Fed Funds futures are now seeing a 100% chance of a 25-basis point rate cut by end of the fourth quarter. This shift in futures markets’ expectations is in line with our Federal Reserve Bank forecasts established throughout the year on the rationale that market contagion and prolonged housing weakness will transmit into the overall economy. Fed Chairman Ben S. Bernanke’s inflation-targeting credentials may act as an obstacle to such a policy shift, but as we indicated earlier, the downward impact of cyclical economic slowdowns has consistently proven itself on price growth.
The 8:30 am EST report will show U.S. advanced gross domestic product (GDP) to have grown by 3.2% in second quarter from 0.7% in Q1, thanks to a recovery in inventory accumulation and improved net exports, shadowing a sharp slowdown in personal consumption expenditure to an expected 1.5% from 4.2%. Although the advanced report is based on incomplete information, it will be effective in drawing traders’ appetite through its components. Traders will be especially watching whether consumer spending grew by more than the 1.5% consensus forecast after growing by a healthy 4.2% in Q1 2007 and Q4 2006. The inventory buildup is also expected to shadow a slowdown in business fixed investment (seen at 0.5% from 2.6%).
The report is expected to show the opposite version of the Q1 GDP figures, i.e. a rise in inventories and a decline in personal consumption expenditure. Q1 GDP growth slowed to 0.7% from 2.5% in Q1 due to a 1.0% decline in inventories, which shadowed the persistently strong 4.2% increase in personal consumption growth. In Q2, however, GDP growth is expected to rebound to as much as 3.5% due to an inventory buildup. But these are expected to shadow a sharp slowdown in personal consumption, expected as low as 1.2%, which would be the lowest since Q4 2005 when Hurricanes Rita and Katrina hit the Southeast region.
Consumers will again be the focus at 10 am EST with the final release of the University of Michigan consumer sentiment survey seen slowing to 91.2 in July from 92.4. Also at 10 am EST is a report on U.S. residential vacancies and homeownership expected to show vacancy rates for Q2 after these rose to 2.5% in Q3 2006, 2.7% in Q4 2006 and 2.8% Q1 07 respectively. Further increases in vacancies will mean continued declined in home prices, as was the case in existing home sales, whose unsold supply rose to the highest in 1992.
Technicals indicate further losses in S&P 500 and USD/JPY Since the S&P 500 index and USD/JPY have closely mimicked risk appetite on a daily basis, an examination of their technical developments is important. Yesterday’s S&P 500 close below its 100-day moving average was the first since the February/March market correction, but the index remains well above the vital 200-day moving average currently at 1450. From a momentum and oscillators perspective, S&P 500 suggests further selling ahead, with the 1460 likely to come up within next week. Today’s GDP release may shore up sentiment back in the market, but a close below 1490 (failed triple bottom) and the 100-day moving average of 1488 would be bearish for next week’s activity.
Yesterday’s USD/JPY breach (and close) below its 200-day moving average was the first since March 28 when the pair was under the late February early March damage. Indeed, that very market correction had brought down the pair below its 200-day moving average for the first time since Dec. ‘08, suggesting that the current losses are likely to extend through the 118.30 support (38% retracement from the May 2006 low to the June 2007 high). Upside retracement is limited at the 200-day moving average of 119.50, which failed in Friday’s Asian session.
Kiwi & sterling: Fall from high yielding grace The sharp reduction in risk appetite from escalating concerns with credit access in U.S. and global markets combined with emerging signals of an impending end to the tightening campaigns of the Bank of England and Reserve Bank of New Zealand is punishing the currencies against the U.S. dollar.
The New Zealand dollar (NZD), the best performing currency in the industrialized world, is now under threat to sustain further damage as investors extend their exodus from carry trades amid a combination of deteriorating credit conditions in global capital markets and the end of the RBNZ rate hikes. NZD/USD extends damage from 88¢ (Wed evening EST) to 77.30¢ (Friday morning EST), now eyeing the 77¢t figure. We continue to see declines in NZD vs. CAD, breaching through the Head-and-Shoulder formation from 82.80 to 82¢, eyeing 81.80¢. Upside in NZD/USD remains capped at 78¢, with the periodic upswings remaining as selling opportunities.
Sterling loses more than 3¢ in three days as market contagion from high yielding plays is reducing chances of further Bank of England (BoE) rate hike especially after this week’s weak releases on U.S. home prices and CBI survey. We expect cable to extend selling towards the 2.025 target, which is can clear the way for 2.02. We do not rule out further losses reaching the major foundation of 2.0120.
Euro eyes 1.3580
We stick with our short-term forecast (made Wednesday evening) for further losses in the euro towards the 1.3580, once the interim support of 1.3620 is breached. Upside capped at 1.3660.
Euro zone fundamentals are playing a minor role in euro losses with Germany’s IFO survey reflecting a peak in business sentiment. The bulk of these losses is emerging on rationale that credit access concerns may be reaching to Euro zone but as well on an overall of unwinding of euro longs spreading from the damage in EUR/JPY. The cross pair is now nearing a key support of 161.48, which could clear the way to 2-month low territory of 161.30.
We stick with yesterday’s FX strategy calling for further pullback in the sterling crosses, (EUR/GBP 67.30 med term, GBP/JPY 240 =100-day MA).
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY (212) 644-4220 a.laidi@cmcmarkets.com
