Well, well, well the week has finally come to and end and basically we can say it was a DOLLAR WEEK! Though the fundamentals were of no major support markets are supporting the dollar as the federal currency’s grounds were tempting after touching fresh record low against the euro and the oil was glimpse away from $120 barrel!

Consumer confidence in the US is still finding lower grounds to sink too, unlike markets sentiment that with the earnings season in the US they see there is a room for companies to prop up the economy and so to do with greenback!

The euro bounced back slightly in the American session after touching the lows at the strong support at 1.5550s the euro left its intraday high intact in early trade at 1.5707 while currently its trading at 1.5640s still the Hawkish stance for the ECB is under question now since remarks on the euro levels sparked fears of the future of monetary policy in the EU which has spurred further euro weakness against the dollar.

The pound managed to gain against the dollar today, as the GDP readings which though indicated softness in the economy they did not indicate the bottoming of expansion and provided underling hope for the economy to weather the turmoil storm. The pound set the high at 1.9880s which is strong resistance that it couldn’t breach to trade solidly above to slide to currently traded levels around 1.9840s, as the pound was supported to take the upside lows after strong demand provided at early lows around 1.9670s.

The yen is still consolidating against the dollar after more upside bias in early trading hours where the pair set the high at 104.80s still couldn’t continue until 105.0s trading lower in the American session attempting 104.10s yet still didn’t manage to trade markedly lower than that trading currently around 104.30s. The yen trimmed early gains against the euro after taking the pair to as low as 162.60s while the pound continued to claim gains against yen taking the pair to as high as 207.50s today.

Crown Forex

disclaimer:The above may contain information for investors/traders and is not a recommendation to buy or sell currencies, gold, silver & energies, nor an offer to buy or sell currencies, gold, silver & energies. The information provided is obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. I am not liable for any losses or damages, monetary or otherwise that result. I recommend that anyone trading currencies, gold, silver & energies should do so with caution and consult with a broker before doing so. Prior performance may not be indicative of future performance. Currencies, gold, silver &energies presented should be considered speculative with a high degree of volatility and risk.

The University of Michigan consumer sentiment index dropped to 62.6 in April from 69.5 in March - its lowest level since 1982. The market was expecting the index to remain unchanged from the early April reading of 63.2.

The current conditions component declined to 77 in April from 84.2 in March. The expectations index dropped to 53.3 from 60.1 in March. The one-year inflation forecast was unchanged from the early April reading of 4.8%. This represented the highest level since 1990. The five-year inflation forecast also increased, rising to 3.2% from 2.9%.

The decline in the University of Michigan consumer sentiment index follows a deterioration in the ABC Consumer Comfort Index and a sharp decline in the RBC CASH (Consumer Attitudes and Spending by Household) survey.

The level of the University of Michigan consumer sentiment index is firmly in the range historically associated with recession, putting significant downside risk on our consumer spending forecast calling for slightly positive growth in the first half of the year.

RBC Financial Group
http://www.rbc.com

The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.

Week beginning 28 April 2008

• Australia: RBA to stay on hold despite ‘high’ CPI.
• Key Australian data: retail sales crucial for Q1 GDP f/c; building approvals; credit growth.
• New Zealand: trade balance, building consents, business confidence.
• US FOMC: Fed to cut 50 bp with domestic demand contracting.
• US data focus: consumer confidence, Q1 GDP, manufacturing ISM and employment report.
• Key economic & financial forecasts.

Australia: RBA to Stay on Hold Despite ‘High’ CPI

The March quarter CPI printed slightly higher than we expected. Following the release of the March quarter PPI we raised our forecast for underlying inflation to 1.1% in March from the 1% we nominated in last week’s preview. We estimate that the average of the trimmed mean and the weighted median was 1.2% for March. To a second decimal place we estimate the trimmed mean at 1.16% and the weighted median at around 1.25% meaning that both measures were ’soft’. That is the ‘official’ estimates of both measures of 1.2% and 1.3% were rounded up, rather than down.

