Broken News ( Daily Update )

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G7 Europe Fin Mins See Resilient Econs Despite Financial Woes

Thu, Jan 17 2008, 18:10 GMT
http://www.djnewswires.com/eu

G7 Europe Fin Mins See Resilient Econs Despite Financial Woes

PARIS -(Dow Jones)- The four European finance ministers of the Group of Seven leading industrial nations met Thursday and expressed confidence in the resilience of the European economies in the face of global financial turmoil.

In a meeting in Paris, the U.K.'s Alistair Darling, Germany's Peer Steinbrueck, Italy's Tommaso Padoa-Schioppa, France's Christine Lagarde, as well as European Commissioner for Economic and Monetary affairs Joaquin Almunia, called for enhanced cooperation among financial regulators to prevent future financial crises.

The ministers said although the financial-market turmoil was a threat to global growth, it hasn't affected the real economy in Europe yet which is more resilient than that of the U.S.

They added that emerging markets will continue to fuel global growth.

"The downside risks to economic growth in Europe have increased," Almunia said during a press conference. "Growth forecasts for Europe in 2008 are being revised downwards. But the downwards revision is even more pronounced in the U.S.

"We can't ignore downside risks to growth," Almunia added.

The ministers said they didn't discuss the U.S. economy and stopped short of saying that the U.S. is headed for a recession. But Almunia did say the U.S. economy is facing a "pronounced slowdown."

-By Geraldine Amiel, Nathalie Boschat and A.H. Mooradian, Dow Jones Newswires; +331 40171740; [email protected], [email protected];

(END) Dow Jones Newswires

January 17, 2008 13:10 ET (18:10 GMT)


Copyright 2008 Dow Jones & Company, Inc.

 

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Bernanke says stimulus package must raise federal deficit short-term

Thu, Jan 17 2008, 18:13 GMT
http://www.afxnews.com

WASHINGTON (Thomson Financial) - It is inevitable that any fiscal stimulus package would raise the federal deficit, Federal Reserve Chairman Ben Bernanke said today, and the efforts by some in Congress to offset spending increases with tax increases would not make sense.

"It would be counterproductive to increase taxes as part of this program," he told the House Budget Committee in the question-and-answer session following his testimony on a possible fiscal stimulus package.

Bernanke said any stimulus had to be quick, temporary, maximize spending by consumers and businesses in the next 12 months and not worsen the long-term budget problems facing the federal government.

[email protected]

dem/wash/ajb

COPYRIGHT

Copyright Thomson Financial News Limited 2007. All rights reserved.

The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.

 

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Bernanke says stimulus package must raise federal deficit short-term

Thu, Jan 17 2008, 18:13 GMT
http://www.afxnews.com

WASHINGTON (Thomson Financial) - It is inevitable that any fiscal stimulus package would raise the federal deficit, Federal Reserve Chairman Ben Bernanke said today, and the efforts by some in Congress to offset spending increases with tax increases would not make sense.

"It would be counterproductive to increase taxes as part of this program," he told the House Budget Committee in the question-and-answer session following his testimony on a possible fiscal stimulus package.

Bernanke said any stimulus had to be quick, temporary, maximize spending by consumers and businesses in the next 12 months and not worsen the long-term budget problems facing the federal government.

[email protected]

dem/wash/ajb

COPYRIGHT

Copyright Thomson Financial News Limited 2007. All rights reserved.

The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.

 

[surf4sports]

U.S. Stocks Drop on Merrill Loss, Decline in Philly Fed Index

By Eric Martin

Jan. 17 (Bloomberg) -- U.S. stocks fell for a third day after a Federal Reserve report said manufacturing in the Philadelphia region dropped to a six-year low and Merrill Lynch & Co. posted a loss that was double analysts' estimates.

Merrill, the largest brokerage, slumped the most since September 2001 in New York Stock Exchange trading after writing down $16.7 billion in failed investments. Goldman Sachs Group Inc., Morgan Stanley and Bear Stearns Cos. also tumbled. Monsanto Co. posted its steepest decline in almost five years after UBS AG recommended selling shares of the world's biggest seed producer.

The S&P 500, which is off to its worst-ever start to a year, lost 24.84, or 1.8 percent, to 1,348.36 at 1:05 p.m. in New York and is down 8 percent this year. The Dow Jones Industrial Average decreased 180.3, or 1.5 percent, to 12,285.86. The Nasdaq Composite Index slid 25.29, or 1.1 percent, to 2,369.3. Almost five stocks fell for every one that rose on the NYSE.

