Expert Analysis of Today's Market

• The dollar traded mostly higher on Wednesday. US durable goods orders dropped more than forecast and consumer spending fell the most since 2001 as the US recession is deepening. New-home sales sank to its lowest level since the 1991 recession. Despite the gloomy economic data, US stocks rose for a fourth day after President-elect Barack Obama picked former Federal Reserve chief Paul Volcker to head an economic advisory board aimed at bolstering economic growth. The euro fell below the important 1.31 resistance. Sterling was unable to penetrate the 1.55 resistance as UK consumer spending posted its sharpest decline for 13 years. The commodity currencies were little changed; the aussie slightly higher and the loonie modestly lower.


• The USD/JPY advanced on rising US stocks and increasing risk appetite. The pair is trying to break the 97- area resistance of the last couple of months’ downtrend. Tracking the development in the stock market, the USD/JPY failed to make a new low last week as the US stock market made an 11-year low. This may be a bullish sign for the pair. If the USD/JPY breaks its downtrend, a rally to 100 is possible.

Financial and Economic News and Comments

US & Canada

• US personal income increased a more-than-expected 0.3% m/m in October, Commerce Department data showed, while personal spending declined 1.0% m/m, matching consensus expectations. Personal income rose 3.3% y/y while personal spending rose 2.3% y/y. Disposable personal income increased 0.4% m/m in October, up 3.8% y/y. Pre-tax wages and salaries increased 0.1% m/m in October. The overall PCE deflator fell 0.6% m/m in October but rose 3.2% y/y. The core PCE deflator, which excludes food and energy, declined 0.1% m/m in October but increased 2.1% y/y. After adjusting for inflation, real consumption was down 0.5% m/m in October, down 0.9% y/y.

• US durable goods orders declined a more-than-expected 6.2% m/m in October, Commerce Department data showed. Excluding transportation, durable goods orders fell a more-than-expected 4.4% m/m. Durable goods orders dropped 10.6% y/y and declined 6.1% y/y excluding transportation. The weakness in October durable goods orders was widespread, with every major category of orders in decline. The biggest drops were in transportation, primary metals, and industrial machinery. Shipments of non-defense capital goods excluding aircraft declined 2.4% m/m in October. If these shipments are unchanged in November/December, the Q4 average will fall at an 8.0% annual rate versus the Q3 average. Unfilled orders declined 0.6% m/m in October but rose 10.1% y/y.

• US new single-family homes were sold at an annual rate of 433,000 in October, slower than the consensus expected 441,000 pace, Commerce Department data showed. New-home sales dropped 40.1% y/y. Sales declined in the South and West, but rose in the Northeast and Midwest. At the current sales pace, the supply of unsold new homes increased to 11.1 months in October. The inventory of new homes fell to 385,000 in October, down 32.5% from the peak in mid-2006. The median price of new homes sold was $218,000 in October, down 7.0% y/y. The average price of new homes sold was $272,300, down 12.2% y/y.

• US initial jobless claims fell 14,000 to a seasonally-adjusted 529,000 in the week ending November 22, the Labor Department said. The previous week’s level was the highest in 16 years. The 4-week average of new claims rose another 11,000 to 518,000, the highest reading since January 1983. Continuing claims for the week ending November 15 fell 54,000 to 3,962,000. However, the 4-week average hit a fresh 25-year high.


• The Reuters/University of Michigan final index of consumer sentiment dropped more than expected to 55.3 in November from 57.6 in October.


• Manufacturing and services in the Midwest plummeted in November, with the Chicago PMI falling to 33.8, its lowest level since 1982, from October’s 37.8. The new orders index declined to 27.2, its lowest level since 1980, while the employment index fell to 33.4, the lowest since 1982. The prices paid index moderated to 50.7, down from October’s 52.7.

• Overall, US economic figures indicate a deepening recession.

Europe

• Germany’s consumer-price inflation rate surprised to the downside to 1.4% y/y in November, preliminary estimates from the Federal Statistical Office showed, down from October’s 2.4% y/y. The CPI contracted 0.5% m/m in November, following October’s 0.2% m/m decline. In EU harmonized terms, German consumer-price inflation rate slowed to 1.5% y/y from October’s 2.5% y/y, the biggest rate drop since 1996. The HICP fell 0.5% m/m in November, following October’s 0.3% m/m decline. Germany’s slowing inflation rate gives the European Central Bank leeway to cut interest rates further.


• The UK’s Q3 GDP contracted 0.5% q/q, in line with advance estimates, preliminary estimates from the Office for National Statistics showed, following Q2’s flat reading. Consumer spending declined 0.2% q/q, the most since 1995, and fixed investment fell 2.4% q/q. The UK economy grew 0.3% y/y in Q3, also in line with previous estimates, down from Q2’s 1.5% y/y rise.

• The UK index of services fell 0.4%, as expected, in the three months to September, its sharpest decline since June 1995, after contracting 0.3% in the three months to August, the Office for National Statistics said.


• The European Union proposed a €200 billion ($259 billion) economic-stimulus plan for the eurozone economy, saying more may be required to combat the global financial crisis. “We may even need more,” European Commission President Jose Barroso said, adding that the plan was an “exceptional response” to an “exceptional crisis.”

Asia-Pacific

• The People’s Bank of China cut China’s interest rates for the fourth time since mid-September to stimulate economic growth. The PBC slashed the key one-year lending rate 108 basis points to 5.58%, the largest rate cut since the 1997 Asian financial crisis. The deposit rate fell by the same amount to 2.52%.

FX Strategy Update