Expert Analysis of Today's Market

• The dollar rose against its rivals except the yen on growing concerns the global economic slump is deepening and consumers’ access to credit is shrinking. Federal Reserve Chairman Ben S. Bernanke said he may use less conventional policies, such as buying Treasury securities, to revive the economy. He also signaled further interest-rate cuts. Manufacturing purchasing managers’ indexes showed manufacturing around the globe is plunging. The Dow industrials sank 680 points wiping out more than half of last week’s historical rally. The Australian and Canadian dollars declined as commodity prices fell. Gold tumbled the most in eight months and crude oil dropped below $50 a barrel.


• The USD/JPY fell to a one-month low as risk aversion and asset deflation returned. International stocks and commodities plunged. US treasury yields declined to a record low as Bernanke indicated the Fed will not be constrained by the liquidity trap as they can buy other assets while expanding their balance sheet. The USD/JPY is in a clearly defined downtrend, testing the important 92-area support. If this is broken, the pair may drop significantly. There is resistance in the 97-area.

Financial and Economic News and Comments

US & Canada

• The Business Cycle Dating Committee of the National Bureau of Economic Research said the US economy has been in a recession since December 2007, when economic activity peaked. The NBER Business Cycle Dating Committee defines recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.” “The committee determined that the decline in economic activity in 2008 met the standard for a recession.” The 1.2 million decline in payroll employment so far this year was the biggest factor in determining the start of the recession, the committee said. The Globicus coincident index, which uses similar indicators the Dating Committee uses to determine the business cycle, peaked in November 2007.

• Dismal ISM data showed a continued contraction in US manufacturing. The ISM US manufacturing index declined more than expected to 36.2 in November, the weakest reading since May 1982, from 38.9 in October and 43.5 in September, according to data from the Institute for Supply Management. The output components of the overall index all went from weak to weaker. The new orders index dropped to 27.9 from 32.2; the production index fell to 31.5 from 34.1; and the employment index declined to 34.2 from 34.6. The new orders and production indexes are the lowest since 1980; the employment index is the lowest since 1991. The prices paid index declined to 25.5, the lowest since 1949, from 37.0.

• US construction spending fell 1.2% m/m in October after September was revised to unchanged, Commerce Department data showed.


• President-elect Barack Obama, annoucing his national security team, said he will use the “power of our moral example” in making a clean break from Bush administration policies on Iraq, Afghanistan and overseas diplomacy. While selecting Robert Gates to remain as Defense Secretary, Obama nominates Senetor Hillary Clinton as Secretary of State, Arizona Govenor Janet Napolitano as Homeland Security Secretary, former Justice Department official Eric Holder as Attorney General, Susan Rice as US Ambassodor to the United Nations, and Retired Marine General James Jones as National Security Adviser.

Europe

• Germany’s manufacturing PMI declined to a series-low 35.7 in November, down from both the expected 36.7 and October’s 42.9, Markit Economics reported.


• Germany’s retail sales unexpectedly fell 1.6% m/m in October as recession damps spending, following September’s upwardly revised 1.0% m/m decline, the Federal Statistics Office said. Retail sales fell 1.5% y/y.


• The UK’s manufacturing PMI reached an all-time low of 34.4 in November, down from both the expected 39.7 and October’s downwardly revised 40.7, Markit Economics reported.

Asia-Pacific

• China’s manufacturing contracted the most on record, with the manufacturing PMI dropping to a seasonally adjusted 38.8 in November, the lowest reading since the index started in 2005, from 44.6 in October, the China Federation of Logistics and Purchasing said. The PMI released by CLSA Asia-Pacific Markets also indicated a record contraction, declining to 40.9 in November, the lowest level since the index began in 2004, following 45.2 in October. The consecutive manufacturing contraction increases the risk of economic slowdown in China.

FX Strategy Update