``The market clearly right now is fearing, and trading on the assumption, that there is a significant slowdown going on in the economy and probably a recession on the horizon,'' said Dean Gulis, who helps manage $3 billion at Loomis Sayles & Co. in Bloomfield Hills, Michigan. ``That's what's driving stocks.''

Approaching 'Bear' Market

Benchmark indexes are approaching so-called bear markets, which are marked by declines of at least 20 percent from highs. The S&P 500 and Dow average have both lost more than 13 percent from their Oct. 9 records, while the Nasdaq composite has tumbled 17 percent from an almost seven-year high on Oct. 31.

Manufacturing in the Philadelphia region contracted more than forecast in January, adding to evidence factories are cutting production as the economy slows. Fed Chairman Ben S. Bernanke reiterated in testimony before Congress that the outlook for growth in 2008 ``has worsened.'' Still, he said the central bank is not forecasting a recession for this year.

Builders broke ground on the fewest houses since 1991 in December, making last year's decline in homebuilding the worst in almost three decades.

Merrill fell $4.40, or 8 percent, to $50.69. Goldman lost $4.20 to $193.30. Bear decreased $4.15 to $74.90.

Merrill's fourth-quarter net loss of $9.83 billion, or $12.01 a share, compared with a $4.82-a-share deficit forecast by analysts in a Bloomberg survey. The decline resulted in Merrill's first full-year loss since 1989.

Financial companies in the S&P 500 have lost 9.8 percent as a group this year after tumbling 21 percent in 2007.

Bond Insurers Tumble

MBIA Inc. and Ambac Financial Group Inc., battered by losses from the collapse of the subprime mortgage market, fell the most ever today on concern they will lose their AAA credit ratings.

Ambac dropped as much as 65 percent and Armonk, New York- based MBIA fell as much as 38 percent after Moody's and S&P said late yesterday they are reviewing the rankings the companies' depend on to sell bond insurance.

Monsanto tumbled $12.15, or 11 percent, $100.55. UBS initiated coverage of the shares with a ``short-term sell'' rating, saying the company could miss second-quarter earnings estimates as farmers plant more acres of soybeans and less of corn. Corn made up 33 percent of Monsanto's revenue versus 11 percent for soybeans in the fiscal year ended in August, according to Bloomberg data.

``Right now, this market is the Devil's arcade,'' said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages about $6 billion in San Antonio. ``We're looking at a possible recession with housing being the drag.''

Economy Watch

The Philadelphia Federal Reserve Bank's general economic index declined to minus 20.9, the lowest reading since October 2001, from minus 1.6 in December, the bank said today. Negative readings signal contraction. The index averaged 5.1 in 2007.

Housing starts decreased 14 percent to an annual rate of 1.006 million, the lowest since 1991, the Commerce Department said. For all of 2007, starts were down 25 percent, the biggest decline since 1980, to 1.354 million.

Bernanke said a ``temporary'' fiscal stimulus would help the central bank to buttress economic growth, while warning against worsening the longer-term outlook for budget deficits.

``Fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary policy actions alone,'' Bernanke said in testimony to the House Budget Committee. He repeated remarks from last week that the Fed is ready to take ``substantive additional action'' to insure against risks of a recession.

Rate-Cut Bets

The odds on the size of an interest-rate cut at the Fed's meeting at the end of January remained the same. Fed funds futures trading indicates a 40 percent chance of a 0.75 percentage point reduction in the benchmark rate to 3.5 percent, the same odds as yesterday. The rest of the bets are for a 0.5 percentage point cut.

Harley-Davidson Inc., the biggest U.S. motorcycle maker, dropped $2.27 to $37.36 after it was downgraded to ``sell'' from ``hold'' at Citigroup Inc.

McAfee Inc., the second-largest maker of security software, slumped $1.41 to $30.74 after it was downgraded to ``neutral'' from ``buy'' at UBS.

To contact the reporter on this story: Eric Martin in New York at [email protected] .
Last Updated: January 17, 2008 13:09 EST

 

[surf4sports]

Bernanke Says Fiscal Stimulus `Could Be Helpful' (Update2)

By Craig Torres and Scott Lanman

Jan. 17 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said ``temporary'' fiscal stimulus of as much as $150 billion would help revive economic growth, while warning against worsening the longer-term outlook for budget deficits.

