While somewhat outdated given recent events the Euro-zone put in some good numbers in June first announcing a solid rise in the Trade Surplus to EUR 7.8bn, well above May’s EUR 1.7bn and forecasts of EUR 4.0bn. A year ago the surplus was at EUR 1.6bn. In addition June’s construction output was announced at +0.6% MoM and +2.7% YoY being a solid rise from May’s +0.2% and +1.8% respectively. Solid numbers indeed, but the focus has shifted and was highlighted in the ZEW survey results. The German Economic Sentiment saw a drop to -6.9 points in August which is a hefty drop from July’s +10.4 and also well below forecast of -1.50. The Euro-zone Economic Sentiment was similarly hit dropping to -6.1 versus +7.2 in July and forecasts of a flat outcome. The ZEW commented in their statement “The ZEW Indicator of Economic Sentiment for Germany is being overshadowed by the crisis on the US-mortgage market for subprime-loans. The experts see risks that might arise from this crisis for the development of the real economy in the United States and the potential consequences for the German economy.” They also noted that a potential credit crunch could damage German exports which would be reduced by the lower purchasing power of US-consumers but felt that otherwise any problems in the U.S. would not impact on German stock prices. However, there have already been signs in the U.S. that some businesses are downsizing and preparing for the worst. The U.S. Challenger has indicated that financial job cuts are soaring with nearly 90K jobs being cut this year being 75% more than the entirety of 2006. Of this year’s cuts 25% came in August. Of the year’s cuts 41% were linked to the housing problems. Chief Executive John Challenger said in an interview, “Many companies expected the mortgage situation to implode; they've just been wondering when the bubble would burst. But many are stopping on a dime, shutting down operations shocked with the speed with which it is occurring.” Elsewhere connected to the housing problem U.S. foreclosures have risen by a hefty 93% over the past 12 months. In July alone auction sale notices and bank repossessions totaled 179,599 with five states accounting for 50% of the numbers. We have seen comments from several officials saying that the situation would get worse before it improved. The bigger question is just how big their stop loss is… The Fed is putting its weight behind calming the markets although Paulson feels the market turmoil could still last a while yet. He noted that “Credit is being repriced, reassessed across our capital markets. However, as the Federal Reserve addresses liquidity this makes it possible, this makes it easier, for the market to focus on risk and pricing risk. This will play out over time and liquidity will return to normal when the market has a better understanding, investors have a better understanding, of the risk-return trade-off.” The issue will be just how much of a drag on growth this will mean. The Richmond Fed’s Lacker added his comments by commenting, “I believe there are still reasons to remain concerned about the risks to the inflation outlook.” In turn it is unclear how the economy, particularly consumer spending, would react to the market meltdown. This is particularly important given the high debt levels of the U.S. consumer. Lacker added that “Financial market volatility, in and of itself, does not require a change in the target federal funds rate, in my view. Interest rate policy needs to be guided by the outlook for real spending and inflation. Federal funds rate adjustments in response to changes in the outlook for inflation and growth should continue to endeavor to stabilize inflation expectations.” As if in response to his comments on consumers’ reactions the ABC News/Washington Post Consumer Confidence number for last week fell 9 points to -20. Only 32% respondents expressed confidence in the economy. However, 53% of those polled said their own finances were in good standing. The risks are clear. The only issue that isn’t quite so clear is the timing. The European ZEW surveys highlight the impact is being seen in Europe as well and with lower European and U.S. growth Japan will undoubtedly catch a cold. While the prospects are therefore uncertain the market will feed on fear and this is going to be a constant thorn in the markets’ sides for some while to come. The Fed is determined to provide liquidity to smooth out the volatility and attempt to calm nerves but there is a serious risk of hemorrhaging as time progresses. Right now it is quite clear that the European economy still holds the edge over the States and this should soon be reflected in the Forex rates with a bottom in European losses expected over the next week or so. However, there is little reason to buy into Europe that strongly and we could find the coming months quite choppy. Overnight saw narrow range trading again as the market hovers between two stools but we should begin to see the Dollar make minor gains over the rest of the week. The bigger news for the Asian session is the Bank of Japan monetary policy meting whch will produce a rate decision tomorrow but which no one expects to be anything but a “no change” statement. However, the is the first rate decision following the turmoil and what the market is now focusing on is how CB’s are going to react. Fukui is reported to be hell bent on hiking rates come what may, ostensibly it is reported, to provide his successor from next march to be able to lower rates if necessary. However, will the damage be done by then if the global economy hasn’t recovered? More later when the analysis is complete. Economic releases expected from Asia today are: Australia
June Westpac Leading Index (MoM)
August DEWR Skilled Vacancies Japan
July Merchandise Trade Balance Total JPY 829bn
July Adjusted Merchandise Trade Balance JPY 760bn
July Supermarket Sales (YoY) Bank of Japan begins its 2-day monetary policy meeting | 
