ForexTV Market Vision w/ Tim Kelly

Current Markets Overview

From Econoday...Consumer expectations are improving and inflation worries are easing, the results of the Conference Board's consumer confidence report earlier in the week and today's Reuters/University of Michigan report. The Reuters consumer sentiment index rose more than 1 point from mid-month and nearly 2 points from July to 63.0. But the moderate gain masks a solid and important gain in the expectations component, to 57.9 vs. 56.8 at mid-month and well up from 53.5 in July. Expectations are definitely improving, not only in consumer sentiment reports but also in the Philadelphia Federal Reserve's report on the manufacturing sector released earlier in the month. The gain in today's expectations data offsets an actual month-to-month decline in the assessment of current conditions, 71.0 in August vs. 73.1 in July.

Now the good news on the inflation side. One-year inflation expectations held on to their big mid-month improvement, down 3 tenths to 4.8 percent. Like overall sentiment, expectations on inflation are improving just when things appear to be at their worst: right when the CPI is running at a 5 percent year-on-year clip, consumers see less pressure ahead. Five-year inflation expectations are unchanged at 3.2 percent.

Though the data show improvement, it's important to keep in mind that levels are coming off record lows. Financial markets showed no immediate reaction to the report which nevertheless hints that consumer spending, just when it's hitting a bottom as evidenced by this morning's personal income/spending report, may be poised for a rebound.

What's Priced Into the Market:

Markets are currently pricing in the following probabilities for future interest rate moves as of the close on Monday:FED - OIS Implied Rates

Markets are pricing in a 14% chance of a 25bp hike by the next meeting on Sept. 16.

Markets are pricing in a 28% chance of a 25bp hike by year-end.

Markets are pricing in a 100% chance of a 25bp hike and an 82% chance of a 50bp hike by June 24, 2009.

BOC - OIS Implied Rates

Markets are pricing in a 33% chance of a 25bp cut by the next meeting on Sept. 3.

Markets are pricing in a 100% chance of a 25bp cut and a 21% chance of a 50bp cut by year-end.

Markets are pricing in a 100% chance of 25bp cut and a 67% chance of a 50bp cut by June 9, 2009.

BOJ - OIS Implied Rates

Markets are pricing in a 3% chance of a 25bp hike by the next meeting on Sept. 17.

Markets are pricing in a 2% chance of a 25bp hike by year-end.

Markets are pricing in a 10% chance of a 25bp cut by Feb. 19, 2009.

RBA - OIS Implied Rates

Markets are pricing in a 100% chance of a 25bp cut and a 29% chance of a 50bp cut by the next meeting on Sept. 2.

Markets are pricing in a 100% chance of a 50bp cut and an 81% chance of a 100bp cut by year-end.

Markets are pricing in a 100% chance of a 75bp cut and a 99% chance of a 100bp cut by April 7, 2009.

BOE - SONIA Implied Rate

Markets are pricing in a 0% chance of a 25bp hike by the next meeting on Sept. 4.

Markets are pricing in a 70% chance of a 25bp cut by year-end.

Markets are pricing in a 100% chance of a 25bp cut and a 67% chance of a 50bp cut by March 5, 2009.

ECB - EONIA Implied Rate

Markets are pricing in a 5% chance of a 25bp hike by the next meeting on Sept. 4.

Markets are pricing in a 22% chance of a 25bp cut by year-end.

Markets are pricing in a 42% chance of a 25bp cut by March 5, 2009.

US Economy Showing Signs of Strength...but slowly

US economic data is showing small signs of recovery but those looking for a "rebound" may be disappointed.  There is not much that can move the US economy towards robust growth in a short period of time as inflation still has a strangle-hold on the global economy and the US housing market will take months, if not years to recover.  Still, retail sales and housing prices showed some resilience today and crude ebbs lower.  Earnings for US banks and financial institutions, while not exactly setting records are not faring as badly as many expected.  Many analysts and economist that I have spoken with don't see a "true recovery" until the middle of 2009 at the earliest.  The US equity markets are at the brink of bearish territory, so there are few catalysts that are likely to lift the world's largest economy in the short term.

This is a market that is tailor-made for technical analysis, as the fundamentals that will significantly lift the markets are becoming fewer and farther apart and limited to major releases and indicators.  The following is today's ProSticks/Ichimoku technical forex report.