A package that delivered at least $60 billion to $70 billion in spending by early 2009 would have a ``significant'' effect in the second half of this year, he said.

``It would certainly be measurable, it would not be window dressing,'' he told the House Budget Committee in Washington today in response to a question. He said $50 billion to $150 billion ``are reasonable ranges'' for Congress to consider.

Bernanke's acknowledgment that the economy is weak enough to need stimulus may reinforce forecasts for the Fed to lower interest rates by at least half a point this month. It may also give impetus to the Bush administration and Congress to reach an agreement more quickly, analysts said.

He repeated remarks from last week that the Fed is ready to take ``substantive additional action'' on interest rates to insure against risks of a recession.

``Support of a temporary fiscal stimulus suggests great concern on Bernanke's part about the downside risks,'' said Robert Eisenbeis, a former research director at the Atlanta Fed. ``He certainly doesn't want to be held responsible for a recession, even though the seeds were laid during'' the final years of former chairman Alan Greenspan's tenure, he said.

Timing Critical

Bernanke warned that a fiscal package could also ``prove quite counterproductive'' if it arrived at the ``wrong time or compromised fiscal discipline in the longer term.''

Bernanke reiterated that the outlook for growth in 2008 has worsened and ``the downside risks to growth have become more pronounced.'' He said the Fed isn't forecasting a recession this year.

Retail sales fell last month, unemployment rose, and housing markets are mired in the worst slump in 16 years.

Bernanke noted that banks are trying to protect asset quality and funding, and tightening credit conditions for the rest of the economy as a result.

``Banks have also evidently become more restrictive in their lending to firms and households,'' he said. ``More expensive and less-available credit seems likely to impose a measure of restraint on economic growth.''

Housing Starts Tumble

Homebuilders broke ground on the fewest homes since 1991 last month, the Commerce Department reported today. Building permits, a sign of future construction, declined by the most in 12 years, suggesting the housing slump will deepen.

Residential construction subtracted about 1 percent from growth in the third quarter, and likely curtailed growth even more in the fourth quarter, Bernanke said. Sluggish housing markets ``may continue to be a drag on growth for a good part of this year.''

Bernanke said that inflation, both including and excluding food and energy costs, ``should moderate this year and next, so long as the public's confidence in the Federal Reserve's commitment to price stability is unshaken.'' He cited inflation expectations that appear ``well anchored'' and futures suggesting food and energy price increases will slow.

Break With Greenspan

Bernanke in past congressional appearances has typically avoided recommending any particular tax measure. His predecessor, Alan Greenspan, involved himself in shaping tax policy, recommending cuts over spending increases in 2001, a strategy which his colleagues disliked out of concern it would compromise the central bank's independence.

The Fed chairman's speech ``is an endorsement of temporary measures, if enacted quickly, but he's covering himself to ensure he is not blamed for anything in a few years, the way Greenspan is now blamed for endorsing the Bush tax cuts,'' said Ian Morris, chief U.S. economist at HSBC Securities USA Inc.

Aside from quick implementation, a stimulus package should also be ``structured so that its effects on aggregate spending are felt as much as possible in the next 12 months,'' Bernanke said today. If stimulus comes at a time when growth is improving, it could be ``destabilizing,'' he said.

U.S. Treasury and White House officials are considering tax proposals that would provide consumers with more cash and give businesses an incentive to invest more in their capital stock, according to analysts speaking with administration officials.

Economists at JPMorgan Chase & Co. estimate that the economy grew at 1 percent in the final quarter of last year, slowing from a 4.9 percent pace the previous three months. Merrill Lynch & Co., Morgan Stanley, Goldman Sachs Group Inc. and Nomura Securities International Inc. are all predicting a recession in 2008.

New Strategy

Bernanke and Governor Frederic Mishkin signaled a new strategy last week, when they said in speeches that they favor greater ``insurance'' against the prospect of an economic downturn. That's a break from basing policy on central bank forecasts, which anticipate a continued expansion.

The Jan. 10 remarks by Bernanke, 54, and Mishkin the next day led traders to increase bets the central bank will cut its main interest rate to 3.75 percent from 4.25 percent currently at the conclusion of Federal Open Market Committee's two-day meeting on Jan. 30.

Policy makers' shift may have been driven by the Labor Department's Jan. 4 report showing the jobless rate jumped to 5 percent in December, economists said. The figures also showed the first decline in private-sector employment since 2003. Bernanke called the jobs data ``disappointing.''