Despite this result being about 0.2ppt above where we think the Bank expected underlying inflation to print, we do not believe that it will trigger an immediate rate hike. However, the Bank’s rhetoric will now change from ‘clearly on hold’ to a tone suggesting the restoration of a tightening bias.

Certainly, a close look at the numbers does provide some encouragement that the price pressures in demand sensitive components are slowing down even after adjusting for normal seasonality: clothing -2.4%qtr, household contents -0.6%qtr, recreation -0.3%qtr (see below for more detail).

The overrun was in rents (up 2.0%) and food (up 2.1%) compared to our forecasts of 1.7% and 0.5% respectively. We were aware of the likely blow out in house purchase costs at 1.7%, well above our original (pre-PPI) estimate of 1.4%, following the release of the PPI on Monday.

If our forecast for food had have been correct the overall number would have been 0.26% lower. Of the twelve items which increased by more than 3%, nine of them were food items. The RBA should be prepared to look through the food effect as reflecting global factors rather than being associated with domestic demand.

As we have discussed before, the Bank needs to be able to credibly forecast that underlying inflation will be back within the 2% to 3% band by the end of their forecast period (likely to be December 2010) when it produces its next forecast on May 9. That will come after the May 6 Board meeting and the call is whether they have seen enough slowing in the domestic economy to make that call, when the ’starting point’ of 4.2%yr is above where we think they thought the starting point would have been (at 4.0%).

Our reading of their assessment of the outlook for the economy, and the downside surprises from the retail demand related components of the CPI, will provide them with sufficient confidence to make that prediction without needing to be bolstered by another rate hike in May.

However, as we have been arguing, a clear downtrend in demand will need to be confirmed or the Bank will have no choice but to raise rates again. Bear in mind that the biggest one year fall in underlying inflation was 1ppt in 1996. So to get inflation back to even 2.75% in 2010, a historically very large fall in inflation (1.5% over two and a half years) will be required. In fact, demand growth will need to slow to 3%-3.5% in 2008 and 2% or less in 2009. If that profile does not become clear then we will see the Bank opting for another rate hike.

Our view is that demand will slow in that way, but we recognise that the Bank’s degrees of freedom have been reduced as a result of the unexpected acceleration in the quarterly core inflation measures.

Not surprisingly the markets, that only a few weeks ago were pricing near certain rate cuts this year, are now giving around a 60% chance of a further rate hike. We believe and have always believed that this thinking is much more realistic than those previous views, although we would put the probability of a move at less than 50%. Usually we expect that the Bank will be most influenced by the overall number but there are some very interesting messages that emerge from a detailed analysis of the components of the CPI.

There is some convincing evidence that the slowdown in consumer spending we are seeing in the March quarter is moderating price pressures. Following two negative months of nominal retail sales growth in January and February we are forecasting consumer spending growth in the March quarter to slow to an insipid 0.4% compared to average quarterly growth of 1.2% in 2007. Of the twenty one items that actually fell in price eighteen can be expected to relate to a weakening in consumer spending.

Prices in the clothing group fell by 2.4% - the second steepest fall on record for the clothing group. This is particularly significant since the import price index for textiles clothing and footwear actually rose by 0.2% although prices fell by 2% in the December quarter indicating that there may have been some lagged effect from imports.

The price of AV and PC equipment fell by 5.8% - the biggest fall since 2005Q1 - overall import prices for household electrical items fell by 2.7%. Furniture and furnishing prices fell by 3.6% - their steepest fall on record. Household appliances, utensils and tools fell 1.3% - the steepest fall since 2003Q1.

This evidence will be welcomed by the Bank. They will be aware that in the two previous downturns that culminated in rate cuts - 1995 and 2000 - the slowdown in demand growth was significantly due to a slowdown in housing activity. That is because dwelling approvals were significantly above underlying demand and there was adequate scope for housing activity to slow. During those cycles housing activity slowed by around 25-30%. With building approvals running below underlying demand for the last four years a chronic shortage of housing stock has emerged. In this downturn we expect that the contraction in housing activity will be limited to around 5%.