US Facing Economic Winter

FannieMae and FreddieMac aside, the U.S. financial markets are in a serious downslide and there appears to be no end to it.  Aussie and Euro are approaching historic highs, the US equities markets are retracing dangerous downside resistance levels and crude oil prices are maintaining historic levels.  Dollar is in retreat across the board and there are expectations of further downside.  The technicals are in play here more than at any other time in the recent past, as the economic calendar has no major, market-moving events in the next week or two.

Looking ahead for Asian session(from CEP News desk):

In addition to the release of the Japanese Cabinet Office's monthly economic report for July, the Bank of Japan's interest rate announcement is scheduled for Monday evening. The BOJ is expected to hold off on any rate movement this month. The bank's release of its monthly report of recent economic and financial developments is another highlight of the day.In Australia, aside from the release of the Westpac Leading Index of Economic Activity, RBA Governor Glenn Stevens is scheduled to speak on the subject of 'Challenges for Economic Policy' at an event organized by the Anika Foundation and Australian Business Economists. The Reserve Bank of Australia's July minutes will also be published.

Monday: (All times in EDT.)

21:30 AU Reserve Bank's Board July Minutes
July -14 JP BOJ Target Rate 15-July Exp: 0.5% Prior: 0.5%
July -14 JP Cabinet Office July Monthly Economic Report

Tuesday:
0:00 JP Tokyo Condominium Sales (Y/Y) June Prior: -17.7%
2:00 JP BOJ Monthly Report
19:50 JP Tertiary Industry Index (M/M) May Exp: +0.2% Prior:+ 1.8%
20:30 AU Westpac Leading Index (M/M) May Prior: +0.4%
22:30 AU Climate Minister Penny Wong Speaks in Canberra
23:05 AU Reserve Bank Governor Stevens Speaks in Sydney
14-30 July AU NAB Business Confidence Q2 Prior: -4

Looking ahead for European session(from CEP News desk):

It's a big day in the UK with the release of inflation data. Although core UK inflation is expected to remain steady, headline CPI is expected to tick higher in June. Economists expect annualized core inflation to rise 1.5% following a matching increase in May. Headline inflation is expected to rise 3.6% following the previous rise of 3.3%.Economists from Barclays Capital forecast a 0.4% rise in the CPI in June month-over-month, and a 3.5% increase year-over-year. "The key drivers of the monthly change are a 3.5% m/m rise in energy prices are linked to a 6.5% increase in petrol price and a 0.3% rise in services prices notably a 6% m/m rise in airfares, stronger than the seasonal average of recent years, reflecting the fact that some large UK carriers raised air passenger duty rates in the month," wrote the Barclays economists.

Economists from Capital Economics share the same view, putting the blame on increasing petrol prices. "The consumer prices figures have provided some nasty surprises in the last few months. Although inflation was expected to move above 3% in May - triggering only the second ever open letter from the Governor of the Bank of England to the Chancellor - the outturn of 3.3% was higher than expected. The picture is unlikely to improve in June's figures. If nothing else, petrol prices are likely to have registered another chunky increase in response to the latest surge in oil prices to close to $140 per barrel," the economists wrote.

The Centre for Economic Research (ZEW) will announce its Germany and euro zone economic sentiment indicator for July as well as the business sentiment figure for Germany on Tuesday. Economists are forecasting the ZEW German economic sentiment indicator to reflect continued pessimism regarding the economic outlook and fall to -55.0 after slipping to -52.4 in June. The German current situation indicator is also expected to decline further, going to 32.0 in July from the previous month's 37.6 level.

Economists from BNP Paribas predict that the ZEW survey will serve as a confirmation of economic deterioration. "The business sentiment index, which has generally held just below -40 since January 2008, weakened to a new threshold of-52.4 in June, the lowest level since year-end 1992. Given the size of June's decline, the July survey is expected to confirm the past deterioration, without necessarily building on it. The business sentiment index could level off temporarily or decline slightly. The current conditions index, in contrast, could drop off much more sharply after declining slightly in June, even though it still held above the historical average," wrote BNP Paribas.

Economists from Citigroup said they think that the ECB rate hike and the ongoing increase in oil prices have had a negative impact on the German economy. "The sixth consecutive fall in incoming orders will add to the downturn in business expectations. If our forecast is correct, this would be the lowest reading since late 1992, a time when Germany was in recession," wrote Citigroup.