To contact the reporter on this story: Craig Torres in Washington at [email protected] , Scott Lanman in Washington at [email protected]
Last Updated: January 17, 2008 13:01 EST

 

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UK Retail Sales Could Accelerate the GBP/USD Rally Towards 1.9900
Thursday, 17 January 2008 14:50:42 GMT
Printer Friendly | Email Article | RSS | Previous articles
Previous Articles

* Jan 17 - UK Retail Sales Could Accelerate the GBP/USD Rally Towards 1.9900
* Jan 16 - Australian Labor Market Data May Help Propel AUD/USD Towards 0.9000
* Jan 15 - Will US CPI Lead the Dollar to Record Lows Against the Euro on Wednesday?
* Jan 14 - EUR/USD: Will US Retail Sales Drive The Last Nail Into The Dollar's Coffin?
* Jan 11 - Will UK Inflation Data Push GBP/USD Towards 1.97?
* Jan 10 - Will USD/CAD Rally to 1.0250 or Return to Parity?
* Jan 09 - How Will the ECB and BoE Rate Decisions Affect the Euro and British Pound?
* Jan 08 - AUD/USD May Break Above 0.8900 On Strong Australian Retail Sales
* Jan 07 - US Pending Home Sales Likely To Show That Housing Hasn't Bottomed Yet
* Jan 04 - Euro-zone Consumer Sentiment May Weigh On EURUSD, But Not For Long
* Jan 03 - US Dollar: The Worst May Not Be Over Yet As NFPs, ISM Loom On Friday
* Dec 31 - What To Expect For EUR/USD, Treasuries, and the Dow As We Enter 2008
* Dec 28 - EUR/USD May Take On 1.50 With the Help of Weak US Existing Home Sales
* Dec 27 - USD/JPY: Stagflation in Japan? Unlikely - But Yen Weakness May Persist.
* Dec 24 - Japanese Data Could Reignite Price Action, Push USD/JPY To 115
* Dec 21 - USD/JPY Could Spike Through 114 On Weak Japanese Business Sentiment
* Dec 20 - NZD/USD: Will New Zealand Q3 GDP Reignite A Bid Tone For Kiwi?
* Dec 18 - GBP/USD: Bank of England Minutes Will Determine The Pair's Next Move
* Dec 17 - Will USD/CAD Break Parity On Tuesday's Canadian CPI Data?
* Dec 14 - Dollar Strength Could Continue as Current Account Shrinks

Written by Terri Belkas, Currency Analyst

JAN 18


UK Retail Sales (MoM) (DEC) (09:30 GMT; 04:30 EST)


UK Retail Sales (YoY) (DEC) (01:30 GMT; 19:30 EST)




Expected: 0.2%


Expected: 3.4%




Previous: 0.4%


Previous: 4.4%

What Are The Markets Facing?

Retail spending in the UK is anticipated to slow during the month of December to 0.2 percent, while the annual rate of growth is forecasted to hit an 11-month low of 3.4 percent. The data would be in line with the British Retail Consortium’s (BRC) December survey, which indicated that mounting energy prices and deterioration in the housing sector led sales to only rise a tepid 0.3 percent from last year. On the other hand, UK retailers such as HMV, Home Retail Group, Kesa Electricals, and Primark reported stronger-than-expected figures that suggest the headline retail sales report could be a bit better than forecasts. Furthermore, labor market conditions remain extremely resilient, and average earnings in November surprisingly held steady at 4.0 percent (they had been expected to ease lower). However, it may only be a matter of time before the UK consumer will cut back on discretionary spending drastically, especially as the effects of the Bank of England’s tightening cycle in the earlier part of 2007 comes into play. Indeed, Bank of England Deputy Governor John Gieve said on Thursday, “Growth is slowing quite sharply now, in part because of the rises in interest rates last year. That in itself might justify a progressive shift in policy from restrictive to a more neutral stance." Gieve notes a “neutral stance” rather than an accommodative one, as he also noted that accelerating food, petrol, gas and electricity prices are likely to push the “inflation rate well above target in the coming months at a time when short-term inflation expectations remain uncomfortably high.” As a result, the Bank of England is likely to leave rates steady at 5.50 percent in February, but the monetary policy committee’s bias remains a dovish one and the markets are betting they will cut rates down to 4.75 percent by the third quarter.