That will put more ‘responsibility’ on the consumer and business investment to slow demand. Evidence from the CPI that prices in the retail sector have tumbled so quickly will provide some comfort to the RBA that the required demand slowdown is underway.

The tax cuts will only add to demand if consumers choose to spend them. The Westpac Consumer Sentiment Survey has shown a sharp increase in households’ preferences for bank deposits as the wisest place for savings. We expect that debt stressed consumers will prefer a larger than normal allocation of savings from the tax cuts.

Further complicating the outlook for demand has been a discernible easing in credit conditions. Businesses that were borrowing term money at around 120 bps over swap can get funding at around 80 bps and there has been an improvement in the risk appetite of investors. However those funding costs are still around 60 bps above the pre-crisis levels. Borrowers may decide that such costs cannot be justified and defer projects, but at least the spectre of widespread credit rationing seems to be passing.

Overall we still think the economy is set to deliver the slowdown the Reserve Bank requires with an eventual easing in inflation pressures. However if the Bank assesses that the slowdown signs are dissipating then get ready for even higher rates.

Bill Evans, Managing Director, Economics & Research

Australia: Data Wrap

Mar motor vehicle sales

• The official ABS estimate of vehicle sales came in stronger than anticipated, with sales up 1% in March. This came after a 2.4% fall in Feb and a flat Jan and in spite of raw industry figures that had suggested - to us at least - that sales had fallen again in March. The raw figures may have been affected by the timing of Easter this year, falling in March instead of April. Although the ABS does not specifically adjust vehicle sales for the Easter timing, it’s trading day seasonal adjustments may well have captured the effect.
• Technical issues aside, the trend in sales has also now clearly turned. Notwithstanding the March uptick, sales overall were still soft in Q1 (-1.6%qtr vs +3.7% in 2007Q4). This turnaround alone will take about 0.25ppt off aggregate consumer spending in the Q1 national accounts (although an offsetting dip in imports will leave a net neutral impact on GDP).
• The outlook is fairly bleak for sales as well. The Westpac-Melbourne Institute Index of Consumer Sentiment showed a slump in sentiment with on motor vehicle purchases to its lowest level since the survey question began in 1995. As such, a continued pull-back in vehicle sales looks likely in Q2.

Q1 PPI

• Q1 Final Stage PPI inflation was well above consensus at 1.9%qtr (biggest quarterly rise since the series commenced in 1998Q3), lifting the annual rate to 4.8% from 2.8%.
• Non-core elements added more to the PPI than expected, with petroleum refining prices up 10.4% (adds 0.32ppts) reinforced by a 2.1% rise in food prices (adds 0.34ppts), adding a net 0.66 ppts to the quarterly PPI.
• The rise in food prices was led by strong gains in dairy product manufacturing, bakery product manufacturing, beverage and malt manufacturing, and fruit and vegetable processing. While CPI food prices are more margin dependent and not well correlated with PPI equivalents, the overall 2.1% jump in PPI food prices reinforces our view of upside risks to the CPI food group (our f/c is +0.5%qtr).
• Ex-food and petroleum, the core PPI was also markedly stronger than Q4’s subdued outcome. The core PPI rose 1.5%qtr and 3.3%yr (vs 0.4%qtr, 2.2%yr prev).
• Domestic core pressures were strong even after abstracting from an acceleration in building construction prices. A strong utilities rise played some part in the domestic core acceleration, but there was broad based price pressure with only 4 of 32 domestic core items with price falls. The domestic core PPI ex-construction rose 1.4%qtr and 3.6%yr (vs 0.4%qtr, 2.4%yr prev).
• Core import prices fell -0.1%qtr and -5.9%yr.
• Building construction prices saw a strong 1.9%qtr rise, led by house construction. With house construction output prices up 1.8%qtr, our CPI house purchase forecast has been revised up to 1.7%qtr (from 1.4%). The utilities jump has also driven an upward CPI revision, and with the upside risks to food also, we have revised up our Q1 CPI forecasts. We now expect an average RBA core rate of 1.1%qtr and 4.1%yr (trimmed mean 1.04%qtr and 3.9%yr) and a headline CPI of 1.2%qtr and 4.1%yr.

