First Quarter Not Good for Stocks

The markets wound their way through the final day of the first quarter on Monday, trying in vain to freshen up an otherwise pig-ugly three months.

For the record, the Dow lost just over 1000 points, the NASDAQ shed 372 points and the S&P dropped 146. Overall, it was not as bad as the worst levels of the quarter, which in general were another 2-3% lower than the March 31 close.

Dow 12,262.89 +46.49: NASDAQ 2,279.10 +17.92; S&P 500 1,322.70 +7.48; NYSE Composite 8,797.29 +35.17

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The indices actually finished higher for the day, mostly in a rejiggering of portfolios and in somewhat of a tepid response to the government's call to overhaul federal regulatory structures. The plan, largely promoted by Treasury Secretary Henry Paulson, calls for more oversight by the Federal Reserve, in the belief that they can somehow cure banks and other financial institutions from acting badly or stupidly or irresponsibly.

We would love to believe that the great and magnificent Federal Reserve Bank can also end poverty, cure cancer and rid people of the shame of psoriasis.

It's a sham, and, thankfully, the congress isn't about to enact sweeping regulatory reform this year, or next, at least.

Stocks mostly meandered in slightly positive territory most of the day, and the internals were similarly dull. Advancing issues outdid decliners, 3806-2453. New lows beat new highs for yet another session, 193-51.

What is remarkable is the abysmally low number of stocks making new highs. Even in the worst of times - like now - there are usually more than just a paltry few dozen every day. Economic conditions are abnormally severe with no real change on the horizon.

Commodities took it on the chin today, with oil down $4.04 to $101.58, gold off an even $15.00 to $921.50 and silver lower by 63 cents at $17.31.

While it may not be exactly the best time to be buying the metals, such a move could prove prudent, if only for the long term value. The temporary setback for gold and silver is not likely to last long, though long-term asset deflation is a looming problem that nobody really wants to notice or discuss.

The markets will adjust as needs. A crucial quarter for the US economy is about to get underway.

NYSE Volume 4,192,029,750
NASDAQ Volume 1,828,315,875

The Big Give-Back

After rocketing ahead early in the week, the markets gave back all of the gains and then some. The Dow, which closed Monday at 12,548.64, lost ground four consecutive sessions, finishing 145 points lower for the week.

Dow 12,216.40 -86.06; NASDAQ 2,261.18 -19.65; S&P 500 1,315.22 -10.44; NYSE Composite 8,762.12 -55.05

Volume was on the very low end of the scale, indicative of an end-of-month wait-and-see attitude all around, though Monday's final day of the quarter could prove significant.

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It seems that no matter what moves the Fed makes and how much happy talk the Fox News and CNBC pundits produce, nothing can stop stocks from falling. Just glancing at the charts of the major indices shows that they are still in a holding pattern above recent lows and retests and retreats are inevitable.

Declining issues overwhelmed advancers once again, 4120-2075. Only 39 stocks made new 52-week highs, while 165 made new lows. The string of days with more new lows than new highs stretches back to October 31 of last year, except for two days in December. That's a very long run and the streak is now unlikely to be unbroken until we reach the original falling-off point in August.

Commodities continue to trade very uncertainly, with oil down $1.96 to $105.62, gold off $17.50 to $936.50, and silver down 61 cents to $17.94. Deflation is taking hold in a big way, which is expressly what the Fed sought to avoid with its interest rate cuts and interventions into the credit markets.

Obviously, it's not working.

NYSE Volume 3,610,889,000
NASDAQ Volume 1,739,376,375

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Another Dose of Volatility

In the absence of any more devastating financial news, stocks took the path of least resistance and put on healthy gains on Thursday.

Dow 12,361.32 +261.66; NASDAQ 2,258.11 +48.15; S&P 500 1,329.51 +31.09; NYSE Composite 8,717.56 +168.06

While the unemployment figures delivered this morning prior to the opening bell showed more people applying for benefits, investors chose to overlook that and point to the idea that the Fed is allowing the banks to put up shaky collateral for its Term Securities Lending Facility (TSFL) loans in the form of CMOs (Collateralized Mortgage Obligations).

In other words, the Fed is going to swap good liquid money for toxic, illiquid assets. Those mortgage loans are the same structured vehicles that started the entire mess. Now the Fed is willing to accept these bad investments as collateral.

With any luck, other central banks around the globe will not want to trade with the Fed or hold dollars, since the Fed is wiling to risk its own credit standing and confidence in exchange for bailing out the banks and investment houses which made the ill-advised investments in the first place.

Bernanke's desperate solutions are bound to make matters even worse, albeit further down the road.

As for equities investors, what buyers at these levels must not comprehend is that there is hard resistance at 12,450 on the Dow and the market is very close to attaining that point, meaning that in all likelihood today's gains will have been made in a vacuum and will soon be swept away by more waves of selling.

Advancing issues swamped decliners by a 4406-1895 margin. New lows beat new highs once again, 374-48.

Commodities were in the spotlight once again as recent gains continued to unravel. Oil traded below $100 before closing down just 70 cents at $101.84. The metals were under more severe pressure. Gold fell $25.30 to $920.00, while silver took its second significant tumble in as many days, losing $1.60 to $16.85.

So-called "hot" money is being diverted from the metals into stocks. Fools rush in where angels dare to tread, and there are more than this market's fair share of fools out there.

NYSE Volume 6,158,374,000
NASDAQ Volume 2,652,208,500

Now It's Commodities Turn to Dance with Stocks

Following Tuesday's spirited rally, stocks quickly gave up the ghost in a broad retreat which ended up with stocks closing at their lows of the day.

Dow 12,099.66 -293.00; NASDAQ 2,209.96 -58.30; S&P 500 1,298.42 -32.32; NYSE Composite 8,549.50 -276.94

In what has been already a tumultuous week, the bears on the Street seem to have finally exerted themselves on the market while behind the scenes there may have been some serious liquidation of assets which resulted in a major sell-off in gold. Reports were circulating that a number of hedge funds had margin calls to meet, prompting the gold rush, but others pointed to more central bank and government intervention aimed at propping up the US economy.

A key was the a release by Federal Housing Enterprise Oversight to allow Freddie-Mac and Fannie-Mae to relax excess capital requirements, which would free up more than $200 billion into the US housing market. The dollar also broke a string of declines with a strong rally against the Yen and Euro.

It certainly seems the government and the Federal Reserve have taken off the kid gloves and are prepared to fight a downturn in the economy with every weapon at their disposal, and they have plenty with which to inject further liquidity into the general economy.

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Of course, while such actions may be politically expedient for the administration in power, the longer term effects are difficult to gauge.

Like the stock and commodities markets this week, we may be seeing the very early signs of disruptions in an economy being ripped from its economic moorings. Volatility is usually emblematic of uncertainty, and markets certainly won't accept uncertainty for long, but we are a a point of maximum doubt and a crisis of confidence which is only now getting underway.

Declining issues took back the leadership positive over advancers, 4467-1846. New lows buried new highs yet again, 308-69.

The real story was in commodities, especially gold. While oil fell $4.94 to $104.48, gold dropped more than 6%, losing $59.00 to close at $945.30. Silver also was battered, dropping an unprecedented $1.52, to $18.45, a 7.5% loss.

It seems, just a day after the Fed cut rates and two days after Bear Stearns, a major investment bank, was rescued by the Fed, the action is about to get hotter than ever. Just keeping up with the changes to come will be a challenge for the average American, to say nothing of the economic punditry which likely will be wrong more often than right.

Use short stops, try to stay at least 60% in cash and stay tuned. This party's just getting started.

NYSE Volume 5,499,307,000
NASDAQ Volume 2,327,522,250

Market Love From Fed, Goldman, Lehman

Investors were treated to an unusually heavy dose of good news today, as two investment banks Goldman Sachs and Lehman Brothers, reported better than expected earnings and the Fed cut the federal funds rate by 3/4s of a percent, to 2.25, the lowest rate since December, 2004.

Wall Street, desperate for short-term gains, rode stocks higher at the open and maintained a buying posture throughout the session. Markets dove shortly after the Fed announcement in apparent dissent that the Fed didn't cut rates a full point, but that was quickly overcome by more buying and some expected short covering, which likely contributed to much of the day's gains.

Dow 12,392.66 +420.41; NASDAQ 2,268.26 +91.25; S&P 500 1,330.74 +54.14; NYSE Composite 8,826.44 +337.06

What the market chose to ignore were a pair of pre-open economic reports which portrayed the economy in a much more sober and realistic vein.

Housing starts in the U.S. slumped in February and building permits fell to the lowest level in more than 16 years. The PPI (Producer Price Index) rose another 0.3% in February, and core PPI - which excludes food and energy - rose an unprecedented 0.5%, signaling that inflationary pressures from rising energy prices have infected the rest of the economic landscape.

Contributing to the rampant inflation is the Fed itself, by its de facto devaluation of the currency through a cumulative 3% cut in the federal funds rate in just the last six months.

What the Fed should have fully understood in gauging their various actions, was that inflation will eventually lead to lower demand, precipitating and aggravating a deflationary cycle that is largely manifested in the housing crash.

Unfortunately, the Fed is a very active political participant, dead set on keeping the economy and the stock markets afloat near term at all costs. Their actions, when viewed in retrospect, will surely be seen to be largely reckless and short-sighted. Long term, they are causing more distortions and damage in markets than acting as a stabilizing force, weakening their own influence.

Because of yesterday's dramatic salvation of Bear Stearns dominating the news, some other key economic reports were largely ignored.

On Monday, the NY Empire State Index fell to -22.2 in March, a record low. Industrial production fell 0.5%, while capacity utilization for February fell 0.6% to 80.9%.

Separate or together, those are not rosy figures.

Tuesday's outsize gains are likely to be short-lived. A significant resistance level exists at Dow 12,450, and the market nearly met that today. Obviously, the nature of the Fed's recent actions speaks to the severity of the credit crisis and it's unlikely that just one large investment bank failure is the end of it.