Additionally, ISTAT will release its final estimates for the Italian consumer price index for June. No revisions to the preliminary estimates are expected.

On Tuesday, the Bank of France will report on its business sentiment indicator for June. Economists are expecting the indicator to dip further to 96 after slipping to 97 in May.

In terms of speakers, Central Bank of Ireland Governor John Hurley is expected to speak in front of the Parliamentary Committee in Dublin.

All times in EDT

2:30 FR Bank of France Business Sentiment June Exp: 96 Prior: 97

2:45 FR Current Account (EURO) May Prior: -€3.0B

4:00 GB Bank of England's Sentance Speaks at Pensions Conference

4:00 DE Germany's Glos Meets Russia's Medvedev, Putin in Moscow

4:00 IT CPI (NIC including tobacco) (M/M) June Final Exp: +0.4% Prior: +0.4%

4:00 IT CPI (NIC including tobacco) (Y/Y) June Final Exp: 3.8% Prior: 3.8%

4:00 IT CPI - EU Harmonized (M/M) June Final Exp: +0.5% Prior: +0.5%

4:00 IT CPI - EU Harmonized (Y/Y) June Final Exp: +4.0% Prior: +4.0%

4:30 GB CPI (M/M) June Exp: +0.4% Prior: +0.6%

4:30 GB CPI (Y/Y) June Exp: +3.6% Prior: +3.3%

4:30 GB Core CPI YOY June Exp: +1.5% Prior: +1.5%

4:30 GB Retail Price Index June Exp: 216.0 Prior: 215.1

4:30 GB RPI (M/M) June Exp: 0.5% Prior: 0.5%

4:30 GB RPI (Y/Y) June Exp: 4.3% Prior: 4.3%

4:30 GB RPI Ex Mortgage Interest Payments (Y/Y) June Exp: 4.4% Prior: 4.4%

5:00 DE ZEW Survey (Economic Sentiment) July Exp: -55.0 Prior: -52.4

5:00 DE ZEW Survey (Current Situation) July Exp: 32.9 Prior: 37.6

5:00 EU ZEW Survey (Economic Sentiment) July Exp: -56.0 Prior: -52.7

6:00 EU ECB Hurley speaks to Parliamentary Committee in Dublin

9:00 EU France's Lagarde speaks to EU Parliament in Brussels

July-15 IT Bank of Italy Releases Quarterly Economic Bulletin 15-July

July-15 PT ECB's Constancio Presents Summer Economic Bulletin in July

Euro action ahead of NFP

"Muted Asian markets kept spot in a 1.5640/80 range and this band held
into early European action. A bout of Russian buying soon sparked a Euro rally
with hedge funds then seen buying EUR/USD into the 1.57"s in an attempt to run
the stops in the low 1.57"s. Add into the equation the speculation of official
Asian Dollar selling and interbank names were soon seen supporting the move
higher with EUR/USD finding supply into the 1.5720"s to limit the initial
follow-through. The move into the 1.57"s consolidated with Euro Zone officials
keen to point out everything and anything they feel needs addressing. Ahead of
the German data and spot finally popped higher but poor German data forced a
drop out of the 1.5730"s back into the 1.57-teens." (from ForexTV's Americas Market Preview this morning)

While it is very unlikely that US NFP will beat estimates, especially in any meaningful way…the gamble by the Eastern European Hedge Funds seems like a high percentage play…but still a gamble. There is plenty of room to benefit after the trend begins…this type of blind gamble keeps me up at night. I would be a spectator until the date is out.