Q1 CPI

• While the strong 1.2%qtr RBA core CPI result was 0.2ppts above what we think the RBA expected, we do not expect it to trigger a May rate hike. However, the Bank’s rhetoric will now likely change from ‘clearly on hold’ to one suggesting the restoration of a tightening bias.
• The headline CPI was 1.3% in Q1, well above consensus (1.1%), after 0.9% previously. This saw the annual rate jump to 4.2% from 3.0% previously, the highest (excluding the GST boost over 2000/01) since 1995Q4.
• Quarterly core CPI rates were very strong, lifting the annual core rate to 4.2%, its highest since 1991Q3 - above the RBA’s ‘around 4%’ forecast noted in recent statements. We calculate the average of the RBA seasonally adjusted trimmed mean and weighted median measures was 1.21%qtr (vs 0.9% consensus and 1.1% WBC f/c) after an estimated 1.08% previously, the highest since 1990Q4. This saw the annual rate rise to 4.2%yr from 3.6%yr, the highest since 1991Q3.
• In the detail, the main positive headline contributions were from petrol, pharmaceuticals, house purchase costs, electricity, rents and other financial services. These were partially offset by falls in furniture, audio, visual and computing equipment, domestic holidays and clothing accessories.

Round-up of local data released last week

New Zealand: The Week ahead & Economic Wrap

Once upon "a time"

The main domestic economic event this week was the Reserve Bank review of the Official Cash Rate (OCR). As expected, the OCR was left on hold, with the tone of the commentary suggesting rate cuts are likely to occur earlier than end-2009 as forecast by the RBNZ back in March. Other data out suggested weak retail turnover in March, and that migration may be finding a floor. Next week brings merchandise trade, March building consents, and April business confidence.

The RBNZ surprised no one by leaving the Official Cash Rate on hold at 8.25% today. When stuck between a rock and a hard place, not moving is a fair response. They are beset by an increasingly ugly near-term growth slowdown on one side and a still-alarming inflation picture on the other.

The main interest was regarding hints about future policy. The RBNZ stated that they "expect that the OCR will need to remain at current levels for a time yet". This is a marked change from "a significant time yet" in the March MPS commentary. A more dovish approach is entirely appropriate, but the RBNZ is taking a risk in giving the market a green light to price in cuts in short order. It increases the chance that they may need to talk tough to haul back market pricing if upside inflation risks eventuate. It also increases the odds that the NZD will be smacked by offshore speculators, which would cause the near-term inflation outlook to deteriorate significantly.

The RBNZ commented that "economic activity has weakened more markedly than expected". We agree. The outlook for 2008 growth is grim, due to the factors the RBNZ identified: sentiment, tighter credit conditions, weak housing, weaker world growth, global financial market turbulence and drought.

But does this solve the inflation problem? The RBNZ hopes so, but is understandably nervous: "there is a risk that wage settlements respond to … short term price shocks rather than adjusting to the changing economic conditions, thus perpetuating inflation pressures". NZ has not seen a good old-fashioned wage-price spiral for many years, but the risk of one is heightened at present.

Taken literally, that the OCR now expected to be on hold for "a time yet" could mean absolutely anything. However, a sensible interpretation is that the RBNZ will be bringing forward projected rate cuts in their June Monetary Policy Statement, in line with a weaker growth profile (the March MPS had no cuts until the end of 2009). It is important to note that the RBNZ already slashed their growth forecasts in March (the sharp falls in consumer sentiment we’ve seen are consistent with that forecast), but it seems likely that their investment forecasts will be revised down markedly.

