NBK Weekly Money Markets Report dated 16-05-2010
Greenback Still Benefits From Its Safe Status
The announcement of a massive unexpected bailout plan to fight the European fiscal crisis spurred a buying mode on Monday pushing the EUR to a week high of 1.3094. The Euro was subsequently unable to hold its gain as renewed fears and suspicions weakened the European common currency progressively to reach a low of 1.2334 on Friday before closing at 1.2360. The Sterling Pound seesawed during most of the week around the opening level of 1.4870 before edging down on to a close of 1.4537. Finally, the Japanese currency traded in the range of 92-94 throughout the week before strengthening back on Friday to 91.80 and closing at 92.44.
Budget Deficit Widens
The US posted its largest April budget deficit on record as receipts declined in a month that typically sees an increase in individual income tax payments. The excess spending over revenue rose to $82.7 bn last month compared with a $20.9 bn gap in April 2009.
Trade Balance Expands Further
The trade deficit grew by 2.5% to $40.4 bn, the highest level in more than a year as imports climbed faster than exports, adding to evidence of a US economic recovery. A rebounding consumer confidence coupled with increased business spending on equipment and inventories boosted the increase in imports.
Retail Sales Climb for Seventh Month
Commerce Department figures showed that retail purchases rose by 0.4% in April after a previous increase of 2.1% in March. The climb in retail sales for a seventh month signals that consumers are helping to broaden the economic recovery. Excluding auto & gas, retail sales were also up by 0.4%, above the analysts’ median expectation of 0.2%.
Consumer Confidence Edges Up
The University of Michigan Consumer Sentiment index rose to 73.3 from 72.2 in April. The gauge was projected by analysts to rise to 73.5. Employers last month added the most workers in 4 years, indicating that an improving job market may keep bolstering consumer sentiment. The survey also reported that the majority of consumers expected interest rate increases during the year ahead.
€750 bn Loan Package to Halt Crisis
European policy makers shocked the market with a mega-rescue package consisting of extraordinary measures from the European Central Bank (ECB) including purchases of selected sovereign securities, and a potentially €750 bn loan facility for governments facing financing problems. The combined facility will include 3 components: a €60 bn fund as an extension of an existing facility, a €440 bn 3-year facility under a Special Purpose Vehicle (SPV) guaranteed on a pro-rata basis by the national governments, and a commitment in principle by the International Monetary Fund (IMF) to lend up to around €250 under its policies. Stocks, commodities and European troubled bonds all soared after the announcement of the bailout plan on Monday.
Europe’s Economy Grows Further
The Gross Domestic Product (GDP) of the Eurozone rose by 0.2% in the first quarter, a faster pace compared to market consensus. The economic expansion was supported by the global recovery, which boosted exports, helping the region overcome the Greek fiscal crisis and consumers’ reluctance to increase spending. France and Germany reported 0.1% and 0.2% respectively, while the peripheral countries scored a growth of 0.1% for Spain, 0.5% for Italy, a better-than-expected 1.0% for Portugal and a widely forecasted negative figure of -0.8% for Greece. The year-on-year figure for the Eurozone is at 0.5%. Separately, industrial production ended the first quarter on a strong note. With the Euro’s decline making European goods more competitive, Europe’s services and manufacturing industries jumped by 1.3% in March.
Spain and Portugal Prepare Austerity Measures
In line with European leaders’ pressures to start cutting budget deficits, Spain and Portugal announced preliminary austerity measures to try to stop their economies from becoming further infected by the Greek fiscal crisis. Spanish Prime Minister Zapatero announced the biggest round of budget reductions in 30 years, including a 5% cut in public wages. The planned deficit reduction aims to cut the gap from the current 11.2% to 6% in 2011. Similarly, the Portuguese Finance Minister said he is prepared for “social tension” after announcing additional cuts.
Cameron’s Deficit Plans
New Prime Minister David Cameron’s Cabinet met for the first time last week and spelled out the need for immediate action to cut UK’s record fiscal deficit. The initial plan aims for 6 bn Pounds in spending cuts in an emergency budget within 7 weeks to reduce the deficit. Bank of England (BoE) governor Mervyn King welcomed the plan and said at a monthly press conference that “the agreement I have been informed about that was reached between Conservatives and Liberal Democrats is a very strong and powerful agreement”.
BoE’s Interest Rate Unchanged
As widely expected, the BoE kept its bond-purchase plan on hold at £200 bn for a fourth month and its interest rate at a record low of 0.5%. This BoE decision intends to nurture the recovery as the post-election power vacuum and the Greek debt crisis overshadows the local economic conditions.
Manufacturing Jumps Most Since 2002
The weakness of the Pound stoked exports from metals to cars, pushing UK factory production by 2.3% in March, greatly above the market expectations of 0.4%. Of the 13 categories in manufacturing, 12 increased, led by basic metals, metal products, and paper, printing and publishing.
Unemployment at 16-year High
UK unemployment measured by International Labour Organization (ILO) methods rose 53,000 to 2.51 million. The ILO jobless rate rose to 8% from 7.8%, compared to 9.9% in US, 10% in Eurozone and 5% in Japan. Newly appointed finance minister George Osborne said the jobless increase confirmed the “difficult situation” facing the UK while the BoE Governor warned that European deficits had increased risks for the recovery.
Consumer Confidence Slightly Up
UK consumer confidence measured by the Nationwide Building Society’s index rose by 1 point to 74 after dropping 9 points in March. Consumer confidence was negatively affected by the uncertainty over the elections and proposed government spending cuts.
Current Account Surplus Widens
Japan’s current account surplus widened in March on exports, a sign that overseas demand is sustaining a slow recovery in the world’s second-largest economy. On a year-on-year basis, the gap rose by 65% to 2.53 trillion Yen, above market expectations of 2.17 trillion. Exports rose by 45% from a year earlier while imports climbed 22%.
Gold Reaches Record Highs
Demand for a hedge against currencies amid Europe’s debt crisis drove Gold price to an all-time high of $1,249.70 an ounce during the week. Gold prices in Euro also climbed to records, impacted by speculations that cost-cutting measures of European nations will undermine economic growth.
China’s Trade Surplus Shrinks
China’s trade surplus shrank 87% in April from a year earlier as imports grew faster than exports, supported by a higher stimulus-driven domestic demand. The surplus came at $1.68 bn, compared with a deficit of -$7.24 bn in March. On a year-on-year basis, exports rose by 30.5% while imports increased by 49.7%, driven mainly by higher costs of imported goods such as soybean, vehicles and iron-ore.
Economy in China Still Overheating
Chinese consumer prices rose by 2.8% in April from a year earlier, the fastest pace in 18 months. In parallel, property prices also jumped by 12.8% on annual basis versus market forecasts of 11.7%. Additionally, the central bank announced that new lending increased to 774 bn Yuan, significantly above market consensus. China’s accelerated inflation, excess bank lending and property prices jump all increase pressure on the government to raise interest rates and let the domestic currency appreciate.
Australia’s Jobs Growth Accelerates
Employment rolls in Australia rose for the second straight month by 33,700, exceeding median estimates. The unemployment rate held at 5.4%, indicating diminished slack in an economy currently fueled by resource shipments to China.
Dinar at 0.29070
The USDKWD opened at 0.29070 on Sunday morning.