Lehman Brothers (LEH 44.88, +13.13), Bear Stearns (BSC 6.38, +1.57), Fannie Mae (FNM 28.18, +5.97) and Countrywide (CFC 5.07, +0.97) posted their record one day percentage gains. That's particularly interesting because two of the companies - Bear Stearns and Countrywide - have already lost more than 95% of their value and are both in the midst of takeovers.

As expected, advancing issues soared past decliners, 5289-1084. New lows, however, continued to dominate new highs, 345-62.

While the Fed may be helping out its banking buddies with lower interest rates, don't expect any relief at the gas pump. Oil soared another $3.74 to $109.42 on the NY Merc. Gold rose another $1.70 to $1004.30. Silver continued to pare back recent gains, falling 34 cents to $19.96.

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NYSE Volume 5,458,751,000
NASDAQ Volume 2,351,646,250

Bear Stearns Fire Sale; PPT Goes Into Overdrive

US stock markets get stranger and stranger every day. On Monday, the strangeness just went completely off the charts into new areas of weirdness.

Prior to the markets opening on Monday, the Federal Reserve took some specific actions. First, they lent tacit approval to the fire sale of Bear Stearns (BSC) to JP Morgan for $2 per share by announcing that the Fed would guarantee up to $30 billion in Bears' debt. Second, they lowered the discount rate a quarter point (25 basis points) to 3.25%; third, they extended the term of "discount window" lendings from 30 to 90 days, and fourth, they opened the discount window to brokerages and securities dealers.

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This last maneuver was the real cake-taker. The discount window has always been reserved to borrowing by member banks. All others were excluded. By opening the discount window to brokerages, the Fed has now become not just the lender of last resort, but the ultimate bailout arbiter for all the corrupt practitioners in the brokerage business.

With that, the Fed is telling the American public that the health and welfare of Wall Street is more important than the actual value of the currency.

In other words, Americans can kiss their dollars good bye. Already worth less than half of what they were 10 years ago, US greenbacks will soon be worth almost nothing in comparison to other established currencies such as the Euro, Yen, Yuan and Swiss Franc. Anyone close to the Canadian border would be well advised to convert all US treasury notes into Loonies, and soon.

Essentially, the Fed has no plan to save the nation from falling into recession other than to prop up failed Wall Street brokerages. We should all be reminded that the Federal Reserve, the nation's central bank, issues nothing but scrip, or fiat money, backed by nothing more than good will and blind faith.

The Fed has acted as the nation's bank since 1913, before the Great Depression, and since it wasn't summarily discarded during that fiasco, the Fed has been allowed to act illegally as the main minter of money ever since.

The US Constitution, Article 1, Section 8 clearly defines the powers of Congress (not the Federal Reserve): "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;"

The dollar fell to historic lows against the Euro and the Yen. Officials from Japan and at major banking interests called the dollar's decline "concerning, dangerous and unwelcome."

Foreign markets were battered well before the US stock exchanges opened, and when the US exchanges did open, they collapsed immediately. The Dow tumbled nearly 200 points within the first ten minutes, marking the last "normal" move of the day.

By 11:00 am the Dow was at the unchanged mark and it crisscrossed the break even line until finally closing positively.

Dow 11,972.25 +21.16; NASDAQ 2,177.01 -35.48; S&P 500 1,276.60 -11.54; NYSE Composite 8,489.38 -146.54

No matter how you slice and dice the news, when the NYSE Composite is down nearly 150 points, there's no way the Dow should be up at all. It's completely ludicrous and suggestive of more manipulation by the Fed and their clandestine agents to prevent what we all know is imminent: a crash.

Volume raged today as declining issues submerged advancers, 4993-1300. New lows swamped new highs, 1183-57. Just about one in five stocks hit a new 52-week low today. But those 30 Dow stocks are still safe bets, right? Sure.

With so much negative news concerning global economics, oil finally began selling off on demand concerns, losing $4.53 to $105.68. The distress only bolstered gold's price, which gained $3.10 to another new record close of $1002.60. Silver, which had been rising at an unprecedented pace, was slowed due to its use in industry, falling 36 cents to $20.30, still a remarkable figure.

After today's flamboyant Dow Jones display by the Wall Street crowd, stocks should be expected to fly tomorrow when the Fed announces yet another cut in the federal funds rate of anywhere from 50 to 100 basis points, which will lower that key rate from 3% to 2.50 or even a flat 2%.

The Fed is trying to borrow its way out of a credit crisis, which is like saving drowning victims by pouring more water upon them. It's a complete and utter mess, and sadly enough, the very same people who created the problems are now being called upon to right it. They can't, they won't and they are living and working on borrowed time and borrowed money. All of this is going to end very, very badly, and sooner rather than later.

NYSE Volume 5,783,798,000
NASDAQ Volume 2,381,058,250

Bear Stearns Blows Up, Stocks Slide

For the past week, the denials had been adamant. Officials at Wall Street brokerage Bear Stearns contended that their business was sound and their liquidity position stable.

On Friday, all of the bluster was gone, replaced by admissions that the company was in the throes of a severe credit squeeze and a bailout plan was devised by JP Morgan and the Federal Reserve.

For its part, the Fed trotted out Chairman Ben Bernanke, who once again warned that home foreclosures were damaging to neighborhoods and to the overall economy. Naturally, what the Chairman failed to delineate was the utter failure of the Fed and the banking community to provide safeguards against defaults all through the explosion in risky mortgage vehicles during the past decade.

Now that the banks themselves have their necks in the guillotine, Bernanke and his friends want reforms. How quaint. How reactive and how completely artless are the supposed "rescues" and "solutions" promoted by the Fed.

Bear Stearns typifies the kind of hubris and delinquency rampant in the banking and finance sector of the economy. Bear Stearns, which traded for as much as 159 per share as recently as May of last year, closed down 26.15 (-45.9%) at 30.85. Surely, the financial services firm is facing dire times ahead.

Essentially, Bear Stearns, like many other major players on the Street, is currently unable to finance their ongoing operations because nobody will loan them any more money. They've mismanaged their business and now the Fed is promising to hold their worthless paper. Sadly, the burden will eventually fall upon every living American. For years we will be plagued with higher taxes, lower living standards and price disruptions in everything from mortgages to loaves of bread.

That will only erode the value of the dollar even further. We are witnessing the evisceration of the US dollar as the de facto reserve currency of the world. Foreign central banks and large financial dealers are increasingly wary of buying our debt or valuing deals in dollar-denominated amounts due to its rapidly-declining value.

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What Bear Stearns, the Fed, the banking community and most of America fails to admit is that years of rampant credit expansion, massive government deficits and a wickedly-lopsided trade imbalance has at last destroyed the value of the currency and shattered confidence worldwide.

The complete failure of the US economic system will have ramifications far and wide throughout the worldwide floating fiat-money system. When the top dog yelps in pain, the smaller dogs whine along in time.

Bear Stearns' condition is nothing new. Bankers, all the way up to the level of the Federal Reserve, haven't managed the wealth of the nation well at all. The most obvious manifestation of their mismanagement is the ever-rising rate of inflation, though stagnation in real wages runs a close second. Wealth, in America, is a fleeting thing. At this very moment, some of the wealthiest individuals in the country are literally losing millions every day.

Bear Stearns marks neither the beginning nor the end of this crisis. We are, by most accounts, still in the early phase of what promises to become a long, drawn-out dramatic collapse.

Dow 11,951.09 -194.65; NASDAQ 2,212.49 -51.12; S&P 500 1,288.14 -27.34; NYSE Composite 8,635.92 -191.24

Stocks followed the lead of Bear Steams in hammering prices lower once again. Tuesday's meteoric rise (over 400 points higher on the Dow), was nearly wiped out by Wednesday and Friday's losses. For the week, the Dow was up less than 60 points, the S&P lost five points, while the NASDAQ finished unchanged, to the penny.

The dollar index continued its relentless decline, off more than 15% since January 2007.

Declining issues hammered advancers on the day, 5064-1213. New lows outnumbered new highs, 527-96. Volume was very high signaling that the selling has not only resumed, but likely will carry on for some time.

Oil backed off an entire 1 cents today, closing at $110.21. Gold finally met the expectations of investors closing at an even $1000 per ounce, up $6.20. Silver also closed at a new record high, $20.66, up 24 cents.

Surely, next week and the months ahead will be difficult ones for investors. There is more and more bad news to come, piled atop an already mountainous heap. Our leaders, both in government and the financial community have failed the US population, and badly.

It is long past time for change. Unfortunately, those in power will not go away quietly.

NYSE Volume 5,344,189,500
NASDAQ Volume 2,574,493,500

Laugh (or lie) of the Day: End in Sight for Subprime Writedowns

Today's word from Standard & Poors that the "end is in sight" for the massive subprime writedowns taken by major financial institutions, is as ludicrous and bittersweet as news can become.

The ratings agency issued word that the subprime losses had reached the "halfway point" amidst yet another spate of bad news that had markets reeling early in the trading session.

Prior to the opening bell, the Commerce Department reported that retail sales fell by 0.6 percent in February, while analysts had been expecting a gain of 0.1%.

Chiming in, the Labor Department noted that first time applications for unemployment benefits was unchanged, at 353,000. Import prices also registered a gain of 0.2% in February.

With that news in hand, investors quickly sold off stocks, sending the averages to intraday lows, with the Dow down more than 200 points in the first hour of trading.

With the manufacture of positive news the latest weapon in the arsenal of attacks against falling equity prices, the S&P ploy was just what the spin doctors ordered. Stocks eventually turned positive, with the Dow registering a 100-point gain just after 2:00 pm.

Dow 12,145.74 +35.50; NASDAQ 2,263.61 +19.74; S&P 500 1,315.48 +6.71; NYSE Composite 8,827.16 +45.93

Of course, the hot air eventually was mostly blown out, and the session ended with stocks holding onto marginal gains.

