NBK Weekly Money Markets Report dated 01-08-2010
The announcement of the European banking stress test results at the end of the preceding week opened the route for stronger European currencies against the US Dollar. Benefiting from relatively weak figures in the US, the Euro rose progressively during the week to reach a high of 1.3107 on Thursday before giving up part of its profits on Friday and closing at 1.3052. The Sterling Pound continued its bull rally since mid May, opening the week at 1.5425 before recording a month-high of 1.5721 on Friday and closing the week at 1.5689, up 1.71% for the week. Last, the Japanese currency strengthened further to 85.95 against the greenback, the highest level since last November. The stronger yen comes despite growing concerns about Japan's economic outlook where a group of ruling party lawmakers renewed calls for the Bank of Japan to target inflation and weaken the yen with monetary policy. The Yen closed the week at 86.47.
Economy Still Growing, But Slowly
The US Gross Domestic Product (GDP) expanded at a 2.4% annual rate, below market expectations of 2.5% and the newly revised 3.7% growth pace in the January-March quarter. Growth in the last quarter was held back by a 28.8% surge in imports, which eclipsed a 10.3% rise in exports. This surge in imports created a trade deficit, which lowered growth by 2.78% points, the largest subtraction since the third quarter of 1982. Outside the trade sector, business investment rose at a 17% rate while growth in consumer spending was at a 1.6% rate in the second quarter after increasing from a revised 1.9% in the first quarter.
Improving Housing Market
Sales of US new homes rose by 23.6% in June to an annual pace of 330,000 homes. The hike was above market consensus following an unprecedented collapse in sales during the prior month, signaling that the worst of the slump triggered by the end of a government tax credit might be over. On another front, the S&P/Case-Shiller home price index showed a 0.47% increase in May. On a year-on-year basis, prices are up by 4.61%.
Consumer Confidence Slips
American consumers’ confidence was lower in July, shaken by mounting concerns over jobs and wages that threaten to constrain the economic recovery. The Conference Board’s sentiment index fell to 50.4, its lowest level in 5 months, and below the median forecast of 51. In parallel, the University of Michigan Consumer Sentiment index fell from 76 in June to 67.8, the lowest since November, adding to the bleak prospects originating from consumers.
Fed: Slower Economy Recovery
The Federal Reserve said US economic growth slowed in some areas over the past 2 months, dragged down by commercial real estate and the expiration of a tax credit for homebuyers. The central bank said in its Beige Book business survey that the “economic activity has continued to increase, on balance, since the previous survey,” while noting that 2 of the Fed’s 12 districts reported the economy “held steady” and 2 said the pace of expansion slowed. The report underscored the Fed’s view that the recovery, while still moving forward, is progressing at a slower pace than earlier in the year. Fed Chairman Ben Bernanke said in congressional testimony in the prior week that the central bank expects “continued moderate growth” and noted that the economic outlook remains “unusually uncertain”.
Inflation Speeds Up While Unemployment Remains at 10.0%
European inflation accelerated to the fastest pace in more than a year and half on rising energy costs, according to the official initial estimate. The Eurozone consumer prices rose 1.7% from a year earlier in July after increasing 1.4% in June. Separately, unemployment held at 10.0%, the highest in almost 12 years; 15.8 million people were unemployed in June, up 6,000 from May and 788,000 higher on an annual basis.
European Banks Shares Rise Further
European stocks were supported this week as UBS AG and Deutsche Bank AG reported earnings that beat estimates and the Basel Committee on Banking Supervision softened its proposed capital rules. UBS, Switzerland’s largest bank, reported a net income of 2.01 billion francs, after a net loss of 1.4 billion francs a year earlier. Deutsche Bank, Germany’s largest lender, reported a second-quarter net income of €1.16 billion as gains in retail and transaction banking helped offset a decline in sales and trading.
Spain’s Debt Costs Fall After Stress Tests
Spain sold €3.4 billion ($4.42 billion) of Treasury bills as its borrowing costs fell in the first debt sale since the European Union stress tests of banks. The €971.4 million three-month bills were issued at an average rate of 0.672%, compared with a yield of 0.913% at an auction in June. Spain also sold €2.46 billion of 6-month debt at an average rate of 1.144%, down from 1.577% last month.
Weaker Housing Performance
The Nationwide survey reported a 0.5% decrease in UK house prices during the month of July, after increasing 0.1% in the prior month. On an annual basis, home prices in UK are still up by 6.6%, below the market expectations of 7.0%
Unemployment Rises While Industrial Production Falls
Unemployment unexpectedly rose for a fourth straight month and industrial production fell the most in more than a year, signaling the economic expansion is poised to slow. The jobless rate climbed to 5.3% in June up for the sixth consecutive month and hitting its highest level since November. Separately, factory output slid 1.5% from May, below both market expectations and prior the previous month’s figure. The industrial production is still up by 17.0% on a year-on-year basis.
Deflation Still Hurting
Deflation continued as Japan's core consumer price index fell 1% from a year earlier. The government's new high school tuition breaks weighed heavily on prices, dragging education costs down 13%. The headline inflation is still in negative territory at -0.7%.
Japan’s exports rose faster than economists estimated sustaining a boost to the recovery that may diminish as global growth cools and the yen strengthens. Shipments abroad advanced 27.7% in June from a year earlier while the median estimate of economists was for 23.2%.
India Raises Rates Again
The Reserve Bank of India raised the reverse repurchase rate to 4.5% from 4% and the repurchase rate to 5.75% from 5.5%. The rate increase is above economists’ estimates, as the Central Bank battles to contain a surge in inflation that triggered labor strikes and opposition-party organized public protests.
Dinar at 0.28710
The USDKWD opened at 0.28710 on Sunday morning.