USD Rally Depreciates Risky Assets

* The dollar rallied on Friday and closed sharply higher for the week against other major currencies. US GDP grew in Q4 2009 at the fastest pace since 2003, indicating the economic recovery is gaining momentum. US stocks pared initial strong gains, pressured by the soaring greenback. The S&P 500 fell 10.66 to 1,073.87. Commodity prices and interest rates also declined as the dollar gained. The yen fell. Overall Japanese economic data suggest the Japanese economy is improving but falling prices indicate the deflationary problem is still present. Finance Minister Naoto Kan urged the Bank of Japan to use “appropriate and flexible” monetary policy to fight deflation. The euro declined on continuing concern about the fiscal outlook for Greece and other southern EMU countries. Sterling fell below 1.60 and approached the important 1.59 support. The Australian and Canadian dollars fell for a third straight week as commodity prices weakened.
* The dollar index rose for a fourth straight day and closed at the highest level since July. The dollar has risen as risk appetite has fallen on worries that China’s monetary tightening will slow the global economic recovery and Greece’s debt problems will worsen. More importantly, the Fed’s failure to meet increasing dollar demand may end the US and global fragile economic recovery as the rising dollar may overvalue asset prices again. The dollar index is up nearly 7% since the beginning of December. There is support in the 78-area with minor resistance in the 79.50 and more important resistance at the 81 handle.

Financial and Economic News and Comments

US & Canada

* US GDP expanded at a higher-than-expected 5.7% annualized rate in Q4 2009, the fastest pace in six years, after a 2.2% annualized pace in Q3, advance US GDP data from the Commerce Department showed, indicating the US economic recovery is strengthening. The largest positive contributors to Q4 GDP growth were inventories, personal consumption, and business investment in equipment and software while the weakest components were business investment in structures (like offices and retail space) and government spending. Personal consumption increased at a higher-than-expected 2.0% annualized rate in Q4 after a 2.8% annualized pace in Q3. Core PCE rose at a 1.4% annualized pace, following Q3’s 1.2% annualized rate, indicating inflation remained below the Federal Reserve’s long-term forecast. The GDP price index grew at a lower-than-expected 0.6% annualized rate in Q4 after a 0.4% annualized pace in the prior quarter. In all of 2009, GDP declined 2.4%, the largest fall for an entire year since 1946, after rising 0.4% in 2008 and 2.1% in 2007.


* The employment cost index rose a slightly more-than-expected 0.5% q/q in Q4 2009 after a 0.4% q/q increase in Q3, according to a Labor Department report.
* The Chicago business barometer unexpectedly rose to 61.5 in January from 58.7 in December, indicating US business activity expanded beyond the 50 expansionary level for a fourth consecutive month and reached the highest level since November 2005, according to the Chicago Report by Kingsbury International, Ltd. and the Institute for Supply Management – Chicago, Inc. The new orders index grew to 66.4 in January from 64.4 in December and the production index increased to 66.6 from 64.2. Employment expanded in January, with the employment index rising to 59.8, the highest level since April 2005, from December’s 47.6. Prices paid strengthened this month, with the prices paid index climbing to 66.2 from December’s 55.6.


* The Reuters/University of Michigan final consumer sentiment index grew to a higher-than-expected 74.4 in January (vs. preliminarily reported 72.8) from 72.5 in December, indicating US consumer confidence rose to the highest level since January 2008, according to the latest Thomson Reuters/University of Michigan surveys of consumers. The index averaged 66.3 in all of 2009, up from 63.8 in 2008. The current economic conditions index rose to 81.1 in January (vs. preliminarily reported 81.0) from 78.0 in December. The consumer expectations index advanced to 70.1 (vs. preliminarily reported 67.5), the highest since September 2009, from December’s 68.9.


* Canada’s GDP rose a slightly more-than-expected 0.4% m/m in November, a third consecutive monthly-on-month rise, led by increases in the wholesale trade, oil and mining industries, after upwardly revised gains of 0.3% m/m in October and 0.5% m/m in September, GDP data from Statistics Canada showed. The economy declines 1.7% y/y in November.
* Canada’s industrial product prices unexpectedly declined 0.1% m/m in December after a downwardly revised 0.9% m/m increase in November, and raw materials costs unexpectedly fell 1.7% m/m following two consecutive monthly rises, both on lower petroleum prices, according to a separate report from Statistics Canada.