Bonds – 10-Year Long Gilt Futures

On a short-term basis, Gilts have recovered quite a bit from trendline support, but there are still indications that the contract has topped out. Given the UK event risk on Friday, Gilts could tumble through noted support towards 110.25, as retail sales are forecasted to improve. Furthermore, BOE Deputy Governor Gieve’s recent commentary suggests that rate cut expectations for the bank may be overdone, and Gilts may respond accordingly in coming days.

Cross1_1-17

FX – GBP/USD

The GBP/USD pair has done nothing but consolidate losses since running into support at the 1.95 level, though it has managed to push above 1.97, which lends a bullish bias. Meanwhile, DailyFX Technical Strategist Jamie Saettele noted recently that Cable may have formed an intermediate bottom, and that the pair could rocket higher towards the 2.00 level. However, the release of UK retail sales on Friday could weigh the British pound down, as the figure is anticipated to show that consumption growth slowed during the month of December. However, if the data proves to be better than expected, the news could actually lead Cable to trek higher. Moreover, with aggressive rate cuts by the Bank of England already priced into GBP/USD, the declines may be overdone and the pair could respond more severely to slightly bullish economic figures.

Do you think Cable will recover? Discuss the topic with other traders and DailyFX analysts in the GBP/USD Forum.

 

[surf4sports]

Fed – still a long way to go

Fri, Jan 11 2008, 13:15 GMT
by HVB Group Global Markets Research

HVB Group

*

Disappointment! The US economic data released at the turn of the year fell very shy of expectations: The purchasing managers’ index plummeted, the downturn in the housing sector continued unabated, and the unemployment rate surged to 5% (pages 4-7).
*

Recession? Nevertheless, we still do not expect a full-blown recession (chart below). But growth at the start of the year probably did little more than stagnate. Factors arguing against a contraction in GDP are still rising incomes and robust exports, which are profiting from the weak USD.
*

Fiscal program. In addition, there will probably be tangible fiscal impulses. Planning is at a fever pitch. The Bush Administration has adequate scope for this – despite the Democratic majority in Congress and the continuing presidential primaries (pages 8-10).

*

Fed. However, the measures will not come soon enough to take the pressure off the Fed. Indeed, Bernanke's surprising speech yesterday suggests that the Fed wants to buy additional insurance. This makes a 50 bp rate cut at the end of January almost a done deal – followed by further cuts of 75 bp until mid-year, bringing the target rate down to 3%.
*

Further topics:

– Weekly Comment: Separate ways (page 2).

– ECB: Trichet’s doux tightening bias (page 10).

– Eurozone: Wage rounds a major headache for the ECB (page 11).

– Data outlook: ZEW & EMU industrial production decline; US leading indicators and retail sales to decline (page 14).

– Market outlook: EUR and bonds to continue to post gains (p. 23).


Separate ways

Yesterday’s decoupling between Trichet’s and Bernanke’s speeches was remarkable, and seems to me unsustainable. I found Bernanke’s tone surprisingly dovish, but the message was clear. The Fed, like us, has been looking to the resilience of the labor market as the floor supporting US consumption and growth. The latest employment report flagged the risk that this floor might cave under the weight of the housing rubble. Should that happen, a recession would be inevitable. With housing also deteriorating beyond expectations, the Fed thinks that the baseline outlook has worsened and the downside risks to growth have increased. It therefore stands ready to buy insurance with further “substantive easing”. We read this as implying a 50bp cut this month and a 3.0% Fed funds rate by mid-year, and are changing our call accordingly. Compared to Bernanke, Trichet sounded implausibly aggressive, and I prefer not to believe that the ECB yesterday seriously considered hiking rates. I believe the ECB is bluffing to scare wage setters into agreeing to moderate wage increases. Having said this, the bluff will make it difficult for the ECB to quickly change stance without losing face and credibility. It seems therefore likely that it will stand firm while it starts building a positive interest rate spread against the Fed. Some softening of the rhetoric and a decline of headline inflation numbers should allow it to moderate its rhetoric towards a neutral stance, and this will hopefully suffice to prevent a rapid further rise of the euro. If this were not the case, the ECB would be in trouble.

Trichet maintained an extremely hawkish tone in his press conference after the ECB decided to leave the refi rate unchanged at 4%. In the Q&A session, he stated very clearly that the Monetary Council had debated only two options: whether to hike rates or whether to keep them on hold; the possibility of cutting rates was not on the table at all. He also stated that the bank still has a tightening bias, and not a neutral one. I have been arguing that rate cuts are not on the ECB’s radar screen, but still found Trichet’s hawkish tone striking. Trichet’s assessment of the economic outlook was also relatively sanguine based on a working assumption that the slowdown in the US will be mitigated by the strong dynamics of emerging markets. Trichet’s statement also played down the extent to which the financial crisis is limiting the availability of credit, arguing that there is little evidence that the turbulence has influenced money and credit growth, and that the supply of credit does not seem to have been impaired so far.