However, we think market pricing is getting ahead of itself in anticipating rate cuts as soon as October. Growth is coming to earth with a thud, severely testing the RBNZ’s resolve. But given the nature of the positive inflation shocks hitting in the next couple of years, and elevated inflation expectations and wage settlements, the RBNZ is going to have to act tough much longer than has historically been the case in the face of growth slowdowns. The chance of the credit squeeze worsening significantly remains a key risk to this expectation.

In other data, external migration was a little stronger than expected in March, with a net 490 people arriving (seasonally adjusted). Annual net migration ticked up from 4,643 to 4,678 people arriving. However, it looks as though migration will trough around 1,000 people p.a. weaker than the Reserve Bank assumed in March, which all else equal will reduce their estimate of inflation pressures.

In other data this week, March credit card billings fell a whopping 2.7% in March (seasonally adjusted), while retail electronic card transactions fell a more modest 0.3%. The former is a reasonable indicator of urban sales, while the latter is more correlated with rural spending, which has been holding up better. The falls must be interpreted with some caution as they may have been overstated due to both an extra day in February, and Easter falling early this year. However, the data do provide more evidence that the NZ consumer is struggling in the face of significant headwinds.

Next week brings a few releases of interest. Merchandise trade for the March month looks like being another ripper, with export receipts expected to outpace import spending by some $600m. This would be the largest monthly trade surplus since May 2004, and the smallest annual trade deficit since August 2004. The trade balance is expected to continue to improve thanks to solid terms of trade and weaker consumption and investment over coming quarters reducing import demand.

Wednesday brings March building consents and April business confidence. We expect dwelling consents to drop a sharp 5% s.a. on top of a 6.5% fall in February, with house sales and Easter timing implying a risk of an even larger plunge. Non-residential consents are also expected to stay weak given the deterioration in the growth outlook and tight credit conditions.

Business confidence has fallen sharply in recent months and is likely to tick down a bit further in March. It should start to find a bottom soon, but there is little reason to expect a bounce-back, with demand slowing markedly, costs still sky-high, and profitability squeezed. Widespread rain may spread a little cheer in the agricultural sector, but probably not until the next survey.

Round-up of local data released last week

Data previews

Aus Mar private sector credit

Apr 30, Last: 0.7%, WBC f/c: 1.0%

Mkt f/c: 0.8%, Range: 0.5% to 1.1%

• Growth in credit to the private sector faltered in February, with a subdued 0.7%mth rise slowing growth to 15.5%yr, up from 14.5%yr a year ago, but down from a Dec-07 peak of 16.5%yr.
• Business credit growth remains strong historically at 22.3%yr, but faltered in February with a low 0.5% rise (vs 2007H2 avg of 1.9%mth), slowing 3mth annualised growth to 23.1% from a January peak of 26.8%. The February result tentatively suggested that the 2007H2 boost from reintermediation amidst capital market turmoil has passed its peak. We expect a 1.4%mth rise in March, keeping %yr growth steady.
• Housing credit growth is expected to ease to 0.85%mth from 0.91%mth previously, constrained by rate hikes. Personal credit has fallen last two months as retail sales fell - a likely weak March for retailing sees us expect a flat credit result.

Credit: business falters, housing constrained

Aus Mar dwelling approvals

May 1, Last: 0.1%, WBC f/c: -1.0%

Mkt f/c: -0.5%, Range: -1.9% to 3.5%

• Monthly approvals inched 0.1% higher in Feb but have moved well off their 2007 highs (trend approvals are down 2.9% since Oct). Interest rate increases - both official and unofficial ‘market driven’ rises - are weighing on activity but approvals have been surprisingly resilient to date with the softening mainly just an unwind of earlier strength.
• March is expected to see a further weakening. Another official rate hike and market-led increases brought the total rise in mortgage rates since Aug to 130bps, with floating rates hitting 9.35%, an 11yr high. However, a worsening dwelling shortage will see strong pent-up demand continue to support activity.
• New home sales and finance approvals for construction have been resilient in recent months. Hence we are forecasting a modest 1.0% decline in dwelling approvals in March.