Europe

* Eurozone unemployment increased a seasonally adjusted 87,000 to 15.763 million in December, Eurostat reported. The seasonally adjusted unemployment rate rose to 10.0%, the highest since August 1998, from November’s downwardly revised 9.9%.



* The eurozone inflation rate rose to 1.0% y/y in January, the highest since February 2009, from 0.9% y/y in December, according to a flash estimate released by Eurostat. However, the 1.0% rate was lower than market expected.
* The GfK NOP UK consumer confidence index increased to a slightly higher-than-expected -17 in January from -19 December, indicating UK consumer confidence climbed for the first time in three months, according to data from GfK NOP. Consumers became more optimistic about prospects for the UK economy in the next 12 months, with the expectations gauge increasing to -2 in January from -6 in December.
* The KOF Swiss leading economic index increased to a higher-than-expected 1.77 in January from an upwardly revised 1.73 in December, according to LEI data from the Konjunkturforschungsstelle Swiss Institute for Business Cycle Research. The institute said: “the year-on-year growth rate of Swiss GDP should continue in positive territory. However, the recovery of the Swiss economy is likely to slow down.”

Asia-Pacific

* The Nomura/JMMA Japanese PMI declined to 52.5 in January from 53.8 in November, indicating Japan’s manufacturing activity expanded for a seventh consecutive month but at a slightly slower pace, according to PMI data released by Markit Economics.
* Japan’s core consumer prices, which exclude fresh food, fell for a 10th consecutive month in December, falling as forecast 1.3% y/y, after a 1.7% y/y November decrease, CPI data from the Statistics Bureau showed, signaling prolonged deflation remains a major concern to Japan’s economic recovery. The CPI excluding food and energy slid 1.2% y/y in December after a 1.0% y/y decline the prior month. Tokyo’s core CPI, a leading indicator for nationwide price trends, fell a more-than-expected 2.0% y/y in January after a 1.9% y/y slide in December.


* Japan’s unemployment rate unexpectedly declined to 5.1% in December from 5.2% in November, data from the Statistics Bureau showed. The job-to-applicant ratio, a leading indicator of employment trends, increased as forecast to 0.46, a fourth consecutive gain, from November’s 0.45,
* Japanese household spending increased a more-than-expected 2.1% y/y in December, a fifth consecutive gain, after a 2.2% y/y advance in November, a separate report from the Statistics Bureau showed.
* Japanese industrial production increased a less-than-expected 2.2% m/m in December, a tenth consecutive month-on-month gain, after increasing at the same pace in November, according preliminary December IP data released by the Ministry of Economy, Trade and Industry (METI). IP rose 5.3% y/y, following November’s a 4.2% y/y decrease. Industrial production rose 4.6% q/q in Q4 2009, a third consecutive quarterly gain.
* Japanese housing starts fell 15.7% y/y December to 69,298 units, a thirteenth straight year-on-year fall but the slowest in a year, after a 19.1% y/y drop in November, according to data from the Ministry of Land, Infrastructure and Transport. Housing starts slumped to 788,410 in 2009, down 27.9% from 2008 and the lowest level since 1964. Construction orders increased 0.6% y/y in December, the first gain in 14 months, to ¥899.4 billion ($10.03 billion), after an 11.6% y/y decrease in November,
* The Conference Board Australian leading economic index, a measure of future economic activity, fell for a third straight month in November, falling 0.3% to 111.2, following declines of 0.3% in October and 0.1% in September. The November LEI decline was led by building approvals, the sales to inventories ratio, and money supply, while the yield spread, share prices, rural goods exports, and gross operating surplus were the positive contributors. The coincident economic index, measuring current economic activity, grew for a second consecutive month in November, rising 0.3% to 114.0, after an upwardly revised 0.2% October increase.
* Australian private sector credit grew 0.3% m/m in December after a 0.1% m/m increase in November, the Reserve Bank of Australia said. December private sector credit rose 1.5% y/y. Housing credit increased 0.7% m/m in December and climbed 8.2% y/y. Personal credit grew 0.7% m/m in December but fell 0.4% y/y, while business credit declined 0.2% m/m and 7.0% y/y.

Source: Hans Nilsson

29.01.2010