement. As unemployment is a lagging indicator, the credit market turmoil is not likely to have had a significant negative impact yet.

BHF-BANK

U.S. Market Update

- Dow -141 S&P -14.7 NASDAQ -25.2

Equity and Bond markets continue to focus on the plunging U.S Dollar and its relationship to commodity prices around the world. Indices are swooning to new lows late in the morning session as comments from Barnanke's testimony on the hill cross. Overall his remarks leave the door open to continued aggressive rate cuts going forward which has maintained pressure on the Greenback. Following a larger than expected increase in weekly unemployment claims and preliminary Q4 annualized GDP of 0.6%, the Fed Chairman noted he does not believe credit disruptions are near an end that there will probably be some bank failures. Treasury prices are climbing with 10-year yield falling back towards 3.7%. The April fed fund future contract has seen the odds of a 75 basis point cut push back towards 40% and the July contact is fully pricing in a 2% fed funds rate. Shares of Apple are helping the NASADQ hold up better than the other indices after the COO reaffirmed growth projections for the iPhone. The energy complex is also outperforming as natural gas futures surge some 4% after weekly inventory data. OIH +1.8% MFGlobal is sliding 20% after the company disclosed they would be taking a large hit from the wheat trading operations.

The USD remains soft ahead on month end trading as oil and gold maintain upward momentum. Dealers are noting that the appetite for commodities is being seen by pension funds. Calpers, which has $240 billion in assets, agreed at its Feb. 19 board meeting to hold between 0.5 percent and 3 percent of its assets in commodities. NYMEX crude moving back towards the 102 level during the session while gold remains above $965 per oz. EUR/USD hit fresh all-time highs above the 1.5190, while USD/CHF broke below the 1.0530 handle. Verbal rhetoric continues to ebb out from various European officials. Swiss Nestle CFO stated that the strong CHF posed challenges, but added that it will not prevent co. from achieving its financial targets. Commodity currencies holding steady. USD/CAD at 0.9730, while AUD/USD at 0.9470. Carry-related pairs focused on continued credit market concerns. US mortgage company Thornburg noted that it saw sudden adverse change in mortgage market conditions, especially on Alt-collateral since Mid-Feb. London hedge fund, Peloton Partners, has liquidated its ABS fund. EUR/CHF is drifting lower towards the 1.60 level. Fed's Bernanke noted that credit disruptions are 'not near' an end.

Trade The News Staff
Trade The News, Inc.

Japan: Manufacturing Losing Momentum

Manufacturing in Japan currently is clearly losing momentum as industrial production in January declined more than expected, -2.0% mom/+2.5%yoy (consensus: -0.6% mom/+3.6% yoy). According to production plans production is expected to decline by 2.9% mom in February. However this decline is expected to be reversed by a +2.8% mom increase in September (see chart).

The loss of momentum in industrial production is partly explained by slower export growth. Real export growth has slowed from 6% 3m/3m in mid 2007 to about 2.5% 3m/3m in January (see chart). However export growth has stabilised - at least for the moment - on the back of surprisingly strong January trade figures, and at 2.5% 3m/3m growth export growth is still quite respectable. With industrial production currently declining -0.8% 3m/3m export performance is not the only the only reason for the current weakness. Domestic demand probably has been a major drag on industrial production since mid 2007 on the back of both weak private consumption and the plunge in housing construction.

However there are some comforting signs that industrial production is not going to collapse in the short run:

- Actual shipments only dropped -0.9% mom in January returning the inventory/sales ratio to normal levels (see chart). Looking at actual shipments the trend over last 3 months has been flat (0.0% 3m/3m) rather than declining, as witnessed by the industrial production figures (-0.6% 3m/3m).
- Growth in real exports has stabilised, and overall growth is still respectable and indicates that net exports will continue to contribute positively to GDP growth in Q1 2008 although less than in Q4 2007. That said, export growth is expected to slow further in H1 2008 and there is considerable downside risk to exports.
- The negative impact on industrial production from domestic demand is expected to ease somewhat although production of construction goods continues to be a significant drag on overall industrial production (-2.0 3m/3m), there have been clear signs of stabilisation in recent months (see chart).

Conclusion:

We continue to believe that the overall trend in industrial production is flat. However, today's industrial production figures indicate increasing risk of declining industrial activity in Japan. They underline considerable downside risk to the Japanese economy as industrial activity was the main bright spot in the Japanese economy in H2 2007. We maintain our expectation of +0.3% q/q GDP growth in Q1 2008. However, today's figures underline that there is downside risk to even this weak number.

Danske Bank

Currency Updates: More Dollar Weakness

Mr. Bernanke assured the congress that the Feds stand ready to help moderate growth even if inflation is seen as rising, which spread fears among investors that the bank will cut rates and ignore inflation which might lead the U.S economy into stagflation, sending the dollar to record lows against majors and driving commodities especially gold and oil to record highs.

After breaching the $1.50 barrier for the first time ever yesterday the Euro set its highest at 1.5143, the Euro managed to stay above the $1.51 levels since early this morning to set a high for the day at 1.5125 yet started declining afterwards to set a low of 1.5086 so far, the target is now set at the $1.52 levels since no major resistance levels are standing on its way to the upside.