Dwelling approvals: down but not out

Aus Mar retail sales

May 2, Last: -0.1%, WBC f/c: -0.3%

Mkt f/c: 0.3%, Range: -0.8% to 0.7%

• Retail turnover fell 0.1% in Feb after a similar dip in Jan and a modest 0.3% rise in Dec. The deceleration in sales has been abrupt, with annual growth falling from 8.3% in Dec to 5.8% in Feb. Interest rate hikes are clearly impacting, compounded by high fuel prices (up 2.8% in Mar) and falling equity markets.
• Retail sales are expected to have been even weaker in March. Consumer sentiment slumped badly in the month as another official rate hike combined with more ‘market-induced’ rises in mortgage rates and financial turmoil. Although disposable incomes are still rising robustly (at ~0.6%mth) the clear signal from consumers is that they are pulling back on expenditure. Anecdotal reports suggest the hit to sentiment was matched by weak sales in March. Overall, retail turnover is forecast to fall 0.3% in March, dragging annual growth down to 4.4%yr.

Retail sales: an abrupt slowdown

Aus Q1 real retail sales

May 2, Last: 1.6%, WBC f/c: flat

Mkt f/c: -0.2%, Range: -1.3% to 1.2%

• Real retail sales rose 1.6% in 2007Q4 rounding out a strong year for sales (up 4.8% for 2007 as a whole).
• 2008Q1 is shaping up as a different story. Sales have fallen 0.1% in the first two months and are set to decline again in March. The strong Q4 means this is from a high base, but even still Q1 sales growth is set to come in at just 0.3%qtr.
• The result will be even weaker in real terms. Although its running well below headline CPI, retail price inflation has stepped up a notch since mid-2007. We expect prices to post a 0.3% rise in Q1, up on the flat Q4 result.
• As such, sales volumes are forecast to be flat for the quarter, pulling annual growth down abruptly from 5.7% to 3.5%. Risks are heavily stacked to the downside.

Retail sales: volumes and prices

NZ Mar merchandise trade NZDm

Apr 29, Last: 258, WBC f/c: 600

• We predict a huge monthly merchandise trade surplus, the highest on record for a March month and the highest for any month since May 2004.
• Our exports forecast of $4250m will be the highest monthly value ever. The value of our exports has received a huge boost from Tui oil exports and the more-than-doubling of dairy prices, our biggest industry. For dairy, high prices will swamp the effect of reduced volumes resulting from drought.
• Meanwhile, our import forecast of $3650m is rather subdued. Consumers have taken a big step back due to high interest rates, falling house prices, and high petrol prices.

NZ merchandise trade balance

NZ Mar building consents s.a.

Apr 30, Last: -6.5%, WBC f/c: -5.0%

• February dwelling consents fell 6.5% m/m, and we expect a further fall in March (-5.0% m/m) given the weak housing market and difficulties in accessing credit. The timing of Easter will also play havoc with the data this month, risking an even weaker outturn.
• Housing turnover provides a good 3-month lead on monthly building consents, so the 30% fall in sales in the month of March suggests some very gloomy outturns over the next few months. Sales data alone point to monthly consents dropping to around 1,300 per month by June, from 1,800 in February!
• Non-residential consents are expected to remain weak given the deterioration in the growth outlook and tight credit conditions.

Residential consents and sales monthly, seasonally adjusted

NZ Apr NBNZ business confidence

Apr 30, Last: -57.9%

• General business confidence and own activity expectations have fallen very sharply in recent months to recessionary levels. While a further tick down this month would not be surprising, confidence is likely to find a floor in the next couple of months. There is little reason to expect a near-term significant bounceback, however. Widespread rain should provide some cheer in the agricultural sector, but probably not until the next survey.
• Most interesting will be whether inflation expectations and pricing intentions will find a corresponding peak. The RBNZ will certainly be hoping so.
• Export and investment intentions may fall further. A marked slowing in employment intentions would be noteworthy.