Advancing issues managed to beat back decliners, 3706-2535, though new lows stayed ahead of new highs, 497-84.

Over in the commodities pits, the morning's dismal economic news brought out the best, with gold, silver and oil all reaching all-time highs. Oil gained 41 cents to close at $110.33. Gold soared, briefly trading at over $1000 per ounce, before backing down to finish at $993.80, up $13.30. Likewise, silver added 43 cents to end up at $20.42.

What's interesting, sad and funny all at once about the markets is that any small sliver of good news is magnified far beyond its importance, while bad news is simply taken in stride. While the markets continue to wriggle and writhe their way toward some kind of bottom (probably 12-18 months away), the merchants of happiness on CNBC and at the brokerages have consistently under-appreciated the depth of the downturn.

It's not only too bad for them, but for small investors who have neither the expertise nor keen market understanding to make rational decisions regarding their holdings.

Simply put, anybody who hasn't already taken their 10% penalty and the associated tax bite by at least partially emptying their retirement account has missed the boat. The sad news is that most accounts such as these are already down 15-25% from their summer 2007 highs. The even sadder news is that many baby boomer types are still holding on for dear life (and many happy years in their 60s and 70s), though the chances of regaining their former valuations are slim and nil.

Too bad for them too. The age of 70 is still 15 years away for more than 2/3rds of the boomer generation.

NYSE Volume 5,001,790,500
Nasdaq Volume 2,471,754,250

Foreign Exchange Market Daily Update

The US dollar plunged across the board hitting a new all-time low against the euro and below 100 yen for the first time since 1995 as US retail sales fell unexpectedly last month, adding to the concerns that the United States has entered a recession. In other news this morning, a Carlyle Group fund moved closer to collapse, adding to turmoil in financial markets. The dollar approached parity with the Swiss Franc and slumped versus the British pound after Carlyle said lenders will take over assets of its mortgage-bond fund. Carlyle Capital Corp defaulted on $16.6 billion of debt keeping markets expecting more Fed interest rate cuts. The Fed's attempt at boosting liquidity at the beginning of the week was not enough to restore the confidence in investors and risk aversion will continue as US dollar sentiment continues to deteriorate rapidly ahead of March 18th's FOMC meeting.

The euro soared to unchartered territory against the US dollar as credit market stress reared its ugly head again. European Central Bank President Jean-Claude Trichet reiterated in an interview published today that “disorderly movements in exchange rates are undesirable from the point of view of economic growth.” Despite the ECB President's concern over the recent excessive exchange rate movements, particularly against the US dollar, the EUR has strengthened 7% versus the US dollar this year, building on the 12% gains in 2007.

Sterling rocketed versus the weakening US dollar, taking advantage of the growing sense in financial markets that the Federal Reserve's recent actions to ease credit market strains will not work. England offers the highest interest rates in the G7 nations, which benefits the British pound, due to a widening yield advantage. The Bank of England is not going to cut interest rates any time soon as inflation is likely to rise in the near term.

The Japanese yen shot to the highest in a decade versus the US dollar following poor US economic data and renewed liquidity woes. The yen also gained as investors exited so-called carry trades, in which they borrow in a country with low interest rates and buy higher-yielding assets elsewhere, earning the spread between the two. The risk is that currency moves erase those profits. So far in 2008, the yen has strengthened almost 10% against the US dollar and the Nikkei 225 index has fallen nearly 20%.

The Canadian dollar gained against the greenback supported by record oil and gold prices once again, but has not broken out of the recent range. Canada has strong economic ties with the United States, where it sends the bulk of its exports, so the health of the US economy may eventually start to weigh on the performance of the Canadian economy.

The Australian and New Zealand dollars continue trending higher aided by strong commodity prices and concerns about the US economic slowdown.

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US: More Slowing of Consumer Spending

Overview:

Retail sales for February disappointed with a total decline of 0.6% m/m. Although much of the weakness was driven by non-core components, there was further evidence that real consumer spending is slowing, as households are bowing to a wide range of strong headwinds.

Details:

The weakness in the February retail spending report was exaggerated somewhat by non-core factors. Firstly, the Commerce Department reported another decline in autos sales (subtracting 0.4pp) although the unit sales figures applied by the BEA for the national accounts showed a minor rise in February. Secondly, gasoline sales declined 1.0% (subtracting 0.1pp); they have now risen substantially again. That said, the report was weak even when excluding these factors. Core retail sales (i.e. excluding autos, building materials and gasoline) were flat at 0.0%. With soft readings in prior months as well, the report therefore provides evidence of a further slowing in underlying retail sales. The three-month annualised growth rate in core sales has slowed to 1.1% - the lowest since 2003.

The report included a downward revision of 0.3pp to total December sales, partly countered by a 0.1pp upward revision to January sales. In terms of real personal spending this will imply a minor downward revision to real consumer spending in Q4 from 1.9% q/q AR to 1.8% q/q AR. Contrarily, real personal spending in January will be revised up from 0.0% m/m to 0.1% m/m. For February the report implies rougly flat real personal spending. This implies that even with another flat reading in March real consumer spending will see an increase of ½% q/q AR in Q1.

Assessment & Outlook:

There is little doubt that US households are currently suffering. A whole range of negative factors including high inflation, declining assets prices, tighter credit and a softer labour market is restraining consumers further. The outlook for consumers remains problematic for next few months until the tax rebate begins to kick in during late Q2. Read more on the prospects for consumer spending in our recent research paper "Research US: Consumers under siege".

For the Fed, today's numbers emphasise that the economy is slowing. The markets are now almost fully discounting a 75bp cut in the Fed funds rate at the meeting next week. Our current forecast stands at 50bp, but we doubt that the Fed will dare to disappoint the markets. We will reconsider our call in the edition of Weekly Focus due out tomorrow.

No doubt! Consumer spending is slowing down




Danske Bank

No Spending = No Sales

So what else is new? The surprise isn't that the reading came in bad, but it actually was much lower than expected... THAT was the shock! The worse is obviously has yet to come as we will see more and more dreadfulness in the world's largest economy.

Starting off with the Retail Sales, the Commerce department released their report showing that retail sales fell 0.6% in the month of February compared to the 0.3% rise in January. Retail sales excluding automobiles sank 0.2% in February where the previous month recorded a rise of 0.3% as well.

Retail sales makes up about one-third of the gross domestic product and at this point, it seems that growth slowed down dramatically. But again this isn't much of a surprise since Mr. Donald Kohn previously testified that growth might be as much as zero this quarter. With words like that, confidence was definitely shaken and spending in the economy has slacked due to many reasons such as inclining food and energy prices and weaker income growth.

Further analyzing the components of the retail sales; the sales of durable goods were particularly weak in February while the sales of nondurable goods held up despite the drop in gasoline sales. Automobile sales plunged 1.9% marking the biggest drop since June but were down 4.2% compared with a year earlier.

Another report by the Labor Department concerning Import prices indicated that process of goods imported into the U.S. inclined at a slower pace of 0.2% in February. On an annual basis, import prices also rose 13.6%.

Prices for goods were on the rise as the dollar fell to new record lows against the Yen and the Euro as fears concerning the U.S. entering a state of recession and a possible stagflation piled up.

Imported petroleum prices dropped 1.5% where ironically, these same prices are up 60.9% over the year. Prices for imported natural gas soared 8.7% in February while non-petroleum prices inclined 0.6%. Imported capital goods climbed slightly by 0.1% in February.

On the exports side, the U.S. export prices climbed by 0.9% in February led by the jump in agricultural exports by 4.4%. Over the past year, the have increased 30.8%.

The only cheerful piece of information out today which is not quite that significant was the U.S. weekly initial jobless claims where it showed that the amount of people filing for first time aids in the week ending March 8 was the same at 353,000 from the previous revised reading. The four week average fell last week to 358,500 and continuing claims for benefits remained at its highest level since September 2005.

As for the inventories, U.S. businesses were able to get rid of their inventories in January as sales were faster than their stocks piled up. In relation to sales, inventory levels were at a record low at 1.25 times the monthly sales on a boost from high prices and gains made by wholesalers. Inventories rose 0.8% in January marking the largest rise since mid 2006.

Everyone is favoring a strong dollar... well why would you favor anything else??! A strong dollar is what is needed for the U.S. to ease inflationary pressures and hence bring down energy prices. So unless there's any other way to do that, don't pray for anything but a strong dollar!

But waiting for the dollar to strengthen might take some time especially that the effects of a 50-75 basis point cut next week has been locked into the markets ... dear reader, it's still going to be a while!

Crown Forex

U.S. Market Update

Dow -69 S&P -7.25 NASDAQ -12.3

Early on the eye seemed to have passed for the equity markets as storm clouds built again on re-energized fears in the financial stocks. Futures tumbled overnight after Carlyle Capital failed to reach an accord with lenders suggesting their remaining debt could soon enter default. Credit Suisse confirmed they have been selling some Carlyle assets adding to worries of a fire sale. BSC remains one of the market whipping boys losing another 15%+. XLF -2.5% Gold stocks are one group that is shinning after spot gold briefly traded above $1000 for the first time ever. NEM +3.7% ABX +4% GG +4% Select managed care names are seeing a bit of a dead cat bounce after being slammed over the last few sessions. UNH +4% WLP +2% HUM +10% Equity markets have recouped more than half their losses from yesterday's close after comments from S&P sent the markets rocketing higher. Traders look to be clinging to the ratings agency's call that an end of writedowns for the major financial institutions may now be in sight. Government officials including Treasury's Paulson and House Financial Services Chairman Frank are also introducing new legislation designed to curtail the housing and subsequent credit woes. Bond yields were under pressure early in the session as the risk aversion theme had returned, but as equities have found some traction Treasury prices have come off. The 10-year yield is holding below 3.45% while the 2-year stands at 1.53%. That April fed fund future contract sees better than 90% odds again of a 75 basis point cut while August sees nearly a 75% chance of a 1.75% fed funds rate. Crude remains extremely volatile after making a new high at $111 it has slipped back into negative territory.