The Pound on the other hand was not supported by the same strong momentum the Euro had, managing only to incline to the $1.99 levels yesterday but could not hold above it for too long as it dropped back to the $1.97 this morning. The Pound recorded a high of 1.9847 and dropped to set a low of 1.9777.

While against the Yen, the dollar seems to have settled among the 106 levels, the USD/JPY pair remains trading within very narrow ranges since early this morning, recording a high of 106.50 and a low of 106.18.

As for other majors against the Yen, the Euro managed to settle within the 160s level, while the Pound dropped against the Yen back to the 210 levels.

Crown Forex

US Dollar Under Stress as Bernanke Stands Ready to Cut Rates

The US dollar fell to fresh record-lows against the euro, as a speech by Fed Chairman Ben Bernanke confirmed that the central bank stands ready to cut interest rates further in order to support domestic economic growth. Indeed, the central banker said that growth risk continue to trump those of rising inflation, and as such the FOMC may vote to take rates lower despite strong price pressures. The euro subsequently rallied strongly against its US counterpart, while the Swiss Franc was actually the day’s largest gainer against the downtrodden dollar. The Australian dollar, New Zealand dollar, and Canadian dollar likewise gained sharply against their US namesake - further fueled by similar gains in global commodity prices. Yet we did see the New Zealand dollar fail to hold its fresh 22-year highs against the greenback; strongly disappointing New Zealand Business Confidence index results weighed on outlook for the high-flying currency. The British pound was the only other major currency to lose against the US dollar, as stagnant Gross Domestic Product numbers limited upside potential for the sterling.

Freshly released data hampered growth prospects for the US as Durable Goods orders plummeted, with the housing sector yet to show any sign of recovery. Durable Goods orders fell more than expected as rising costs curbed firms from spending and plunged to minus 5.3 percent from 4.4 percent, while Orders excluding Transportation fell to minus 1.6 percent from 2.0 percent. For the housing sector, the New Home sales data diminished the economic outlook for the US as it fell to minus 2.8 percent, holding at 588K units, with the MBA Mortgage Application release adding to the mounting pressures as it dropped to minus 19.2 percent.

Increased volatility took hold of the securities market as prices swayed throughout the trading session, but ended the on a brighter note as an intraday reversal pushed prices higher. The DJIA added 9.36 points to hold at 12,694.28 points, with IBM shares picking up the most gains while 3M and McDonald’s shares took the biggest dive. Amongst the broader indices, the S&P500 lost 1.27 points to stay at 1,380.02 points as Vanceinfo Technologies and Federal Signal Corp led the winners with Carter’s Inc and URS Corp topping the decliners.

US Treasury prices were driven up as a result of the increased volatility in the securities market, and sent risk adverse investors to seek the safe haven of risk free bonds. The flight to quality sunk the benchmark 10-year Treasury yield to 3.84 percent, while the 2-year Note yield likewise fell to an anemic 1.99 percent.

Looking ahead, volatility will likely continue across domestic financial markets; second revisions to Q4, 2007 GDP results will be released at 9:30 Eastern Time. A simultaneous US Initial Jobless Claims data release likewise holds potential to drive sharp moves in the domestic currency.

DailyFX

Foreign Exchange Market Daily Update

The US dollar fell to an all time low against a basket of currencies late yesterday and continues to weaken this morning after a lower than expected durable good report. New orders for U.S. made durable goods fell 5.3% in January, the biggest drop in 5 months. Expectations were for a drop of 4.0%. After yesterday's weak consumer confidence report and this morning's weak durable goods report, investors look for another 0.50% rate cut next month by the Federal Reserve board to fend off a recession.

The Euro climbed to a lifetime high against the US dollar after hawkish comments from ECB Governing Council member Weber stated that expectations for the ECB to cut rates fail to consider the dangers of higher inflation. Aiding the Euro was yesterday's German corporate sentiment index rose to 104.1, beating even the highest forecast. This data will further reduce the likelihood of a Euro-zone rate cut which some expect in June.

Sterling fell slightly against the greenback after Britain's largest mortgage lender HBOS fell over 8% dragging down other UK banks after it missed forecasts indicating the spillover affects from the subprime fallout has not been fully priced in. In economic news, Britain's GDP report showed household spending growth was negligible and inventories grew at its fastest rate in 20 years. Investors expect further slowing of the British economy on the heels of falling home prices, the credit crunch, and a weaker global economy.

The Japanese yen strengthened against the US dollar after another weak US economic report. The yen is trading near 1 month highs against the dollar.

The Canadian dollar strengthened against the greenback for the third day nearing 2 month highs on record oil and gold prices. Oil is at $101/barrel and gold is $960/barrel helping the commodity rich nation's currency. The loonie has risen 3.2% against the greenback, the most since 1995.

Both the Australian and New Zealand dollars reached multi-decade highs against the US dollar on the heels of record level commodities prices and very attractive yields.

Union Bank of California
The Bank of Tokyo-Mitsubishi Group