European releases overnight:
Q4 Forecast Actual
U.K. Total Business Investment (QoQ) +0.9% - 0.5%
U.K. Total Business Investment (YoY) +2.9% +1.7% January
French Housing Starts (3MoY) - 2.3% - 7.1%
Swiss UBS Consumption Indicator 2.18 (Prior) 2.19 February
Italian Business Confidence 91.2 89.8
German IFO: Business Climate 102.9 104.1
German IFO: Current Assessment 107.2 110.3
German IFO: Expectations 98.7 98.2
U.K. CBI Distributive Trades Reported Sales +4.0 - 3.0
Interesting numbers from Europe. The release of the German IFO saw the headline business climate index and current assessment perform well above forecasts. However, that was it from the positives. The expectations component was slightly below forecasts and should point to what’s to come.
The rest of the European releases were uniformly negative. Q4 saw a huge slump in U.K. business investment, in fact 1.4% below forecast at -0.5%. Given the tight credit conditions this is likely to continue to fall over 2008 which again points one way for U.K. growth. In mainland Europe French housing starts tumbled, Italian business confidence slumped and the U.K.’s CBI reported a weakening in trade sales. ECB officials remain upbeat but the point to remember is that they are facing a completely new paradigm in the fledgling Euro-zone history. Since inception growth has been steady to spectacular, buoyed in recent years by the expansionary investment in globalization. The bubble has burst, credit is tight and inflation is very high by the ECB’s measure. As Orphanides pointed out second round inflation effects would complicate ECB policy and flexibility. This will be worsened by tighter credit. However, this will not make its impact in the near term but as growth declines over the course of the year while inflation remains at elevated levels there will be a big shift in perception on the Euro-zone and the Euro. U.S. releases overnight: Q4 Forecast Actual
U.S. House Price Index (QoQ) - 1.0% - 8.9% January
U.S. PPI (MoM) +0.3% +1.0%
U.S. PPI (YoY) +7.5% +7.4%
U.S. PPI excl food & energy (MoM) +0.2% +0.4%
U.S. PPI excl food & energy (YoY) +2.2% February
U.S. Consumer Confidence 82.0 75.0
U.S. Richmond Fed Manufacturing Index - 7.0 - 5.0
The bullish case for the Dollar was firmly laid to rest, for the time being at least, with a string of rather stressful releases.
The home price index dropped far more than anticipated in Q4, in fact by the biggest drop in the index’s 20 year history. The US housing finance regulator OFHEO reported a Q4 drop of 1.3%, the 2nd consecutive drop in prices. Every state except Maine recorded lower prices. PPI rose by a full 1.0% MoM, while the 7.4% YoY increase was the highest in 26years since October 1981. Consumer confidence dropped over the edge to 75.0 which is well below the 82.0 forecast. The only positive points were the Richmond Fed Survey which improved to -5 while weekly retail chain store sales were up +0.5% over the week. However, what we have to take into account on retail sales is the level of prices increases which inflate the numbers. Real spending remains fairly neutral.
With this mix of numbers yesterday the Dollar finally caved in, bullish divergences are being crushed and this can only point to further weakness. This should reach 1.5210-20 Euro at least where we’ll need to review.
How far this can go is not too clear right now but I still have doubts that this will be a one-way bet for the year. If the Fed’s and private forecasters are correct in their assessment of U.S. GDP for this year at 1.3%-1.5% then there has to be a solid recovery in H2 to drag it back to these levels. Equally, if private forecasts of European growth at 1.5% are correct then there is still some considerable weakening to come from this point. This should translate to a recovery in the Dollar but the biggest issue is timing. Very clearly the U.S. mortgage relief plan and fiscal stimulus plan have not yet had time to make any impact and the earliest we can hope for any real sign of this is probably around the May-June time. At the same time we need to see how quickly the European economy will deteriorate and how soon the market begins to build this weakening into its valuation of the Euro. All this time both economies are vulnerable to further setbacks which promises continued volatility and thus a sustained trend in either direction remains unlikely.
More later once the daily analysis has been done…
The following are due to be released from Asia:
Australian Q4 Construction Work Done +2.0% | 