The USD remains broadly weaker throughout the latter portion of the European session. Financial market turmoil continues to play havoc on central bank credibility and its ability to find a resolution to the growing credit situation. EUR/USD hit fresh all-time highs above 1.5625 after the Carlyle announcement. USD/CHF also hit life-time lows near parity at1.0040 and USD/JPY broke below the 100 level for the first time since November 1995. Record highs in both NYMEX front month crude futures and spot gold are keeping the USD on the defensive. The risk aversion theme is putting a bid in both JPY and CHF currencies, as carry-related pairs are unwound. As noted in Wed session, FX Dealer chatter continues to center on fixed-income hedge funds, which remain under stress despite recent Fed operations to improve liquidity conditions. Verbal intervention is growing among the central bankers as Trichet stated that central bankers are now “preoccupied” with excessive Forex moves. US Treasury's Paulson reiterated a strong USD is in the nation's interest. The SNB and Norway's central banks kept their interest rates steady as expected. Dealers now ponder when and if central banks will perform the rare task of coordinated intervention. Whatever the outcome, volatility will continue to be on the upper end of recent ranges for numerous currency pairs. Dealer chatter circulating that China may enact a "one-off" revaluation of its currency. Dealers note rumors circulating that China's PBoC may use the current USD weakness environment to enact a onetime revaluation of CNY by over 8% to a rate of 6.50 level from the USD/CNY rate of 7.10. Friday's tend to be the favorite day of implementing new policies. With Oil at all-time highs, FX dealers ponder if US would even consider opening the Strategic Petroleum Reserves (SPR) in an attempt to indirectly strengthen the USD.

Trade The News Staff
Trade The News, Inc.

U.S. Retail Sales Falter in February

- Retail sales slipped 0.6% M/M in February which was significantly worse than expected
- Excluding autos, retail sales fell 0.2% M/M and was also well below expectations
- Excluding autos and gas, retail sales fell 0.1%

Retail sales were much worse than expected in February, posting a 0.6% M/M drop. Excluding autos, retail sales were down 0.2% on the month. On a year ago basis, total retail sales are now up only 2.6%, while retail sales excluding autos posted a 4.4% Y/Y gain. Even more concerning is the fact that the three month trend in total retail sales is now down 3.3%, while excluding autos, the three month trend is down 0.8%. Both are well off their recent peaks. These soft numbers are telling in that they indicate momentum in retailing activity and suggest that consumer activity is becoming increasingly fatigued.

It is clear that the housing market continues to exert a big drag on consumer activity. Building materials were down 0.7% on the month, while furniture and electronics fell 0.5% and 0.4%, respectively. The deterioration in these categories comes as little surprise and should continue as the housing market continues to correct.

Other sectors that posted declines aside from the 0.2% decline in autos were food and beverage sales which were down 0.2%. A number of commodities are posting new highs or at least continue to see price gains. As such, food prices continue to rise across the globe and this could be acting as a drag.

There were, however, a small handful of categories to post gains. They included health and personal care (+0.5%), clothing and accessories (+0.2%), and general merchandise (+0.4%). But in light of the confluence of categories that posted large declines, these modest increases do little to offset the deterioration in overall retailing activity in February.

On balance, this report is troubling. It suggests that the consumer is feeling the pinch of a softening job market, higher prices for key goods, and the other macro economic headwinds that currently weigh on the U.S. economy. The fact that the consumer can no longer depend on the housing wealth effect and job growth is slowing is a bad combination for retailing activity and suggests that consumption, which is the largest component of GDP is increasingly at risk.

TD Bank Financial Group

U.S. Retail Sales Surprise on the Downside in February

In February, U.S. retail sales dropped 0.6%, contrary to market expectations calling for a 0.2% rise. This followed an upwardly revised 0.4% gain in January (previous: 0.3%). Excluding autos, retail sales dropped by 0.2%, which was contrary to market forecasts for a 0.2% gain.

In February, the weakness in retail sales was fairly broad based with only health/personal care stores, clothing and accessories stores, sporting goods stores and general merchandise stores posting gains. Housing related sales were all down. Sales at furniture/home furnishing stores dropped 0.5%, sales at electronics/appliances stores fell 0.4% while sales at building material and garden supply stores declined 0.7%. A decline in gasoline prices contributed to a 1.0% drop in sales at gasoline stations. On a year-over-year basis, retail sales were up 2.6%, the weakest pace of growth since January 2007. The component that feeds into the GDP addup, retail sales excluding automotive and building material and garden supply stores, dropped 0.2% though this was after an upwardly revised 0.6% gain in January. Relative to its Q4 average, sales excluding autos/building materials/garden supply stores were up an annualized 3.1%

With an increase in consumer prices in February probable, today's drop in retail sales implies that they were sharply negative on a real basis. Combined with the weak real consumer spending figures in January, today's data points to markedly slower consumer spending in Q1, consistent with our forecast for spending to basically stall over the January/March period. In fact, over the first six months half of the year, consumer spending is likely to be subdued. The arrival of the fiscal stimulus package will probably boost spending, though likely more so in the second half of 2008.

In a separate report, initial jobless claims for the week ending March 8th were released. They were unchanged at 353,000. The week prior, they were slightly upwardly revised to 353,000 from 351,000. The less volatile four-week moving average dropped to 358,500 from an upwardly revised 359,750 (previous: 359,500).

Tomorrow in Canada

Q4 Productivity figures will be released tomorrow. A deceleration in GDP growth coupled with an increase in hours worked points to declining productivity in Q4 after four straight quarterly increases. For all of 2007, productivity was likely up a paltry 0.8%, the weakest pace of growth since 2004. The further weakness in GDP growth will likely see productivity remain subdued over the first half of the year.

RBC Financial Group

U.S. Consumers Curb Spending, Due To Record Oil Prices

U.S. retail sales unexpectedly fell 0.6% in February, recording only the second drop in eight months supporting fears that the U.S is already in a contraction. Looking deeper into the breakdown, we see that six out of the ten major components declined, led by a 1.9% reduction in automobile sales. Additionally, despite record prices, gasoline and food sales were lower, suggesting that consumers are starting to cut back in those areas. Also, a decline in building materials suggests that the housing industry will continue to negatively affect the economy. Overall, discretionary spending was lower as recession concerns are starting to weigh on the American consumer. The weakening job market, tight credit markets and declining consumer confidence are increasing the downside risk to the economy and weighing on future growth.

DailyFX

Euro Breaks 1.55, Where Is it Headed Next?

- Will Consumer Spending Crush the US Dollar?
- Australian and New Zealand Dollars in Play

Euro Breaks 1.55, Where Is it Headed Next?

What makes today's record breaking day in the EUR/USD particularly unique is the fact that the currency pair is now trading above the psychologically important 1.55 level. Data wise, its been a quiet day in the currency market, but comments from European officials, the continual rise in oil prices, a drop in US credit spending and widening credit spreads have all contributed to the Euro's rise. At the ECB's meeting with the Gulf Cooperation Council today, Trichet was asked whether the Euro's move was brutal. He repeated that he was concerned about excessive moves on the exchange rate, but at the same time, he warned that it is 'very important' for the ECB to continue to 'inspire confidence by solidly anchoring inflation expectations.' Once again, inflation is the central bank's top focus and they will not be willing to compromise their priority. In other words, do not expect the ECB to stop the Euro's rise anytime soon and for this reason, we could easily see a move above 1.56, which is the wave 5 objective of our technical analyst Jamie Saettele. From a fundamental perspective, Eurozone economic data continues to surprise to the upside. This morning, we learned that Eurozone industrial production rose 0.9 percent in the month of January. French current account, non-farm payrolls and Italian consumer prices are due for release tomorrow along with the ECB monthly report. These numbers are generally not market moving but the US retail sales report will have a big impact on the EUR/USD. If consumer spending is weak, like we expect, 1.57 could be an achievable target. Meanwhile the Swiss National Bank has an interest rate announcement scheduled for tomorrow. The earliest that they are expected to cut interest rates is in the fourth quarter.

Will Consumer Spending Crush the US Dollar?

The US dollar fell to a record low against the Euro today and is within pips of closing in on its 8 year low against the Japanese Yen. The latest move in the currency and bond markets suggest that traders are suspicious of whether the Fed's action yesterday will have a lasting impact on the financial markets. Rate cut expectations have also rebounded with the market now pricing in a 74 percent chance of a 75bp rate cut next week, up from a 62 percent chance yesterday. How much the Fed actually eases will be largely dependent upon tomorrow's retail sales report. With US corporations cutting jobs two months in a row and foreclosures rising, consumer spending will certainly suffer. According to MasterCard's data, spending In the month of February dropped 1.1 percent, their largest decline in 5 years, when they first started tracking the data. However, the absolute value of retail sales could increase because gasoline and food prices are on the rise. It is therefore important that traders watch not only the headline numbers, but also the details of the consumer spending report. Don't forget that import prices will be released at the same time as retail sales. Prices are expected to rise but it should only have a limited impact on the US dollar. The bigger market mover is undoubtedly the retail sales report. Meanwhile, at the Gulf Cooperation Council, Qatar confirmed that they will be keeping their US dollar peg while the Saudi Monetary Authority called the US dollar a good buy. An article in the Wall Street Journal today talks about the degree of Middle Eastern investment into the US real estate market. With the dollar continuing to fall, these investments could pick up pace, providing support for the ailing housing market.