[Friday 4th April 2008]
[Market Briefs]
* German Feb Industrial Orders -0.5% m/m, 9.0% y/y vs prev -0.7 (r) & 8.9% (r)
* ECB Wellink: U.S cut rates due to housing market, situation different in EZ
* France Lagarde: Juncker should take message of no FX volatility with him to G7
* EU Bajuk: European economy still firm
* ECB Constancio: Slower EZ growth rate in 2008 will help with inflation
* ECB Trichet: Continue to see money market tensions
* EU McCreevy: impossible to say of all banking problems have surfaced yet
* EU Almunia: Downside risks to growth in EZ have increased since Feb
* Eurogroup Juncker: Economic resiliance if Eurozone remarkable
* Japan FinMin Nukaga: Important for G7 finance leaders to confirm shared view
on excessive fx moves
* News: Former UBS boss urges beak-up - Market Watch (DJ)
* News: British Energy leads FTSE higher - FT.com
[Looking Ahead - Economic Data]
* 12:30 Mar US Nonfarm Payrolls (mkt -50k, prev -63k)
* 12:30 Mar US Unemployment Rate (mkt 5.0%, prev 4.8%)
* 12:30 Mar US Average Hourly Earnings (mkt 0.3% m/m, prev 0.3% m/m)
* 12:30 Mar US Average Work Week (mkt 33.7 hrs, prev 33.7 hrs)
[Looking Ahead - Events]
* 12:45 FRB Cleveland's Pianalto (vtr) at urban economics conference
* 14:00 ECB Gonzalez-Paramo speaks
* 16:00 ECB Bini Smaghi speaks
* 18:45 Fed Governor Kroszner (vtr) on global economic and financial challenges

US Jobs Report Claims Up 39k to 407,000

The following is a Highlights Analysis from our partners at Econoday (www.econoday.com):

In a very bad sign for the economy, initial jobless claims posted a 38,000 spike in the March 29 week to 407,000 for the worst reading since Hurricane Katrina in September 2005. Continuing claims confirm trouble, up 97,000 to 2.937 million in data for the March 22 week and the highest reading since mid 2004. The Labor Department did not point to any specific events, such as the American Axle strike, but did note that seasonal adjustments surrounding Easter are volatile. The four-week average for initial claims is now at 374,500 for the highest level since October 2005.

The sudden leap over the 400,000 level is certain to send a chill through the financial markets where new doubts over the health of tomorrow's employment report are likely to surface. The dollar and Treasury yields both fell in immediate reaction to the data. The ISM's non-manufacturing employment index, part of the ISM's 10:00 a.m. ET release this morning, will offer the next clue on tomorrow's report.

Dollar is sliding against Yen but is only drifting moderately against Euro after the news due to poor retail numbers out of Europe.  Dollar is losing ground to the rest of the majors.  Stay tuned to the ISM data and tomorrows payroll data.  Friday could see extreme volatility.  Also, don't miss the ProSticks report on www.forextv.com tonight.

As debate on US Economic Fix Rages, Dollar Marches toward Record Low

US Treasury Secretary Paulson on Monday issued a few candid comments on the economy:

"few regulation changes will happen until market crisis ends; housing correction necessary, inevitable; strong USD in US interest; strong economic fundamentals will be reflected in USD."

The candor of Paulson's statements underscores what I consider a long overdue dose of tough medicine, and tough love. Meanwhile, according to Reuters "the Democratic Chairman of the U.S. Senate Banking Committee on Monday called the Treasury Department's plan to overhaul financial regulation "a wild pitch" that fails to address the housing market crisis. Senator Christopher Dodd of Connecticut said he welcomed the plan offered by Treasury Secretary Henry Paulson, but questioned its relevance in addressing falling home prices, rising foreclosures and the imminent threat of recession."

I am still trying to understand 1) why it's the government's job to directly affect and/or influence the price of real estate in the US, 2) how in a capitalist society a government official should do that?  In the U.S. the price of any asset is determined by the prevailing market dynamics of supply and demand.  Are we next going to see the government prop-up the share price of companies on the stock exchange?...Oops, forgot about Bear Stearns...they did try that.  That worked real well.  It is time to let the market correct itself!

The political dialogue in the US during this election year is as ridiculous as it gets. You talk about fiddling while Rome is burning…?

Ok, so while this debate rages on, Dollar is poised to succumb to all-time low levels against the Euro. On ForexTV's March 31 PM Exchange program http://www.forextv.com/Forex/Commentary/ShowStory.jsp?id=14548&category=2 Bank of New York/Mellon's Michael Woolfolk suggests that the upper short-term range for Euro is 1.61. If we break 1.60 and non-farm payroll disappoints later this week Euro could break into even higher levels. I recommend reading an article from a ForexTV contributor, Brewer Investment Group for an insightful call for the week ahead. http://www.forextv.com/Forex/Commentary/ShowStory.jsp?id=14545&category=1 .

