Philly FED president Charles Plosser, in a Bloomberg TV interview, said inflation expectations still appear to be anchored, but repeated comments from earlier this week about the importance of headline inflation on consumers’ perception of inflation.
Plosser also indicated that spreads between the fed funds rate and mortgage rates are high, but won’t deter the FED from raising rates.
The greenback initially bounced lower following release of a rather pessimistic Fed Beige book, before quickly reversing to touch intraday highs vs. most major currencies.
The report provided a less-than-subtle reminder of mounting downside growth risks — likely to have caused the lower knee-jerk reaction — but the Beige Book was also chock-full of inflation warnings, which when combined with Plosser’s comments y/day helped push USD higher after its initial bounce lower.
EUR/USD broke out of its tight range around 1.57 after the report and is now trading just off its lowest level of the day at 1.5681. Cable, up 0.33% to 1.9983, issued little response to the Beige Book and is currently trading at its 9-day moving average. USD/JPY reached session highs after the release but was unable to breach the 108 level after peaking out at 107.96.
The negative correlation between Gold and the USD Index has notably risen over the past several trading sessions and currently shows a 93% negative correlation on a normalized basis over the past month. The currently elevated negative correlation rate appears to have topped out in the near term, which may lead to a minor breakdown in the relationship in the near term. The negative correlation between Gold and USD fell to an intra-month low at 78% on July 8.
The negative correlation between USD and Crude has been less pronounced and has declined noticeably over the past several days, standing now at 19% on a normalized basis over the month — down from a monthly high of 62% on July 15. If Crude continues the current sell-off, this relationship will continue to be loose at best.
The relationship between USD and the 10yr, currently around 80%, has been solid over the past 2 weeks — a clear indication of how rates have driven up the value of the greenback. Inflation, bond yields and rate outlooks continue to be the main driving force behind USD.
The metals complex finished the day significantly lower with Gold down 2.7% to 923.00, Silver falling 2.9% to 17.49, Platinum shedding 2.5% to 1763 and Copper off 0.9% to 365.75.
Gold extended its losses in the afternoon and is down 4.2% the last two days. Support for Gold lies at the July 8 low of 913. Below that further support exists at the 200-day moving average of 892.35.
Copper fell sharply early in the day but found support at the July 16 low of 363. Copper staged a rally in the early afternoon, but still wound up closing below yesterday’s low of 365.95.
Platinum fell for the 8th session in a row and has lost 14% in that time period.
The dollar dipped slightly following the Beige Book, which indicated the economy “slowed somewhat”, though quickly turned higher once again. FX reaction was muted, as equities largely shrugged off the report. Oil prices have slid further, actually helping the greenback, as prospects for slower economic growth imply slowing oil demand going forward.
Minerals Management Services has shut 4.5% of its oil production (58k BPD) and 7.9% of natural gas production (606mln cubic feet/day) due to Hurricane Dolly.
The Federal Reserve’s Beige Book indicates the economy slowed further based on reports during the first half of July. Five Districts reported weakening or softening in their overall economies, Chicago and Kansas City characterized growth as sluggish and moderating, St. Louis and San Francisco indicated little growth. Only Cleveland, Minneapolis and Dalls reported slight improvements.
Consumer spending was reported sluggish in nearly all Districts with tax rebate checks boosting sales for a limited range of goods, such as electronics.
Auto sales were uniformly weak with sales particularly poor for trucks and SUVs.
Manufacturing activity declined in many Districts with support mostly coming from export growth.
Services growth continued to be mixed although better than the goods sectors. The growth in health care services and IT industries offsetting some of the weakness in other areas.
Residential real estate markets were weak and declining across most of the Districts with sales weak, inventories increasing, and home prices falling.
Commercial real estate activity was described in much weaker terms than in recent reports. Office market conditions were weak in Richmond and bleak in Washington, DC while the Boston District reported sentiment in the sector as “decidely morose”. Retail space was described as overbuilt in Boston and Chicago and there was a steep decline in commercial construction around San Diego.
Loan activity was reportedly weak in most areas with business loans slightly better than consumer and residential real estate loans. Most Districts reported a further tightening of credit standards, especially for construction and real estate loans.
Several Districts reported deterioration in loan quality with increased delinquencies on consumer, real estate and construction loans. While Dallas was not seeing appreciably poorer loan quality, it was expecting deterioration in coming months.
Cleveland reported that smaller banks were seeing some improvements in their deposits as investors sought safety.
All Districts reported overall price pressures as elevated or increasing with the increases widespread across commodities but especially acute for petroleum-based products. Many Districts reported that manufacturers were planning on passing costs through where possible but with concerns about reduced sales.
Labor markets are seen as unchanged or weaker since the last survey period. Wage pressures were modest with the only exception being for highly specialized skilled workers.
B of A says they will buy back nearly 4bln in their own stock over the next year or so. B of A has 4.45bln shares outstanding.
Late yesterday the Alaskan House of Representatives voted to accept TransCanada’s bid to build a 1,700-mile gas pipeline from Prudhoe Bay to an existing hub on the Alberta-BC border, capable of shipping 4bln CFD at a cost of C$26bln.
A state license would mean streamlined permits and a state match of up to $500mln for capital that TransCanada, the world’s largest pipeline company, spends on pre-construction costs.
The vote was 24-16 with some legislators in favor of awarding the contract to one of the major oil producers who were not looking for a state license, which they view as a subsidy, according to reports.
The FED’s Beige Book is out at 2:00pm EDT and given reports from regional Fed banks of late, expectations are not particularly high.
In last week’s FOMC minutes members noted that private payroll employment fell at a slower rate than earlier in the year, but also noted that industrial production contracted at a faster pace than in Q1. Members said real consumer spending had picked up “modestly” (stimulus checks commenced at the beginning of May) with exception of car-buying.
Despite the downbeat nature of the minutes, the board did move its 2008 GDP predictions higher. In April the FED predicted 0.2-1.2% growth in real GDP, but in the June minutes it upped the forecast to 1-1.6%.
PCE inflation was also upped from 3.1-3.4% to 3.8-4.2%, but the unemployment central tendency was left at 5.5-5.7%. The Philly Fed’s Plosser said today that he expects unemployment to decline to 5.25% by the end of 2009.
In short, FED governors and regional Fed presidents are expecting higher growth and inflation, and stable unemployment. Tomorrow’s regional report may reveal pockets of emerging strength or at least less downside.
Recall the 11 June Beige Book characterized the economy as “slower,” “soft,” “weak,” “sluggish,” and “nearly steady.” Not exactly inspiring stuff there.