Australian and New Zealand Dollars in Play

The Australian and New Zealand dollars will be in play tonight with the Australian employment report and New Zealand retail sales due for release. After two strong months of job growth, we expect the labor market to slow materially especially after Westpac reported that consumer confidence fell to the lowest level in 15 years. As for New Zealand, stronger credit card spending points to stronger retail sales. Meanwhile the Canadian dollar has also gained strength against the greenback thanks to surprisingly good economic data earlier this week and the continual rise in oil prices. We are closing in on $110 a barrel and as long as the US dollar continues to fall, oil prices will continue to rise. Canadian capacity utilization is due for release tomorrow, but that should not have any meaningful impact on the CAD

British Pound Hits 2 Month High

The British pound rallied 230 pips to a 2 month high against the US dollar today. As we expected, the trade deficit narrowed in the month of January as the weakness of the sterling against the British pound drove up the volume of good sold to EU countries. The pound weakened against the Euro which tells us that the move in the GBP/USD may be due just as much to the strength of the British pound as the weakness of the US dollar. EUR/GBP on the other hand continues to gain strength as the monetary policy and economic data of the Eurozone come in stark contrast to the US and UK

Japanese Yen Recovers on Stronger GDP

The Japanese Yen is trading within pips of its 8 year high against the US dollar. GDP growth in the fourth quarter was revised up from 0.6 to 0.8 percent, due largely to an upward revision to inventory investment. The Corporate Goods Price Index was also stronger than expected. In fact, the pace of growth was the fastest since 1981. However the current account surplus and confidence fell short of expectations as the strength of the Yen and weakness of the US dollar weighs on exports. This mixed bag of Japanese economic data gives us little indication on the impact that the US slowdown is having on the Japanese economy to date.

DailyFX

Rally Over, Stocks Resume Slide

Following yesterday's massive Fed-induced, short-seller rally, Wall Streeters tried in vain to make it two in a row... and failed.

With healthy gains on the board by 11:00 am (the Dow was up nearly 150 points), stocks sent the remainder of the session losing value. There was no specific news of import to move stocks, simply the general feeling that the economy as a whole is less likely to improve before it deteriorates further.

Dow 12,110.24 -46.57; NASDAQ 2,243.87 -11.89; S&P 500 1,308.77 -11.88; NYSE Composite 8,781.23 -61.45

It's relatively simple to understand where investors are getting the majority of their negative sentiment of late. Oil and gas prices are exploding, as are food prices, while home sales and prices are down and the credit crunch seems far from resolved. Add a falling dollar to the mix, stir gently and viola you have less disposable income for consumers who are tightening their belts, which usually translates into lower corporate profits.

What may be driving Wall Street's declines more than anything, however, is the absolute dearth of leadership from Washington. Investors are concerned about their futures and all they see from D.C. is stagnation and a lack of solutions. America, over the past 7 years of the Bush administration and a strangled congress, has been reduced to a nation of haves and have-nots. The trouble is that the haves cannot survive well without the have-nots having something. The middle class is being shoved down to a survival class with no means of upward mobility. Such a system cannot and will not work in the longer term.

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There's also a feeling that the Fed has become impotent to a large degree and since announcing yet another option to salvage battered banking interests, another rate cut next week may not be forthcoming. The Fed meets on Tuesday, March 18, to discuss the federal funds rate. Analysts had been looking for a 50 to 75 basis point reduction, but since yesterday many have trimmed that outlook to 25 to 50 basis points.

While today's trading range was not great, the breadth of the losses were significant. Declining issues retook the lead over gainers, 3747-2536, and new lows beat new highs, 327-82.

Oil continued to reach new heights, adding $1.17 to close at $109.92. Gold gained $4.70 to $980.70, while silver was up 23 cents to close at an even $20.00.

Naturally, everybody wants to know what's next. Some answers may come as early as tomorrow as February retail sales figures and the most recent unemployment claims hit the street prior to the opening bell.

The news on the retail front is not likely to be cheery, though only a small decline - 0.1% - is expected.

NYSE Volume 4,314,355,000
Nasdaq Volume 2,158,134,250

Foreign Exchange Market Daily Update

The US dollar fell across the board and reached a new all-time low against the euro on speculation the Federal Reserve's plan to provide funds to banks won't be enough to ease a global credit crunch. Traders bet the Fed will cut rates by as much as 75 basis points on March 18th at the next FOMC meeting, while the European Central Bank keeps borrowing costs unchanged.

The euro soared to a record high against the US dollar as strong euro zone economic data renewed focus on European and US interest rates. The euro extended gains following a European Union report showing industrial production in the region increased for the first time in three months in January, rising 0.9 percent from the prior month. Euro zone finance ministers remain extremely vigilant on foreign exchange rates and Luxembourg Finance Minister Jean-Claude Juncker said the ECB has no reason to follow the US in slashing interest rates.

Sterling steadied overnight as UK growth remains resilient, even though England's economy is facing particular difficulties. The UK should be better positioned than the US to deal with the economy's turmoil and chances of a recession in England seem unlikely in the near term.

The Japanese yen rose overnight after Japan's economy grew faster than expected in the fourth quarter. A revised Japanese government report showed gross domestic product expanded an annualized 3.5%. Asian stocks also rose the most in two weeks, extending a global rally, after the US Federal Reserve said yesterday that it will pump as much as $200 billion into the financial system.

The Canadian dollar gained against the greenback supported by record oil prices once again. Stock markets have played an important role in the loonie's performance this year as they are used as a gauge for the health of the US economy, which takes the bulk of Canada's exports.

The Australian and New Zealand dollars remain buoyant, reinforced by rising commodity prices and improved appetite for riskier assets and higher-yielding currencies.

Union Bank of California
The Bank of Tokyo-Mitsubishi Group

Inflation Threats...

Yesterday's action that was announced by the Feds to provide funds up to $200 billion in Term Securities Lending Facility (TSLF) to primary dealers had its immediate effect on the financial markets.

Investors increased their carry trades bets, while providing the U.S Dollar at the same time with the strength to incline against major currencies…

A disappointing fact though an expected reaction, after the surprise effect did the desired effects on the financial markets, investors and economists both were skeptical over the worthy of such action, as they were still betting the Feds will lower their interest rates by at least 1/2 percentage point next week…

The Dollar dropped back again against majors, the Euro inclined even further against the USD today after the upbeat news from the EU industrial sector, the industrial production rose 0.9 percent in January from a revised flat reading in December, while compared with a year earlier production rose in the 15-nation economy to 3.8%, both readings were better than median estimates, this rise marked the first in three months supported mainly by increased output from Germany the EU largest economy…

The U.K on the other hand released their trade balance for the month of January, the visible trade deficit which measures the trade of goods only was unchanged from December's deficit of ?7.50 billion, while the trade deficit with Non-EU widened to ?4.29 billion. Total exports rose 6.3% to ?19.9 billion, while total imports rose 4.4% to ?27.5 billion; both rises were due to rising food and energy prices, highlighting the BOE concerns over rising inflation as the contribution of the Pound's low value to exports was offset by rising imports' costs.

The economical outlook for both the EU and the U.K economies remain relatively strong when compared to their American counterparts, yet rising inflation remains a major threat to both, the ECB established their stance to be Hawkish, while the BOE are yet to find out the extent of slowing in economical activity.

Both the ECB and the BOE maintained their interest rates steady at 4.00% and 5.25% respectively, but both are experiencing increased uncertainties to their economical outlook, should both find their way through this mess, we can all put our eyes to sleep since they along with China can take the burden of global growth from the United States till the Feds are able to march their economy into safe shores…

Crown Forex

U.S. Market Update

Dow +120 S&P +10.4 NASDAQ +23.4

Equity markets are following through to the upside as the momentum continues from yesterday's 3%+ rally for the major indices. Futures are making new highs late in the New York morning. Financial stocks have found some real traction at least temporarily from yesterday's Fed announcement, and look to post solid gains again led by the investment bank/broker dealers. BSC is up 6% after the CEO appeared on CNBC before the open reassuring investors that there is no truth to the rumors that have been circulating the past few sessions. GS +3% LEH +3% XLF +2.5% Humana -12% slashed guidance keeping the pressure on the stock. The energy complex is the notable laggard as sellers have stepped after weekly crude inventories rose by more than 6M barrels. April crude is lower by 1% but the bullish sentiment is tough to break as it still trades near all-time highs. Gasoline and Heating oil are off 1% as well. Treasury prices are marginally higher but the action there is fairly subdued. Prices did firm ahead of the open of floor trade on renewed rumors around the globe of multiple hedgefunds being in trouble. Metals futures are hovering close to the unchanged market as most of the action appears to be in the equity markets.

Fixed-income markets continued to focus on the stress generated from global liquidity concerns. Dealers noted that the hedge fund community remained under considerable strain as banks continue to demand higher levels of collateral, while customer redemption requests continue to stream in despite recent central bank operations to improve liquidity conditions. The WSJ confirmed earlier market rumors that NY based Drake Capital, a $10B fund, received withdrawal notices from half of its investors. Also problems at Dutch fund GO Capital resurfaced as rumors circulated that the Co. has halted redemptions. Thus, the euphoria the USD managed to generate from the central bank led liquidity operation on Tuesday seemed to be slowly evaporating. The USD is also weighed down by continued elevated commodity prices. Front month NYMEX crude continues to probe the 109 area throughout the US morning, while spot gold remains in striking distance of breaking the $1,000 level. Global inflationary fears are hampering any follow through USD buying. UAE Economic Min noted that changing USD peg may ease the country's inflation and stresses that the USD's fate remains in foreign hands. The EUR/USD briefly tested the 1.5500 level before option-related selling stalled the Euros upside momentum. Dealers note that Mid-East demand for Euros has been 'aggressive' over the last 48 hours. The June GILT contract aggressively sold off after the DMO announced its planned FY 2008-09 Gilts sales at £80B v £59Be. Gilts are off 57 ticks at 110.68, June Bunds are firmer by 5 ticks at 117.51 European Equities are in the middle of their session trading range. Euro Stoxx 50 +1.35 at 3,654, FTSE 100 +1.45 at 5,772, CAC 40 +1.5% at 4,700 and DAX +1.3% at 6,609

Trade The News Staff
Trade The News, Inc.

UK Trade Gap Narrows Further

The UK's trade deficit narrowed for the second consecutive month in January, printing at -4.1 billion pounds versus the expected -4.6 billion. The gap reached as wide as -4.7 billion pounds in the third quarter of last year. Since then, the sterling has lost 12% of its value against the Euro and 4% against the US dollar. This has served as a catalyst of the British export sector - volumes of goods sent to EU countries rose 5% while those sent to non-EU countries rose 7.1% in January.

