European news overnight With mainland Europe on holiday it just left the U.K. as the main representative which ended in the BOE picking an argument with the IMF and market over the extent of the negative sentiment in the credit markets. The CB maintains that the worst is likely over and they claim that the IMF’s estimate of subprime related losses could be as much as $900bn. Not so reported the bank which suggests it could be as low as $170bn. Actually the two numbers are not really related since the IMF’s estimate includes losses in global assets generally including subprime related investments by private investors, losses on the stock markets and in housing. The BOE appears talking about banking related losses primarily. As an example of the impact that can still affect banks the Telegraph ran a report on the U.K.’s commercial property defaults which it claims could be as big as GBP 5bn. This would generate losses of as much as 20% of bank profits if the commercial property market collapses. The fact is that subprime was the tip of the iceberg in that it put pressure on all the weaknesses in all areas of the economy. This translates into consumer fears and along with inflation has caused a highly toxic fallout that could, if not countered carefully, escalate the problem through lack of consumer spending.
States news overnight:
March Forecast Actual
U.S. Personal Income (MoM) +0.4% +0.3%
U.S. Personal Spending (MoM) +0.2% +0.4%
U.S. PCE Core (MoM) +0.1% +0.2%
U.S. PCE Core (YoY) +2.0% +1.8%
U.S. Construction Spending (MoM) - 0.6% - 1.1%
April
U.S. Challenger Jobs Cuts (YoY) 27.4%
U.S. Initial Jobless Claims (26th) 360K 380K
U.S. Continuing Claims (19th) 2950K 3019K
U.S. ISM Manufacturing 48.0 48.6 The news of the day was the better than forecast manufacturing ISM. It wasn’t really that good as the number still suggests the U.S. economy is contracting. However, it was more the sentiment of relief that following the mildly positive news from Q1 GDP that indeed, the worst could be over. The ISM noted that new export orders continued to be strong and this is helping to offset the slacking in domestic demand. However the rising input costs remain a problem and worsened by the lower Dollar. When considered with the better than forecast personal spending the market ignored the very poor jobless claims report and bought Dollars and this should continue for a little longer. It came a little earlier than I had expected but is in line with the Dollar’s cycles which are forming a low at this time. However, there is a limit to these gains and this looks to be around 1.5300-40 Euro, 1.9330-60 Pound, 1.0730-70 Swissie and 106.82 Yen. While there is some sense of relief that the U.S. economy may not be as bad as feared the market does appear to be placing faith in the fact that the fiscal stimulus checks will bring about a recovery. It probably will but there will be a minimum 3 month lag before we start seeing these in U.S. numbers and until then the bigger risk is for the employment situation to worsen, manufacturing to remain weak and housing retaining its negative trend. The first test will be tonight’s employment numbers and from the jobless claims it is difficult to get bullish about a positive outcome… Following this Dollar revival I still see around 2 months of weakness before a more sustainable Dollar rally can develop into the end of the year.
More later once the daily analysis has been done…
The following releases are due from Asia due today: Australian Q1 Retail Sales ex inflation (QoQ) - 0.2%
Australian March Retail Sales (MoM) +0.3% Japan Monetary Base (YoY)
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