Similarly, in the Q&A session, Trichet noted that the technical year-end tensions in money markets had receded, and spreads had declined, thanks also to the TAF auctions to inject dollar liquidity. Trichet was of course careful to stress that tensions had not disappeared and that we are not back to normal yet, but overall the emphasis seemed to be on the improvement. This left the ground open for a frontal attack against the temptation of substantial wage increases that could trigger second round effects on inflation: wage settlements or price setting not in line with the ECB’s inflation objective would trigger a policy reaction.

Bernanke’s speech had a diametrically different emphasis, and I was in fact surprised by how dovish his tone was. On the financial crisis, Bernanke also acknowledged the progress made in addressing the liquidity squeeze, particularly with the recent introduction of the TAF, which he argued seemed to avoid the two main pitfalls of the discount window (stigma attached to the borrowing and Fed’s uncertainty on the amount that would be drawn) and which would therefore be kept in operation as long as necessary. However, he noted that difficulties in valuations of assets and uncertainty on credit quality and on possible further write-offs by banks are a separate issue and are still high, so that the financial situation remains fragile. He also argued that the financial turbulence has already resulted in “more expensive and less available credit which seems likely to impart a measure of financial restraint on economic growth.” In other words, the credit tightening is underway and already being felt. He also underscored the risk of a vicious spiral where bad economic data lead to tighter credit, making the economic situation worse still, etc.

Similarly, Bernanke’s assessment of growth was on the pessimistic side. He noted that recent data suggested that the baseline outlook for 2008 has worsened and the downside risks have increased. This reflects: (1) further weakening of housing beyond what the Fed expected, and (2) a weaker consumption outlook due to higher energy prices, lower equity prices, and the worsening housing market. This by itself implies that more easing is required and warranted. Moreover, Bernanke highlighted the recent alarm bells ringing in the labor market, with the jump in the unemployment rate and the poor performance of private sector payrolls. He cautioned that the recent labor market report might be a fluke, but if it is not we are in serious trouble.

Against this background, the reference to inflation risks and inflation expectations seemed perfunctory: the Fed will keep monitoring them, but they are not seen as a real and present danger. Bernanke concluded that the Fed “stands ready to take substantive additional action to support growth and provide adequate insurance against downside risks”. To me that indicates a 50bp cut at the next meeting. A simple reference to substantial further action if needed could have been read as a commitment to act decisively if and when the data deteriorate, but the reference to insurance indicates that the easing must come sooner. The Fed seems worried that a quick and sharp deterioration in the labor market would suddenly undermine the whole GDP growth outlook, and plunge the economy into a recession before it has time to react. That would be a very ugly scenario, and the latest payroll figures seem to have tipped the balance towards buying further significant insurance. A 50bp rate cut at the end of this month would provide that insurance, and hopefully give the Fed enough breathing room to reach the March meeting without the need for an inter-meeting cut (no meeting is scheduled in February). The market has read it accordingly, pricing now a close to 90% chance of a 50bp cut.

Moreover, the very dovish tone of Bernanke’s speech suggests that the Fed will not stop at the January cut but will keep easing policy until it receives some reassurance from the data. While we still do not expect the economy to go into a full-blown recession, we have been highlighting that we expect very weak growth in the next 3-6 months. These data are likely to push the Fed to cut further, and we now expect it to cut the Fed funds rate all the way to 3.0% by the middle of the year. This is a very significant change from our previous 4.0% call, and it stems chiefly from the combination of stronger downside growth risks and a Fed clearly less willing to take any risks on the growth front. Another indication that the Fed is headed for significant further easing in my view stems from the commitment to remain “alert and flexible” reiterated in Bernanke’s speech: the message is that the Fed is ready to err on the side of caution with substantive easing, partly because it stands ready to quickly reverse course and start hiking if the economy turns out to be stronger and the rate cuts excessive.

 

[surf4sports]

Bernanke endorses quick, temporary, targeted fiscal stimulus

Thu, Jan 17 2008, 15:16 GMT
http://www.afxnews.com

WASHINGTON (Thomson Financial) - Federal Reserve Chairman Ben Bernanke told Congress any fiscal stimulus package should be quick, temporary, targeted at maximizing immediate spending and not make the long-term federal budget outlook worse.