From a long term perspective, the trade deficit is bearish for the pound, creating a net outflow of money out of the UK and cheapening the sterling by making it more abundant in the global marketplace. This serves to boost exports by raising the purchasing power of foreigners all the while cutting imports by reducing the purchasing power of domestic consumers. The BOE hopes for just such a re-balancing - a slowdown would allow the central bank to avoid raising interest rates further and potentially crushing the economy to meet their inflation target in the face of rising input costs worldwide.

DailyFX

Fed Looks To Prevent Meltdown

The Fed moves will alleviate immediate downward pressure on the dollar, but underlying fears will continue.

The yen weakened sharply in US trading on Tuesday following the Fed's move to boost liquidity. Risk aversion has eased, at least temporarily, which triggered a recovery in high-yield currencies and triggered stop-loss yen selling. The Japanese currency weakened to 103.40 which eased immediate speculation over a dollar decline to the 100 level.

Domestically, the fourth-quarter GDP growth estimate was confirmed at 0.9%, which provided some relief, but the forward-looking data was less supportive. Consumer confidence was at a 5-year low while the Bank of Japan warned over downside risks to the economy. The government's Bank of Japan Governor nominee Muto has been vetoed by the Upper House of parliament which will unsettle the yen to some extent, especially with current governor Fukui due to leave office next week.

The increase in global stock markets lessened immediate yen demand, but there was evidence of increased exporter selling and the US currency was testing the 103.0 level in early Europe on Wednesday. Underlying risk aversion is also likely to remain at elevated levels which will curb yen selling pressure.

Investica

Consumer Sentiment Collapses

The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 9.1% in March from 97.4 in February to 88.6 in March.

This is an extraordinarily large fall. Even though the 9.1% fall is around the 3 year average (9.4%) fall in the Index following a rate hike by the Reserve Bank, this fall has come from a lower base and pushes the Index to its lowest level since September 1993.

The decline over the last three months (23.9 points or 21.2%) is the sharpest three month decline since the Index was first measured in January 1975. There were many other periods during that time when the Reserve Bank did consecutive rate hikes so this result cannot just be attributed to the shock effect of consecutive moves.

The current credit crisis, which is pushing mortgage and other retail lending rates even higher than the rises associated with the Reserve Bank, has also precipitated the biggest (23.3%) fall in the share market since the recession in 1990-91.

In any rate hike cycle there will be one move (usually the last) when the effect is substantially greater than the effect of any previous move. We saw that in both December 1994 and August 2000 when the previous tightening cycles came to an end. This result points to a similar effect for the March move and probably signals that the Reserve Bank has tightened for the last time in this long cycle which began in May 2002.

Predictably, the confidence of the respondents who hold a mortgage fell by a spectacular 12.1%, to be 31.5% down over the year compared to the overall index which is down by 23.3%.

Gloom over the increases in interest rates has probably been compounded by additional mortgage rate increases by lenders and speculation that there is more to come. Confidence on issues such as employment; inflation; international conditions and overall economic conditions has collapsed relative to a year ago.

All components of the Index were down sharply. The assessment of family finances compared to a year ago fell by 15.6%, while opinions on whether now is a good time to buy a major household item fell by 10.9%. Expectations for family finances over the next 12 months fell by 8%. The outlook for economic conditions over the next 12 months was down by 5.6% and the 5 year outlook also fell by 5.6%.

Households have dramatically changed their attitudes about where to save. The proportion of respondents choosing shares fell by 6.7 percentage points to 7.9% from 14.6% in December. This reading is well below levels seen in the aftermath of the dot-com bubble burst in 2001, and clearly the lowest on record for this series which commenced in 1995. Real estate was also unpopular. The proportion choosing real estate as the wisest place for savings fell by 3.7 percentage points from 21.1% to 17.5%. Households now clearly favour banks (up 2.4 percentage points to 24.7%) and paying down debt (up 8.4 percentage points from 12.9% to 21.3%).

Spending plans have also become much more conservative. The Index on whether now is a good time to buy a dwelling fell by 11.4% since December, to 71.8 the lowest since the housing boom faltered in late 2003 and the second lowest since the question was first included in 1995. Intentions towards motor vehicles have soured. The Index of whether it is a good time to buy a car fell by 22.5% since December to the lowest level since the question was first included in 1995, and 28.3% below the average level over the last 10 years.

The results from this Survey are very important. They indicate that the Reserve Bank's last rate hike, combined with further independent moves from the mortgage lenders may have finally slowed demand such that inflationary pressures will ease. As discussed, the last rate hike in a cycle will generally have a much bigger effect than the moves that preceded it. The rate hike in March 2008 appears to fit that profile. The Governor of the Reserve Bank opined in his last Statement that the March move may have been enough to sufficiently slow demand in the economy. The evidence from the Consumer Sentiment Index is that he is probably correct.

Recent further adverse developments in credit markets indicate that retail interest rates including mortgage rates could well rise further without any further action from the Reserve Bank. This development takes even more pressure off the Bank to raise its rates.

As such, we do not expect that the Bank will raise rates again in the cycle. However, inflation will remain uncomfortably high and generous tax cuts later this year are likely to significantly boost households. Interest rates are now likely to stay around these relatively high levels until the Bank feels confident that inflation pressures have eased significantly.

That is not expected to occur before the second half of 2009 at the earliest.

Westpac Institutional Bank

Japanese GDP Surprises to the Upside

Japan's economy expanded at an annualized rate of 3.5% in the final quarter of 2007, surpassing economists' expectations of 2.3%. Yen appreciation notwithstanding, export growth proved to be an important catalyst for growth. The result validated a report released by the Bank of Japan last week that argued the economy was supported in spite of US slowdown and rising input prices, suggesting demand from emerging markets (notably China) will continue to offer substantial stimulus.

Today's result will moderate calls for the BOJ to lower interest rates, which is for the better considering the bank lacks clear leadership at present. As we reported last week, Governor Toshihiko Fukui is set to step down on March 19th. The candidacy of his would-be replacement and current deputy Toshiro Muto has been blocked by the Democratic Party of Japan (DPJ) that controls the upper house of the Diet (Japan's parliament). Critics alleged that Muto's 37 years with the Ministry of Finance far outweigh his 5 years with the BOJ, questioning whether the central bank can truly retail its independence under his leadership.

DailyFX

U.S. Market Update

Dow +217 S&P +22.5 NASDAQ +43.8

Equity markets around the world surged after the Fed announced various new lending tools that would allow them to lend up to $200B to primary dealers. Financials were the major beneficiary led by names related the mortgage market, but most stocks are well off of opening levels. FNM +5% FRE +6% C +5.8% WFC +5.5% WM +8% MS +7% GS +4% Bear Stearns has slide into negative territory as the stock seems unable to shake the recent worries surrounding it. Home builders are seeing a decent relief rally as well. XHB +2.5% Managed Care stocks need an IV after WLP hacked Q1 guidance following yesterday's close. WLP -26% UNH -10% AET -11% CI -12% HUM -20% Texas Instruments is losing ground after lowering Q1 guidance as well. U.S. yields have pushed dramatically higher following the Fed announcement with intense selling in the 2-year flattening the yield curve noticeably. The 2-year yield has climbed some 25 basis points in 24 hours to 1.70% while the 10-year hovers around 3.60%. Some of the most aggressive Fed expectations in terms of future rate cuts have lost steam. The April fed fund future projects roughly 70% odds of a 75 basis point cut where that had been fully priced in ahead of the announcement. The August contract now sees less than 50% odds of a 1.75% fed funds rate this summer where it had seen better than 90% odds yesterday. Crude made new all-time highs again overnight above the $109 handle but has since backed off back below $108 as the Greenback has firmed on the Fed announcement and higher U.S. yields. Metals markets are off of overnight highs as well but still generally posting small gains.

The USD staged a rally against the major currency pairs following the FED's announcement of new lending tools to boost liquidity and help the markets to 'function'.

The actions announced today supplement the measures announced by the FED last Friday to increase the size of the Term Auction Facility to $100B and to undertake a series of term repurchase transactions that will cumulate to $10B. EUR/USD tested a fresh all-time high of 1.5496 helped by rhetoric from the ECB's ultra-hawkish member Weber, before chatter of a 1.55 option barrier contained the upside momentum. The USD was also aided by a slight improvement in its Jan trade balance from consensus expectations to a -$58.2B reading. The USD was able to eek out its best level since the US payroll report from last Friday as stops were elected below the 1.5300 level. For the most part, the USD remains locked within its 7-day trading range, despite the recent central bank liquidity operations. Dealers note that the risk of a coordinated currency intervention is more likely on USD strength rather than weakness. The 1.4970 level would be a level to keep in mind in the EUR/USD pair and 153.30 in EUR/JPY. JPY was weaker on speculation that the Fed was forced to consider more innovative response as continued strains in credit markets threatening to deepen and prolong an incipient US recession. Thus the liquidity measures announced help to reverse the scenario of risk aversion for the time being. USD/JPY trades up180 pips at 103.25; EUR/JPY has added 250 pips at 158.20. Commodity currencies are holding steady despite oil and gold are off of pre-US opening highs. European equity markets are up 2% across the board. June Bunds are down -65 ticks at 117.40 and June Gilts at 111.23 are off 63 ticks.

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Trade The News, Inc.

Foreign Exchange Market Daily Update

The US dollar rose sharply to three month highs against the yen and rebounded from a record low versus the euro after the Federal Reserve announced it will inject liquidity into the financial system, easing the market’s anxiety over a deepening credit crisis and US recession. The Fed said it will hold auctions to lend as much as $200 billion in Treasuries and increase swap lines with the European Central Bank and the Swiss National Bank. Central banks coordinating actions to address the liquidity issue in the market is helping to stabilize the markets and aiding the US dollar recovery. As a result, the Dow Jones gained over 2.0% this morning and traders trimmed bets the Fed will slash its benchmark rate as much as 75 basis points this month.

