With EUR/USD marginally lower, USD/JPY up more than 0.5%, and Crude down 4%, Gold is down over 1.5% to move to 920. Gold’s 9-day moving average is continuing to slip even farther beneath its 21-day as the 3-day sell-off in Gold continues.
Silver is lower by more than 3.5% to move beneath 17.30 for the first time in a week. Silver has lost over 6% since Friday’s open.
USD picked up some strength in the afternoon session, finishing higher vs. most major currencies though the USD Index was roughly unchanged at 71.686. The greenback came under selling pressure following TSY Secretary Paulson’s proposal for an overhaul of financial market regulation. The proposal includes expanding the FED’s role as a market stability regulator as well as other long-term reforms aimed at improving market stability. Paulson provided few references to the weak USD, but reiterated in a later interview that a strong USD was in the US’s best interest.
The ECB’s Ordonez said the European Central Bank will be unable to slow near-term inflation and that financial market conditions have deteriorated in Europe. The ECB’s Liikanen made similar comments while warning of upside inflation risks. The ECB provided additional liquidity through a 1-day REFI operation in an attempt to ease short-term lending rates. The ECB is likely to continue this policy as opposed to reducing its benchmark.
EUR/USD peaked at 1.5896 following Paulson’s comments and is currently trading flat on the day at 1.5796. Cable is down 0.45% to 1.9853, USD/JPY is up 0.5% to 99.76, USD/CHF is down 0.2% to 0.9933 and USD/CAD is up 0.5% to 1.0277.
The Mar. ISM Manufacturing Index is expected to fall to 47.5 after a reading of 48.3 in Feb. and 50.7 in Jan. The Feb. Prices Paid Index fell to 75.5 from 76, the Mar. New Orders Index fell to 49.1 from 49.5, and the Mar. Shipments Index fell to 50.7 from 55.2. Index readings below 50 indicate contraction.
The 5 major ISM-related surveys maintained recession-like readings over the period, however modest improvements in several surveys could provide a boost for the Mar. ISM Index. These modest improvements include: the Mar. Philly Fed Index (-17.4 after a reading of -24 in Feb.) and the Chicago PMI (48.2 in Mar. from 44.5 in Feb.). The Philly FED Index has held the closest relationship with the ISM data when compared to the other major surveys, but the Chicago index has become increasingly volatile relative to ISM and has limited use as a tool for forecasting ISM.
The Mar. Empire State Index, which fell to an all-time low of -22.2, actually indicates a modest improvement from 48.2 to 49.3 when ISM-adjusted. The NY FED Index has shown an increasing level of divergence recently, but general trends between the indices have been consistent.
Factory sector inventory-to-sales ratios are modestly elevated as sales growth has come under pressure the past few months. Inventories tend to lag sales by roughly half a year which therefore may lead to a build in inventories eclipsing the needs of consumers. If this relationship holds steady, manufacturers will have to adjust their inventories to better match market demand. Due to the drop in sales growth, manufacturers are likely to curb production levels in order to reduce inventories to more sustainable levels.
While improvements in some of the ISM related surveys are promising, a Mar. ISM reading below 50, indicating contraction, should be expected.
Despite a weak close Friday, Crude started the session off strong, moving to a high of 106.78. However, Crude was unable to hold onto the momentum and plummeted to a low of 101.59, dropping more than $4 in 30 minutes at one point.
The sell-off in Crude is likely a combination of worry over US demand slowing down, Iraq supply coming back online following the pipeline attack last week, USD strength, and expectations for a build in EIA Crude Inventories Wednesday.
Crude rebounded off the 101.59 low after the freefall only to drip back towards it. Upon reaching the 101.59 low, Crude plummeted yet again, making new lows beneath 101.
Crude may be set to test the 100.00 level after losing over 4% so far today.
Feb. Construction Spending is expected to fall after declining 1.7% in Jan. Private residential construction fell 3% in Jan., private non-residential construction fell 1.2% and public construction fell 0.2%.
Private residential construction is expected to resume in decline in Feb. thanks to the continued US housing market fallout. Private residential construction has shown a considerable downtrend since mid ’06 and appears poised to continue falling through the end of the year. Housing starts improved modestly in Feb., which may provide marginal support for private residential construction. Aggregate construction hours fell 1% in Feb. after falling 1.3% in Jan.
Except for the decline in Jan., private non-residential construction has been a consistent addition to the monthly construction figures. While private non-residential construction is expected to maintain its upward path in Feb., softer job growth over the last year may slow the pace of non-residential construction in ’08.
Public construction in expected to rebound in Feb. after falling 0.2% in Jan. and falling 1.6% in Dec. The previous 2 month’s data appear to be mere anomalies in what has come to be a consistently positive addition to monthly construction data. Public construction is likely to continue its positive trend for most of ’08.
A Treasury official provided additional detail on the wide-ranging regulatory overhaul proposed by Secretary Hank Paulson earlier today. Treasury:
* Would give the FED “quite broad” licensing, enforcement, and rule-writing powers
* Says the Commodity Futures Trading Commission regulates “significantly more” financial futures trading than agricultural and other commodity futures, making its separation from the Securities and Exchange Commission out of step with the times
* Says the executive order to expand the President’s Working Group should happen soon. Next focus (after working through current market issues) is on starting SEC-CFTC merger and forming federal mortgage commission (MOC)
* Envisions FED oversight of credit default swaps in the long term
* Says hedge funds can pose a threat to stability, so should be more regulated, too
* Acknowledges Treasury “is not winning any popularity contests right now”
* Believes US financial market regulation should give equal standing to consumer protection (unlike UK’s FSA, which focuses more on wholesale markets)
* Says short-term objectives should be complete this year; intermediate objectives in 2-8 years
Speaking at the National Interagency Community Reinvestment Conference, San Francisco FED President Janet Yellen:
*Does not address monetary policy or her economic outlook
*Reveals the Fed is assessing the impact of rising foreclosures and is developing a policy response
*Observes problems that have plagued the subprime market, especially for ARMs, have begun to spread into the fixed-rate subprime market
*Says mitigating foreclosures should be a key priority for both private and public sectors, notably a streamlined approach to restructuring ARMs coupled with new refinancing options to help borrowers.
*Says the increase in GSE loan limits should help but lack the scale to respond effectively to market needs.
*Applauds efforts to convert foreclosed properties into affordable homes and rentals
The greenback came under selling pressure following TSY Secretary Paulson’s proposal for regulatory reform. The proposal includes an SEC-CFTC merger, as well as 3 new overarching regulators, which include: a market stability regulator, a prudential financial regulator of federally guaranteed institutions, and a business conduct regulator.
The USD Index was trading flat before heading into the red on Paulson’s comments.
While Paulson’s proposals may lead to improved financial market conditions going forward, they do not clearly address short-term USD weakness. Cable is down 0.42% to 1.9858 and USD/CHF is down 0.5% to 0.99.
The ECB’s Liikanen says EU inflation expectations have “hardened” while highlighting upside inflation risks as a result of food and energy costs. Liikanen also addressed the negative impact of the weak USD, though inflation remained his utmost concern. The ECB provided additional liquidity through a 1-day bill auction in an attempt to cool elevated overnight lending rates. EUR/USD is higher following Paulson’s comments, up 0.2% to 1.5827. EUR/GBP is up 0.57% to 0.7965