Talking Points<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
· JPY <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />EcoWatchers sinks to 48.4
· DEM Trade Balance bit better than expected
· UK Industrial Production surprises to the downside
· USD 5.5% or pause?
The EUR/USD staged a comeback in European session after stop fueled selling pushed the pair to 1.2805 in early Asian trade as traders tested support for the unit. The dollar initially received a boost from its a pause not a peak theme that swept dealing desk late yesterday afternoon. The idea promulgated by some traders is that even if the Fed chooses to keep rates steady today it may not necessarily signal the end of its rate hike campaign. We, however, doubt that the Fed will have the political will power to resume policy tightening if it pauses today. With <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />US consumer clearly burdened by rising housing and energy costs and with US mid-term elections scheduled for early November, the Fed will likely retreat to the sidelines for the rest of the year if it does not raise rates today. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
More than anything else financial markets abhor inconsistency from monetary policy officials, and should the Fed pause today only to resume hiking rates in September it risks the danger of triggering massive price volatility in US capital markets in the fall. Therefore, aware of the dangers of the flip-flop approach FOMC members will be careful to anchor market expectations today.
In economic news German Trade Balance improved slightly to 13.3B from 13.1B expected but Industrial Production slipped far more than expected printing at -0.4% versus forecast of 0.2% gain. Higher oil and higher euro are crimping the ability of German manufacturers to sustain growth and if the situation deteriorates further it may weigh on any future ECB rate hike considerations. Higher oil also took its toll in Japan where the Eco Watchers survey dropped for the second month in a row registering a reading of 48.4 below the important 50 boom/bust level. Although Japan has made Herculean efforts at energy efficiency, the $75/bbl oil is clearly crimping consumer demand and may impact future growth in worlds second largest economy if it continues for any significant amount of time. In short, while interest rates my be the focus of the day, the true danger to global economic growth appears to be oil. While the recessionary risks to US are becoming clear, the rest of the world is unlikely to escape unscathed if oil prices continue their relentless rise.