The euro weakened against the US dollar after hitting record highs overnight, as traders speculated the steps will help ease a credit crisis that is threatening to tip the U.S. economy into a recession. The euro rose to a record against the dollar earlier after an industry report showed investor confidence in Germany unexpectedly improved this month, adding to evidence Europe's largest economy may weather a U.S. slowdown.

Sterling fell from three-month highs after a UK house price measure fell to its lowest since the market crashed in 1990, supporting the case for further interest rate cuts. In other news this morning, separate data from the British Retail Consortium showed retail sales growing at a modest pace last month, as consumer spending tightened, adding more pressure to the British pound.

The Japanese yen fell over 1.4% versus the US dollar as central banks synchronized efforts to assist global liquidity issues. However, the yen will continue to remain firm and the Nikkei 225 index rose 1.0% overnight.

The Canadian dollar gained against the greenback supported by record oil prices, strong domestic data, and a coordinated move by central banks to help ease credit strains. The Bank of Canada said it was ready to pump CAD $4 billion into the market and domestic data showed Canada’s trade surplus widened in January on a surge in exports.

The Australian and New Zealand dollars remain buoyant, reinforced by rising commodity prices and improved appetite for riskier assets and higher-yielding currencies.

Union Bank of California
The Bank of Tokyo-Mitsubishi Group

Forces REUNITE!

A surprise intervention by the Fed's to help pull the economy out of a recession and a narrowed trade balance all in the same day?! Wow this seems like a bright day for the Americans but will they be able to enjoy it while it lasts... or will it fail like previous plans?

Teeing off with the trade balance, it seems that the gap for the month of January actually widened as oil prices rose to set new records. The deficit increased by 0.6% to $58.20 billion after December's reading was revised downwards to $57.86 billion according to the Commerce Department.

Of course the positive effect of the weak dollar was the boost in exports by 1.6 percent to $148.23 billion from $145.86 billion marking the largest climb in six months. The poor dollar performance wasn't the sole contributor to this rise, but the expansion and growth of trading partners also played a major role.

Sales of Consumer goods abroad, such as pharmaceutical preparations, increased by $489 million while industrial supplies; such as chemicals and steel mill products, also climbed $804 million. Food, feed, and beverages also went up by $601 million.

The funny thing is that imports also continued to increase despite the slowdown in the U.S. economy which is slowly turning into a recession. The purchase of foreign goods and services rose by 1.3% to $206.43 billion from $203.72 billion.

Oil imports in January were up to $27.09 billion from $24.90 billion and the reason is crystal clear. With oil reaching the $109.00 per barrel level, we might see more spending in the U.S. bill for crude oil imports. As for all other energy related imports, the U.S. paid $35.84 billion up from $32.39 billion. Food and feed imports also rose $324 million.

But now to the moment that you all have been waiting for... the JOINT INTERVENTION! We have seen a similar act in December 2007 as the G-10 central banks pumped money into the financial system to ease the liquidity and ease the credit crunch.

However this time it was different... today the Bank of Canada, The bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank all joined hands to take desperate measures to help the world's largest economy from sinking further.

It went as follows... the Feds announced today a new Term Securities Lending Facility (TSLF) where they will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days opposing the previous overnight term. The primary dealers are a group of 20 banks and securities firms that trade Treasuries directly with the Federal Reserve Bank of New York. These securities are backed by federal agency residential-mortgage-backed securities and non-agency private label residential mortgage backed securities. The TSLF's primary intent is to promote liquidity in the financial markets and ease any credit market turmoil. Similar to the current securities lending program, securities will be available through auctions which will be held on a weekly basis beginning March 27, 2008.

But wait, it doesn't just end here dear reader! In addition, the Feds also authorized an increase in its existing swap lines with the ECB up to $30 billion and the Swiss National Bank up to $6 billion. These swap lines have been extended through September 30, 2008.

The ECB said it will lend banks in Europe up to $15 billion for 28 days as the SNB announced up to $6 billion. The Bank of Canada plans to purchase $4 billion of securities while the BoE will offer $20 billion of three-month loans on March 18 and hold a further auction on April 15.

After this quick act by the Feds, bets placed on a 1 percentage point cut in interest rates by the Feds have been removed and they were back down to only a cut by 75 basis points.

Speculations that the Feds were to act upon the turbulence in the markets and in an attempt to save the U.S. economy from a recession was reflected in the Asian stock markets as most of the indices climbed. The Dollar gathered momentum to gain against all the majors after the announcement of the TSLF.

Desperate measures are taken and honestly... I salute you! The Feds are not giving up on the economy and they're trying many things simultaneously. The Feds meeting is a week from today where expectations of a rate cut is awaited. With all the efforts combined and the joining of hands will the forces of the world be strong enough to put a floor under the sinking dollar?

Dear reader, the upcoming period is going to be one bumpy ride so strap your seat belts and hold on tight...

Crown Forex

Central Banks in Panic Mode, Dollar Sells Off, Fed to Auction up to $200 Billion

The US dollar skyrocketed this morning after the Federal Reserve announced auctions to lend as much as $200 billion in US Treasuries. This is a coordinated operation in conjunction with the European Central Bank, the Swiss National Bank and the Bank of England. According to the statement published on the website of all 4 central banks,

"Since the co-ordinated actions taken in December, the G-10 central banks have continued to work together closely and to consult regularly on liquidity pressures in the funding markets,"

"We all continue to work together and will take appropriate steps to address these liquidity pressures."

The Fed has increased its swap lines with the ECB and SNB. The Bank of England also announced that it is extending its 3 month loan program. The Fed is now willing to accept a wider range of collateral including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. These loans will be available for 28-days which make them more generous than the overnight loans offered under the current program.

Today's announcement comes minutes after the trade balance report indicates that the Fed is in panic mode. Their prior actions have only lasted for a few days at best and with each announcement, they are stepping up the ante. Unfortunately as much as they try, banks are still reluctant to lend money, which will hinder their efforts.

Expect the dollar to continue to benefit from this announcement, but the rebound may not last long because this action allows Bernanke to replace a 75bp rate cut with a 50bp cut.

Stocks are up, risk aversion is subsiding, carry trades should rally.

DailyFX

US Dollar Rallies as Fed Announces Measures to Address Liquidity Pressures

US Trade Deficit Widens Less Than Expected

The US trade deficit widened less than expected in January to -$58.2 billion, a 0.6 percent increase from December, as exports grew 1.6 percent while the US dollar plunged towards record lows. Meanwhile, imports gained 1.3 percent from the month prior, led primarily by a 10.4 percent surge in crude oil. However, imports of consumer goods declined 4.3 percent, indicating that households are tightening their purse strings.

The US dollar and carry trades are rallying significantly, but it is primarily the result of an announcement by the Federal Reserve that said they will expand their securities lending program. Furthermore, the FOMC authorized increases in its swap lines with the European Central Bank and the Swiss National Bank of up to $30 billion and $6 billion, respectively. The news bodes well for US equities today, as well as the greenback. For the full text of the Federal Reserve's announcement, click here.

DailyFX

EU on FIRE!!!

In times of turbulence and high volatility businesses and consumers' sentiment account for much, as their perception to the extent of imbalance let's say or deterioration, if seen as worse than current conditions, lead to an actual state of further damage in the future as they tend to now foreshadow their collaborative efforts to lead any economy to its doom.

The extent of downside effect the financial turbulence, US recession, and global growth slowdown is still to be measured upon the European Union; and as ECB's Trichet expressed is still within unusual high uncertainties. After steady rates in the euro zone the ECB remained hawkish and did not much project further slowing in economic growth, despite downgrading initial projection. Nevertheless since Germany withholds the highest portion in the 15 nations' GDP news are rather pleasant from there and form the entire euro boarders.

Euro Zone's single currency responded rather very well to today's ZEW sentiment indicators as they all came well above median estimates and improved in March, providing some sort of salvation to worried investors that the euro is now still on its upside journey as the sentiment is providing further resilience despite aching fears of this current rapid appreciation to the single currency that might be considered as an impediment for growth, yet seems that wont stop the Europeans at the time.

The euro managed to surge against the dollar at the time of the release as the euro set a fresh record at 1.5494 approaching $1.55, since the start of the European session the euro resisted its Asian trading range that was consolidating at low levels with downside bias, yet as the pair failed to progress below 1.5330s the downside correction for the day was canceled as the pair reclaimed the upside wave to set new targets after consolidating since yesterday to gather momentum.

Meanwhile on the British front, the CML housing loans data didn't do much to stop the pound from gaining yesterday's losses against the dollar, the data was rather discarded as it carried what markets saw overdue January figures which were already were canceled among the current strong sterling bullish sentiment. After the pound reached to as low as 2.0030s yesterday which resides near 100 days MA acquiring the pound with upside volume to reclaim the upside wave today to test the resistance level were the pound set it European high near 2.0210s and currently trades near 2.0180s.

The Japanese yen has lost its spark today as the equity markets revival works as always inversely with the yen. Japans currency weakened against majors today as the risk appetite has strengthened providing majors like the Euro and the Pound with more upside momentum as their gains were not just against the dollar, while the reclaim their losses against the yen and rise with strong volume. Against the dollar the yen has been falling taking the pair to the upside from the low opening levels at 101.40s to reach strong resistance levels as the pair could progress above 102.26. While against the Euro and Sterling the yens losses were more massive as the pairs rose to set their highs at the hour of this report of 155.57 and 203.58 respectively and are still on the rise.

In the US session we are waiting for January's trade balance data as the deficit is expected to widen despite the depreciation dollar, which of no surprise will be the result of surging oil prices. Imports have definitely slowed in the US as consumption and expenditure are slowing, while China's trade balance already gave us some hints, while as for exports that have been gaining on the back of a weak greenback seemingly didn't contribute as much as policy makers hoped in order to add to the final GDP, for we saw breadline slowing in the manufacturing sector and we noticed falling export orders. The previous assumed likelihood of strong export sector to salvage some growth in the US is not the case this first quarter. This still is adding to the ongoing sentiment which is definite more rate cuts in by the feds meaning further dollar selling!!!

