European releases overnight:
December Forecast Actual
Italian Industrial Orders (MoM) - 1.9% - 5.4%
Italian Industrial Orders (YoY) +6.0% +0.5%
Italian Industrial Sales (MoM) +0.2% (prior) - 2.7%
Italian Industrial Sales (YoY) +3.6% (prior) +0.0% January
U.K. M4 Money Supply (MoM) +0.8% +1.3%
U.K. M4 Money Supply (YoY) 11.9% 12.9%
U.K. PSNCR GBP -19.5bn -22.1bn
U.K. PSNB GBP - 9.5bn -14.1bn
U.K. M4 Sterling Lending GBP 16.0bn 21.6bn
Italian manufacturing came under increased pressure in December bringing the year-on-year numbers to around zero. Entering 2008 looks as if the economy there is going to struggle and this type of divergence in performance is going to provide the ECB with a classic headache in balancing the monetary policy to cope with this divergence.
This divergence was even seen from comments by two ECB board members. Noyer confirmed that fighting inflation is their main priority claiming “We will never choose to sacrifice purchasing power in the name of growth. To defend purchasing power is to support growth.” On the other hand Garganas pointed out that the credit crisis is likely to cause greater problems that previously thought. He commented, “The impact on lending conditions and on the economic climate from credit market developments may be larger than expected.” Without a doubt the inflation cause still outweighs the growth issues in Europe but does leave the economy vulnerable to surprise shocks.
While the Pound has come under pressure because of the exposure to the credit crisis the U.K. CBI Industrial Trends Survey saw a bounce in February to show that the BOE’s Barker was correct in her assessment that the “immediate case for further rate cuts is “not compelling.”
Greater concern was that the trade group identified price rises being at their highest level since May 2007 when it registered a reading of +25. The survey showed that the balance of manufacturers intending to raise prices edged up to +22 from +21 in January. The industrial output balance rose to +11 in February, compared with +9 in January, far stronger than the balance of -2 than consensus forecast. The strong performance was driven "largely by the capital goods sector, in which order books are at their strongest level since 1988," the CBI said.
U.S. releases overnight:
January Forecast Actual
U.S. CPI (MoM) +0.3% +0.4%
U.S. CPI (YoY) +4.2% +4.3%
U.S. CPI excl food & energy (YoY) +2.4% +2.5%
U.S. Housing Starts 1010K 1012K
U.S. Building Permits 1050K 1048K
With U.S. CPI higher than forecast comes a forecast of stagflation. It does of course limit the Fed’s ability to respond to market woes but equally to expect the Fed to solve the problem of the threat of recession is unrealistic. Indeed, that is why the mortgage relief plan and the fiscal stimulus package have been implemented.
Of course the market was also waiting for the minutes of the last FOMC meeting for clarification of the thought process behind the 75bp emergency rate cut. The minutes revealed that members saw new signs that the risks of a serious economic downturn had increased and that credit conditions could tighten further. The minutes also read “Among other developments, strains in some financial markets had intensified, as it appeared that investors were becoming increasingly concerned about the economic outlook and the downside risks to activity.” The committee therefore wanted to demonstrate their “commitment to act decisively.” The FOMC also updated its quarterly economic forecast which now looks for GDP to grow between 1.3% and 2% this year. The jobless rate is expected to be around 5.2%-5.3% over the year while core inflation is forecast to end around 2.0%-2.2%. Note that the Fed’s forecast for growth and inflation is not that much below private forecasts for the Euro-zone. This will have particular consequence as the U.S. economy has started the year at a low in growth while Europe is probably at it’s year’s high. This does appear to support the technical call for a Dollar rally over the year.
The net impact on the Dollar was that it went up a bit… then down a bit…
But it still remains within a range with the market flapping its arms and chasing after butterflies. It sees more downside risks to the U.S. economy but at the same time knows that every fiscal stimulus package in the last 65 years has had the desired impact. While it will still take some time to develop, and on the assumption that we begin to see more positive signs from the economy, the Dollar should begin to generate some demand. This will be supported later by a softening Euro-zone economy. However, for now the range trading looks set to persist for 1-2 weeks at least and should be followed by Dollar strength but it should be limited in the first attempt. For today, well much the same as yesterday but in reverse… The Dollar should dip a bit … then rally a bit… More later once the daily analysis has been done… The following economic releases are due from Asia: Australia - January
New Motor Vehicle Sales (MoM)
New Motor Vehicle Sales (YoY) Japan - December
All Industry Activity Index (MoM) +0.2% Japan - January
Merchandise Trade Balance Total JPY 20.9bn
Adjusted Merchandise Trade Balance JPY 926.6bn | 
