Concerns over the US and global economy continued to intensify over the week following a stream of weak data releases and renewed downward pressure on asset prices. There was also a renewed increase in stresses surrounding the credit markets as corporate fears increased while Libor rates edged only slightly lower.
Markets were unsettled by the change of emphasis on the TARP rescue fund towards the consumer sector and away from buying mortgage-related securities which undermined confidence in the banking sector. Difficult negotiations over support for the auto sector also damaged sentiment.
The US inflation data recorded sharp monthly declines in prices as consumer prices fell by 1.0% in October, the sharpest decline for 40 years, and producer prices declined by 2.8% over the month. There was a 0.1% decline in core consumer prices for the month.
Housing starts continued to decline in the latest month with an annualised rate of 0.79mn from 0.83mn the previous month while the permits data recorded a steeper decline to 0.71mn. The latest NAHB survey also weakened to a fresh record low of 9 in October from 14 previously with reports that financing in the sector has seized up.
The industrial data was generally weak with the New York manufacturing index weakening to a fresh record low. There was a rebound in industrial production as the impact of hurricanes faded following the sharp decline the previous month. The Philadelphia Fed index also weakened further to -39.3 from -37.5.
Initial jobless claims rising sharply for the second successive week to 542,000 in the latest week from a revised 515,000 previously. This was the highest figure since 1982 and will reinforce fears over a sharp downturn, especially with continuing claims also rising rapidly.
The capital account trends remained important for the US currency and the September data recorded an increase in net long-term capital flows as international investors continued to buy US Treasury bonds. There was also further evidence of underlying capital repatriation as global fears persisted.
Source: VantagePoint Intermarket Analysis SoftwareThe flash Euro-zone PMI data for November indicated a further deterioration with a manufacturing reading of 36.2 while the services index weakened to 43.3 from 45.8 with both series at record lows
ECB officials continued to suggest that inflationary risks had eased. Bundesbank head Weber, traditionally a very hawkish council member, stated that a further rate cut could not be ruled out. He also stated that the central bank would need to move more quickly than usual to normalise monetary conditions.
Mersch was more cautious over a substantial rate cut and chairman Trichet also took a more measured view. Markets continued to expect a further interest rate cut at the December meeting with some speculation over a move ahead of the meeting.
Although there was evidence of serious deterioration within the US, the dollar held firm on increased global fears and defensive demand for the currency with tests beyond 1.25 against the Euro before a weakening back to 1.26.
The yen weakened intermittently during the week, but quickly regained ground and advanced against all the major currencies. The Japanese currency continued to gain support from the underlying increase in risk aversion and de-leveraging in the global markets as fear dominated. There was a peak beyond 94 against the dollar before a corrective retreat on Friday.
Commodity currencies remained under pressure with the Australian dollar sliding to lows below the 0.61 level while the Canadian dollar dipped to lows near 1.30 as energy prices fell sharply.
UK retail sales fell by 0.1% in October after a revised 0.5% decline the previous month, in contrast to expectations of a more substantial decline. There was further weak fiscal data in the latest monthly government borrowing report.
The latest inflation data recorded a sharp decline in the headline rate to 4.5% from 5.2% previously while the core rate also dipped to 1.9% from 2.2% previously.
The Bank of England MPC committee voted 9-0 for the 1.50% November rate cut. The MPC indicated that cuts of at least 2.00% would be needed to meet the revised forecasts for the economy, but they were wary of cutting by such a substantial margin in one move, especially given the threat of a very negative Sterling reaction.The comments from MPC members also suggested that interest rates would be cut further, although Sterling weakness was again a notable feature in their comments.
Sterling secured some temporary respire in mid week, but rallies quickly met selling pressure with volatility a key feature and it consolidated near 1.50 against the dollar.
In a surprise move, the Swiss National Bank announced a further sharp 1.0% in official interest rates to 1.0%. The bank has now announced three unscheduled rate cuts since the last formal policy meeting in September.
Bank Chairman Roth stated that the bank needed to take immediate, pre-emptive action on rates and a big move was required for it to be effective. He also suggested that there was scope for rates to be cut further.
The Swiss currency weakened significantly over the week, dipping to 2008 lows against the dollar beyond 1.2250 while it also weakened to beyond 1.5350 against the Euro.
Darrell Jobman is Editor-in-Chief of TraderPlanet.com, which provides free daily and weekly commentaries for traders as well as complimentary trading tutorials, and eBooks. He is an acknowledged authority on the financial markets and has been writing about them for more than 35 years.
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