Crown Forex

Weak UK Housing Data

The weak UK housing data will reinforce fears over consumer spending trends and limit the scope for Sterling gains in the short term.

Sterling temporarily strengthened through the 0.76 level against the Euro on Monday before retreating to 0.7635. The UK currency also failed to hold levels above 2.02 against the dollar with a correction back to 2.01.

The data overnight on Tuesday was weaker than expected with the RICS index of house price trends weakening to an 18-year low of -64.1% in February from -54.7% the previous month. The British Retail Consortium (BRC) reported that like-for-like retail sales growth dipped to 1.5% for February from 2.6% the previous month. Activity in the housing sector was low which will lessen the immediate impact, but the weak data will reinforce economic fears and limit Sterling buying support.

Sterling was below 2.01 against the dollar in early Europe on Tuesday before rallying strongly again as the US currency came under selling pressure. The UK currency was slightly weaker against the Euro.

The Wednesday annual government budget should not have a major impact, but a sharp downward revision to growth forecasts would tend to undermine confidence.

Investica

Trichet Shows Unease With Euro Strength But Gets No Official G10 Support

Sunrise Market Commentary

- US Treasuries surge higher on rumour mill
Treasuries got a further boost on rumours about liquidity problems at Bear Stearn that was denied later on and lower equities. However, overnight large chunk of the gains were erased, as Asian equities moved higher. Equities and credit market events key factor for trading today. New high on June Note future needs confirmation.
- Rising tensions on the European money markets
Yesterday, the Schatz, Bobl and Bund futures all set new contract highs. For now, we remain bullish on the outlook for European bonds and would use dips towards the 117.24 level to add to long positions, as the reluctance of the ECB to cut rates will fuel the idea the ECB is falling behind the curve and will have to do more afterwards.
- Trichet shows unease with euro strength but gets no official G10 support
Yesterday, Mr. Trichet said to be concerned about excessive exchange rate moves. However, the G10 apparently didn't join his concerns and the markets weren't impressed either. The US data and events probably will continue to set the tone for USD trading and for now the US news flow remains dollar negative

The Sunrise Headlines

- US equities continue their slide after rumours on problems at Bear Stearn drag the financials to new cycle lows. S&P now at the cycle lows, NASDAQ dropping further below lows confirming break.
- Asian equities higher despite Wall Street's decline and soaring Chinese inflation
- Bear Stearn denies rumours that it has liquidity problems but stock tumbles 11%.
- Lehman is laying off 5% of its workforce according to sources, while Blackstone reported very weak quarterly results, but stock ends up.
- Chinese inflation surges higher to 11-year high (8.7% Y/Y), stoking fears of a tighter monetary policy
- ECB Trichet sounds alarm on euro's rise, FT reports
- Crude seems unstoppable as it sets new high above 108 $/barrel, before easing marginally. There is no fresh news behind the move. Dollar weakness and hedge fund buying continue to be the talk in the market. Other commodities traded calmer.
- Very weak UK housing prices (RICS) and retail sales (BRC) might affect UK markets at opening
- German ZEW index and IEA oil report highlights for trading today

Currencies: Trichet Shows Unease With Euro Strength But Gets No Official G10 Support

On Monday, the eco calendar was thin, but global investor sentiment was still haunted by a new wave of negative credit headlines and rumours. However, the impact of these credit-related stories on EUR/USD was rather limited. EUR/USD traded in the 1.5360/80 area waiting for the declarations from Mr. Trichet after the G10 central bankers meeting. The G10 sees downside risks to the global economy, but also continues to warn about inflation risks. On currencies, the G10 apparently didn't feel the need (or didn't reach a consensus) to make any comments on the decline of the dollar or the strength of the euro. So, on this Trichet could only make some comments in its function of ECB president, and not as chairman of the G10. As ECB president, Mr. Trichet said to be concerned about excessive exchange rate moves and repeated that he noted with extreme attention that the US supports a strong dollar. Of course, the fact that he could only make these remarks as ECB president and not as G10 chairman suggests that there is no big support for the European point of view. On top of that, it remains difficult for the ECB to advocate a strong anti-inflation policy while at the same time trying to cap the strength of the euro which is perfectly in line with its anti-inflation policy. So, the EUR/USD reaction on Trichet's remarkets was rather limited. EUR/USD briefly dropped to the 1.5320 area upon the Trichet headlines but returned to the 1.5350 area soon and closed the day at 1.5340, marginally lower from Friday's closed at 1.5356.

Today, the eco calendar contains the US trade balance and the ZEW economic sentiment in Europe/Germany. Both series recently only had a rather limited impact on trading.

Regarding trading, we have a dollar negative bias and recent developments support that view. At least for now, we are not really impressed by Mr. Trichet's attempts to slow the ascent of the euro. In case of more bad news from the US, the ECB warnings will be forgotten soon. Last Friday's post-payrolls correction suggests the market needs some consolidation after the recent steep dollar losses. This may continue today and tomorrow as the US calendar is back-loaded this week with the US retail sales scheduled for Thursday and the CPI on Friday. However, room for any sustained dollar rebound remains limited.

Looking at the graphs, the EUR/USD picture was already euro constructive and the break above the 1.4968/1.50 only opened the way for further euro gains. We continue to feel confirmed in our long-standing buy-on-dips approach. The short-term picture remains positive as long as the pair holds above the MTMA (1.5174). A correction below could signal that the euro rally shifts into a lower gear.

Short-term the pair remains in overbought territory.

Support is seen at 1.531202 (Reaction low/Break-up hourly + daily envelop), at 1.5289/85 (Reactrion low hourly/Broken weekly Boll Top), at 1.5266 (Weekly envelope) and at 1.5174 (MTMA).

Resistance is seen at 1.5404 (ST high), at 1.5427 (daily envelope), at 1.5465 (reaction high), at 1.5482 (2nd target triple bottom) and at 1.5536 (Last target triple bottom).

USD/JPY

Yesterday, USD/JPY resumed its gradual downtrend and drifted lower throughout the session. A series of negative credit headlines during the US trading hours only reinforced the gains of the Japanese currency. USD/JPY dropped to the101.60 area yesterday and USD/JPY even came close to the 101.4 area (post-payrolls low) this morning. However, the test was rejected and USD/JPY currently trades again in the 102 area. The G10 meeting hardly left any traces on
USD/JPY trading.

This morning, Japanese Finance Minister Nukaga said he will keep carefully watching the FX markets. However, the rebound in USD/JPY this morning in Asia probably has more to do with the (slight) improvement in stock market sentiment in Asia rather than with the Fin Min comments.

Over the previous two weeks, USD/JPY fully joined the global dollar decline. Overall dollar weakness and a flaring up of global risk aversion hammered the pair to new cycle lows. Key technical levels are coming with striking distance (101.22 is 1999 low). Japanese officials will probably try to prevent an uncontrolled USD/JPY sell-off. However, we don't have the feeling that they are already at the point to take decisive action yet. This remains a sell USD/JPY into up-ticks market and if global market/credit uncertainty persists, a test of the 100 level is on the cards.

EUR/GBP

On Monday, EUR/GBP started the week on a weak footing, extending last week's correction. The pair event tested the0.7600 area around noon. The PPI and production data painted a mixed picture and only had a limited impact on trading. However, later in the session, the negative headlines from the financial sector and the credit markets again weighed on sterling sentiment and EUR/GBP started a gradual rebound bringing the pair to the 0.7637 at the close, even slightly higher compared to Friday's close.

This morning, the BRC retails sales and even more the RICS house price balance again painted a break picture on the health of the UK economy and sterling is again feeling some headwinds this morning, with EUR/GBP trading above the 0.7650 area at the moment of writing.

Except for the correction on Friday, EUR/GBP recently held close to the recent highs suggesting ongoing upward pressures in this pair. After the recent steep gains in EUR/GBP, some temporary consolidation shouldn't come as a big surprise. However, we hold on to our view that any sterling up-ticks should be considered a temporary in nature.

On the graphs, EUR/GBP set a corrective bottom at the end of January which was confirmed mid February. The break above the sideways trading range late February was an additional sign that sterling remains very vulnerable both to negative financial sector headlines and to fears of a pronounced slowing in UK growth. Short-term corrections on overbought conditions are always possible, but the trend is obvious and there is no reason at all to row against sterling negative tide. Any downward corrections in EUR/GBP, if they were to, occur, are seen opportunities to sell the sterling. The previous highs in the 0.7550/80 area should already give decent support in this pair.

The pair is in neutral territory

Support is seen at 0.7632 (reaction low), at 0.7620 (MTMA), at 0.7605/96 (ST low/Daily envelop), at 0.7580/77 (MT break-up + Weekly envelop/38 % retracement) and at 0.7553 (Break-up daily).

Resistance comes in at 0.7679 (Break-down), at 0.7693/97/99 (Reaction high/Second target double bottom/ irr B) and at 0.7706(Target triangle break).

News

Other: Input PPI rise to record high, while industrial production stalls

In the UK, the PPI showed little sign of abating price pressures, as the input PPI reached a fresh record high at 19.4% Y/Y and the output PPI stabilized at a 17-year high of 5.7% Y/Y in February. Core output PPI eased slightly from 3.2% Y/Y in January to 3.0% Y/Y in February. The persistence of strong increases in PPI is expected to keep an upward pressure on consumer price inflation in the coming months, which was already expected to rise towards the 3% level by mid-year.

At the same time, industrial and manufacturing production growth stagnated in January. In the three months to January, output remained unchanged compared to the three months to October, while the increase in energy supply was offset by the decrease in mining and quarrying.

The combination of upside inflationary pressures and slowing economic growth still puts the MPC between a rock and a hard place.

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