Previous Session Round-up

In the US, looking forward after the financial turmoil, the Federal Reserve Bank of Chicago head said Tuesday, Nov. 27, that business investments may decline, while consumer purchases (including those by creditworthy consumers) of durables and housing units will also go down, leading to sluggish US economic growth.

The US Consumer Confidence Index plunged nearly 8 points from Oct 95.2 to Nov 87.3. This marked the fourth consecutive month that consumer confidence decreased. The Nov figure is much lower than the expected 91 and is the lowest level reached since October 2005.

The credit crunch, continued weakness in the housing sector, and soaring oil prices continue to weigh heavily on consumer’s minds.

The S&P/CS housing price index again fell by 4.9% Y/Y in September in a continuing slide from -4.3% Y/Y in August. The labour market situation is currently mixed and uncertain, but forward outlook is not good.

Citigroup, America’s largest bank, which was badly hit by the mortgage crisis, revealed Tuesday it was set to receive 7.5 billion dollars in investments from the Abu Dhabi Investment Authority to shore up the bank’s capital.

In the EU, there was slight improvement in overall business confidence this month in Germany and France. The German IFO rose to Nov 104.2 versus Oct 103.9 which the IFO interprets as an indication of gradual cooling of the still-strong current economy. In France, business confidence also gained ground from Oct 108 to Nov 110. But in Italy, a slight deterioration in business confidence, from Oct 92.8 to Nov 92.2, led to the lowest confidence level reached since December 2005.

Germany’s preliminary inflation data for November increased more than originally thought at 0.5% M/M and 3.3% Y/Y, with the main drivers being higher prices for energy and food. The higher inflation in Germany puts more pressure on the ECB, caught between a slowing economy and a growing inflation.

But the better than expected business confidence levels in Germany, the volatility in the stock market, and the rising inflation buoyed the euro as it tested the 1.49 level. Towards the end of the session, the euro settled in the 1.4820 band, although US data remained weak.

Brief notes on trades:

• EUR/USD at 23:10 GMT rose to 1.4832 dollars, up from 1.4826 dollars in late trading New York.

• GBP/USD at 23:10 GMT was 2.0671 dollars, down from 2.0690 dollars, after a BoE member noted the inflation risk carried by higher oil and commodities prices. The speech dampened market expectations of the BoE cutting interest rates, pushing GBP lower. The weakness in the UK housing sector and uncertainty of BoE interest rate cuts may increase the chances of more GBP losses, going forward.

• USD/CHF traded at 1.1051 francs after the rallying US stock market triggered more volume in carry trade activity, weakening the CHF.

• USD/JPY was trading at 108.84 yen improving from 108.88 yen in late New York trade. Japanese retail sales enjoyed its third consecutive month of increases, rising 0.8% Y/Y in October. Overall retail sales had also risen at 0.5% each during August and September. However, large-scale retailers reported a slight 1.8% Y/Y decrease, after adjustment.

• A degree of bullishness buoyed up the AUD after Construction sector grew 2.8% in Q3 and the US equity markets rebounded. The Australian dollar reached a slightly higher level of 0.8768 US dollars from 0.8767 US dollars overnight..

• USD/CAD traded at 0.9961 as the slowing US economy fuelled concerns that the Canadian economy would be sluggish as well. Selling pressures on the CAD also came from retreating gold and crude oil prices.

Market Outlook

The EU economic calendar will release M3 money supply data today. No activity is scheduled in the UK economic calendar today. Yesterday, a BoE member highlighted two shocks that hit the UK economy: sharp increases in oil and certain commodity prices, and financial market crisis, both of which increase worries of inflation.

Close attention is invited on the US housing data and durable orders. Later in the session, comments from two Fed speakers and information from the Fed Beige Book (a preliminary document in preparation for the December FOMC meeting) should provide significant information. Durable goods are still expected to decline, perhaps by -0.1% M/M. Existing Home Sales for October are expected (5M units, -0.8% M/M) to confirm the softness in the housing market.

The Fed Beige Book may provide information about the stuttering economic growth, which may leave the door open to some easing in policy.