From a technical standpoint, please visit the ProSticks page at http://www.forextv.com/Forex/Commentary/ShowStory.jsp?id=14548&category=2 

Dollar Rebound A Near-Term Possibility On Responsible Global Citizenship?

The regulatory proposals released by US Treasury Secretary Henry Paulson yesterday show a side of the current US Administration that does not get too much attention...or credit.  First, the swiftness and precision in which Administration and Fed officials coordinated relief, regulatory and monetary policy initiatives is the foundation of why the US remains the world's leading economy...and why a recovery may come about sooner than expected.  Furthermore, Paulson's recommendations, based largely on models developed in the UK, Australia and The Netherlands underscores America's emerging role as a good citizen (and student) in the global economy.  Citing an aging and increasingly irrelevant regulatory and oversight infrastructure Paulson stated,

"Now, however, maturing foreign financial markets and their ability to provide alternate sources of capital and financial innovation in a more efficient and modern regulatory system are pressuring the U.S. financial services industry and its regulatory structure. The United States can no longer rely on the strength of its historical position to retain its preeminence in the global markets. "

The proposed regulatory changes advocate an "objectives-based" approach they also seek to combine the agencies of the SEC and the CFTC and give the Fed sweeping authority, but Paulson notes his desire to adopt several of the "Principles-based regulatory philosophies of the CFTC" and states, "Treasury would like to preserve the market benefits achieved in the futures area."

The full presentation and proposal is due to be released on Monday.  While many of the proposed changes will be longer-term and will extend well beyond the scope of the present administration it is a very positive step in the right direction for the US and for the global economy. 

In the short term I would expect further US Dollar weakness, but traders should take the recent steps by the US seriously as the possible beginning of a turnaround.  The US economy has a host of serious obstacles to overcome and is in a very vulnerable stage and any unforseen aberations could disrupt the recovery.  In any case, the steps taken by the Fed along with the Administration's stimulus measures may have been enough to soften or even avoid what could have been a deep recession.  In the face of a secular global  economic restructuring, and a series of deep domestic economic crisis the US is showing resiliency.

Related Stories:

Video:  My interview with Ashraf Laidi, CMC Markets on US economy -  http://www.forextv.com/Forex/Video/Video.jsp?channel=41&movieid=36191

What Next For the US Economy? What next for US Dollar?

The best news so far for the US economy this year was that the US economy narrowly escaped a recession last year.  With jobs and wages trending downward along with interest rates, food and energy costs on the rise and a lingering monetary crisis, the prospects for the US Dollar are not good.  This week the dollar succumbed to Euro strength at a rapid pace.

Fundamental weaknesses in the US are not the sole cause of recent dollar weakness.  While the Fed and the Bush Administration mobilize their stimulus and interest rate strategy to fight-off recession, the rest of the industrialized world seems united in their effort to press interest rates higher to fight inflation.  This will put continued pressure on the dollar in the short-term, but the monetary policy efforts in the US may be showing some signs of being effective as most other currencies did not follow the Euro activity.

We are in uncharted territory from a technical standpoint as most trends have been broken and most models need time to reset at these levels.  But common sense also suggests that the rapid fall of the dollar will pause and/or retrace from time-to-time.  It is unclear yet whether the failure of most of the majors to complete retracement patterns is wariness of a pending monetary intervention by the G-7 or just a pause on the way to even lower levels.

This week I interviewed Ashraf Laidi of CMC Markets, Joseph Trevisani of FX Solutions, David Powell of IDEA Global and Korman Tam of MG Financial on ForexTV's PM Exchange.  To the last man, it was unanimous that we were going to see higher Euro in the short-term...potentially as high as 1.75.  And equally as united that one year could see a recovery to 1.45.  OK, I admit, that's not going out on a limb from a trader's perspective.  But it is an indication of how far from we have moved into unfamiliar territory.

Forex Video Links:

Trevisani: http://www.forextv.com/Forex/Video/Video.jsp?channel=41&movieid=36267

Tam: http://www.forextv.com/Forex/Video/Video.jsp?channel=41&movieid=36233

Powell: http://www.forextv.com/Forex/Video/Video.jsp?channel=41&movieid=36208

Laidi: http://www.forextv.com/Forex/Video/Video.jsp?channel=41&movieid=36191