NBNZ business confidence

US Apr Conference Board consumer confidence

Apr 29, Last: 64.5, WBC f/c: 60.0

• Consumer confidence plunged steeply in February and March, coinciding with deteriorating labour market conditions, rising gasoline prices, continued house price falls, heightened concerns about the banking sector and further stock market losses.
• The last two of these five factors should have less downward impact on sentiment in April, as there has not been more bad news on these fronts in recent weeks.
• However there is evidence that employee layoffs are on the rise, the housing market continues to flounder and gasoline prices are at new record highs. The weekly ABC-Washington Post confidence index hit a new cyclical low in mid April.
• Given these factors we expect further confidence slippage in April, though the monthly loss won’t be as steep as seen in Q1.

US consumer confidence sinks

US Q1 GDP advance

Apr 30, Last: 0.6%, WBC f/c: 0.4%

• GDP growth slowed from 4.9% annualised to just 0.6% in Q4 last year, reflecting a steeper housing fall, slower consumer, business and public spending growth and inventory rundown.
• In Q1, we expect domestic demand to contract for the first time this cycle. That will reflect a near 30% annualised housing slump, a stalled consumer (auto sales in particular have been weak), contracting business investment and only partial offset from slow public spending growth. An inventory bounce and ongoing net exports growth should prevent GDP from printing negative for the first quarter since 2001.
• That said, latest partial data on inventories and trade suggest that the risks around our forecast lie to the downside.
• The core PCE deflator should ease slightly from 2.1% to 2.0% annualised in Q1 - not adding to niggling inflation worries.

US GDP growth: recession

US FOMC rate decision

Apr 30, Existing Last: 2.25%, WBC f/c: 1.75%

• The Fed cut rates by 300bp between Sep 18 last year and Mar 18 this year, most recently cutting by 75bp. The accompanying statement on 18/3 acknowledged that downside growth risks remained (and the subsequent minutes made it clear some FOMC members considered the economy to be in recession), but it also emphasised concern about inflation (and there were two dissenters preferring less aggressive action).
• Since then, Fed officials (including the two dissenters, Plosser and Fisher) have revisited the inflation issue, which might be construed as attempts to play down expectations of continued aggressive Fed rate cuts.
• However our view is that the Fed will not forgo an opportunity to do more to head off recession risk: we expect a further 50bp rate cut on 30/4 and expect rates to hit 1% later this year.

Fed funds target & discount rate

US Apr ISM manufacturing

May 1, Last: 48.6, WBC f/c: 48.0

• The factory ISM ended 2007 on a weak note at 48.4, and apart from a temporary bounce in Jan, has hovered around that level since then.
• The regional factory surveys for April were mixed. The NY Fed bounced back from -22 to flat, but the Philly Fed fell from -17 to -25, a new cycle low. We regard the Philly index as a better guide to underlying factory conditions.
• Durable goods orders data for March are due after we go to press, but we are expecting a further decline, which if confirmed would hint at production softness in April.
• Tying these clues together, we expect further, albeit modest, slippage in the national factory ISM, to 48.0 in April.

US ISM surveys

US Apr non-farm payrolls

May 2, Payrolls: Last: -80k, WBC f/c: -110k

May 2, Unemployment rate: Last: 5.1%, WBC f/c: 5.1%

• Payroll employment fell by around 80k per month in the first three months of this year .
• US GDP growth effectively stalled in Q4 last year and Q1 this year. Business investment growth, a key driver of employment, probably contracted in Q1. Consumer confidence in the job market turned sharply lower in Q1. The pace of layoffs and the numbers receiving unemployment insurance payments have trended significantly higher this year.
• At some point soon these factors will deliver a faster pace of job loss - hence our forecast for a 110k decline in April.
• Assuming a similar-sized loss of jobs in the household survey, and a unchanged labour force, the unemployment rate would hold steady at 5.1% in April (5.1468% before rounding).

US jobs market

Westpac Institutional Bank
http://www.westpac.com.au

Disclaimer

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