That's an approach likely to please Democrats who're talking about short-term cuts and benefit increases, and to disappoint Republicans who're talking about using a stimulus bill to extend President George W. Bush's tax cuts beyond 2010 when they're scheduled to expire.

"To be useful, a fiscal stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next twelve months or so," Bernanke said in testimony prepared for the House Budget Committee.

The Fed chairman also repeated his statement last week that the Fed itself is "ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks."

Bernanke said a stimulus package should be "efficient, in the sense of maximizing the amount of near-term stimulus per dollar." And, as important, "any program should be explicitly temporary."

Bernanke warned that a package could be counterproductive, if, for example it provided economic stimulus at the wrong time or compromised fiscal discipline in the longer term.

He is warning against the long-standing tendency for Congressional stimulus packages to bog down in partisan wrangling and finally pass only in time to add stimulus to an economy that has already begun recovering.

"Stimulus that comes too late will not support economic activity in the near term," Bernanke said, "and it could be actively destabilizing if it comes at a time when growth is already improving."

Long-term tax code changes, "whatever their intrinsic merits, will not provide stimulus when it is most needed," he said. And it is long-term changes which also run the highest risk of increasing the federal government's "daunting" budget problems when it comes to dealing with Social Security and Medicare.

On the economy itself, Bernanke told the Budget Committee that the outlook "in 2008 has worsened and that the downside risks to growth have become more pronounced."

He sees several factors including rising energy prices, falling stock and home prices and a weakening labor market as likely to dampen consumer spending.

Business investment also looks to be slowing down and credit tightness remains a serious economic constraint.

[email protected][email protected]

dem/wash/rfw

COPYRIGHT

 

[surf4sports]

Daily Fx Strategy
Dollar up on Falling Claims, Shrugs Housing Plunge

Thu, Jan 17 2008, 14:23 GMT
by Ashraf Laidi

CMC Markets

Dollar pushes higher on a mix of good news from another fall in US weekly jobless claims and dismal news of double digit percentage declines in housing starts and permits. Jobless claims fell 21K to 301k, while the 4-week moving average drops off its 2-year highs to 328.5K. Housing starts tumbled 14.2% to a 16-year low of 1.006 mln (exp 1.145mln) in December while permits dropped 8.1% to 1.068 mln (exp 1.135 mln). For 2007, housing starts dropped 24.8%. Especially ominous is the deterioration in building permits as they serve as a leading indicator of future construction activity.

There are two increasingly resounding signs of risk reduction trades overwhelming financial markets; 1) the persistent ways in which US equity indices close in negative territory or pare their gains significantly in the last 30 minutes of trading; 2) Asian markets’ shrugging of the rare gains displayed in US markets and; 3) the prolonged strength in the Japanese yen despite the gains seen in equities, as was the case overnight when the 2.0% rally in Japanese equity indices prevented the currency from weakening. Normally, the yen weakens during rising equity markets (rising risk appetite) as traders and short-term fund managers take advantage of the low yielding yen to make bets in higher yielding currencies, equities and gold.

The 10 am EST testimony by Fed Federal Chairman Ben Bernanke is expected to sound off a similar tone to last week’s speech whereby he expressed the central bank’s readiness to take aggressive steps towards further easing monetary policy. Since today’s appearance will be followed by Q&A from Congress, the testimony will be dominated by Bernanke’s views on the anticipated economic stimulus package to be worked out by Congress and the White House. Considering that the Fed is be partially responsible for underestimating the magnitude of the housing recession and its resulting impact on the overall economy, Mr. Bernanke is unlikely to give any major objections to any package based on fiscal discipline. Bernanke’s reiteration of the prolonged economic deterioration will likely weigh on commodity currencies but may boost equities on expectations that a rescue package will be unveiled as early as next week’s Presidential State of the Union Address.

The 12 pm EST release of the Philly Fed manufacturing survey is expected at -1.0 after tumbling to -5.0. Two back-to-back months of negative headline figures would be consistent of a recession in the US .

Yen Adds to Gains After Greater Than Expected Merrill Loss

Euro Seeks Solace from US Weakness

Sterling Gains Add to Vulnerability

Loonie out of Favor

Aussie Foundation Stabilizes

 

[surf4sports]

AT A GLANCE: Bernanke Backs Temporary Fiscal Stimulus

Thu, Jan 17 2008, 18:41 GMT
http://www.djnewswires.com/eu

AT A GLANCE: Bernanke Backs Temporary Fiscal Stimulus

THE EVENT:

Federal Reserve Chairman Ben Bernanke, testifying before the House Budget Committee on Thursday, endorsed a "quickly" implemented fiscal stimulus package, saying it would complement the Fed's efforts to provide monetary-policy insurance against an economic downturn. Bernanke repeated the pledge he made last week to enact "substantive" rate cuts if needed to counter the threat to the economy posed by fragile financial markets and weakening employment. He also said he sees the economy growing, but at a "relatively slow" pace, in 2008.

He added that subprime losses so far have totaled about $100 billion and could climb much higher if delinquencies and foreclosures rise.

WHAT HE SAID:

The Fed is "prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability," he said.

Housing, he said, will probably subtract more than one percentage point from gross domestic product growth in the fourth quarter and "may continue to be a drag on growth for a good part of this year as well."

"I agree that fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary policy actions alone," he said.

Fiscal stimulus is OK, he said, as long as it is "implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next 12 months or so." He said a fiscal stimulus package between $50 billion and $100 billion would be "reasonable."

He also said the U.S. should avoid recession, though he expects a period of subpar growth in the first part of 2008.

Bernanke was asked by lawmakers about the potential economic effect of a fiscal stimulus package totaling around $100 billion. He replied that if a good chunk of that was channeled into spending quickly, the economic effects could be "significant" in the second half of 2008 and into 2009, and not "window dressing."

He also said it was "would be counterproductive to increase taxes" to pay for the stimulus package.

MARKET REACTION:

Treasurys gained on the news that Bernanke said greater rate cuts were needed. The 10-year note jumped 9/32 to 104 21/32 to yield 3.68%. The two-year note increased 3/32 to 101 16/32 to yield 2.45%.

Stocks slid after Bernanke's testimony - the S&P 500 declined 22 points to 1351, while the Nasdaq Composite fell 21 points to 2374. The Dow Jones Industrial Average fell 161 points to 12305.

The dollar has returned to early Thursday morning levels after a sharp decline against its major rivals. Late Thursday morning in New York, the euro was at $1.4682, up slightly from $1.4657 late Wednesday. The dollar was at Y107.02, down from Y107.54. The euro was at Y157.12, down from Y157.60, according to EBS. The U.K. pound was at $1.9745, up from $1.9628; and the dollar was quoted at CHF1.0995, little changed from CHF1.0996 late Wednesday.

Fed funds futures contracts - measuring potential outcomes for next two FOMC meetings - were flat to slightly higher after Bernanke's testimony. The February contract was recently unchanged at 96.35, pricing in about a 40% chance for a 75 BP ease to 3.5% at or before the Jan. 29-30 session. The April contract was recently up 1.5 basis points at 96.685, fully priced for 3.5% at the March 18 Federal Open Market Committee meeting, with about a 74% chance for further ease to 3.25%. That's up from about a 68% chance for 3.25% as priced in at Wednesday's settlement.

WHAT THEY SAID:

"The dollar's declining for a lot of different pieces of news," said Stephen Gallagher, chief U.S. economist at Societe Generale in New York. "The market is pricing in more rate cuts from the Fed. We also had very weak housing news this morning. That also weighs on the dollar."

Bernanke's comments that a fiscal stimulus package "could be helpful in principle" but that it must be temporary and enacted quickly is "a far cry...from (former Fed Chairman Alan) Greenspan's absurd speech in 2001 when he effectively urged huge tax cuts to prevent a massive surplus arising," said Ian Shepherdson, chief U.S. economist at High Frequency Economics. "On the economy, no change in the themes from Mr. Bernanke's speech last week, acknowledging increased downside risks and promising 'substantive additional action as needed.' We expect 50 basis points on the 30th, with more to come."

"There is inherently nothing new" in Bernanke's comments, which is why the dollar returned to previous levels over the course of his testimony, said Geoffrey Yu, foreign exchange strategist at UBS in Zurich. Bernanke's remarks that the Fed isn't concerned with a major moral hazard reaffirm that the Fed "will move rates as much as they believe is necessary and is allowed for the market without precipitating a new housing bubble," he said. "He's being very cautious about this stimulus package, but at the same time being very forthright about the condition of the U.S. economy."

(END) Dow Jones Newswires

January 17, 2008 13:41 ET (18:41 GMT)