Investors have been lacking direction this week with equity markets down and commodity markets taking a large hit on Monday. Italy’s lawmakers failed to elect a president in the first round, while Italy borrowing cost has continued to drop due to the overwhelming market abundance of liquidity.
In the US, James Bullard, president of St-Louis Federal Reserve noted the Fed should remain focused on inflation and resist putting more weight on its employment mandate. He suggested the Fed should be ready to up QE3 if inflation continues to fall. Narayana Kocherlakota from the Federal Reserve of Minneapolis noted on the other hand that the Federal Reserve’s ultra accommodative policies will inevitably result in financial-market instability for years but such risks are necessary to boost employment and inflation. Low real interest rates will probably be needed for “a number of years to come.”
The Beige book had a different message to the market; relating a much more upbeat conclusion drawn from April’s data in comparison to March Beige book.
As expected, the US dollar suffered slightly this week against the majors as the recent economic data casted some doubt about the US recovery.
On the foreign exchange side, currencies closed the week with a slightly stronger Euro but lower Sterling Pound. After reaching a low of 1.5217, the Pound ended the week close to the lowest level seen during the week of 1.5231 after Fitch rating agency downgraded the UK to AA+.
Euro on the other side behaved in a much more volatile way. After dropping to a low of 1.3002 after Weidman’s comments and a Germany downgrade by Egan Jones, the Euro closed the week higher at 1.3052.
In the commodity complex, Gold tumbled in the beginning of the week reaching a low of 1,322, however closed the week almost 6 percent higher at $1,403.
In summary, investors still await further economic data in order to assess whether the US economic recovery is still on track. However, a game changer could be the new message from tumbling commodity prices this week. Indeed, as inflation concerns are moderating globally, this would mark a new phase in 2013, where higher inflation driven currencies are more likely to suffer against the US Dollar.
The Philadelphia Federal Reserve Bank said its business activity index dropped to 1.3 from 2.0 the month before. Economists’ expectations were for a rise to 3.0. Although this represents a weak number, any reading above zero indicates an expansion in manufacturing. The breakdown of the data was moderately disappointing, notably a decline in the 6 month outlook, the lowest since November. Softer orders and inventories were also below expectations.
On the other hand, Bloomberg Consumer comfort index reached five years high. It appears that the rebound in real estate prices is helping consumer’s sentiment.
As discussed above, energy prices have been on a continuous decline. The labour department said this week that its consumer price index fell 0.2 percent from February, mainly due to a 4.4 percent drop in gasoline prices. The March energy index fell 2.6 percent in March after a 5.4 percent rise in February. On an annual basis, overall CPI rose 1.5 percent, slower than the 2.0 percent pace of February. Inflation has been tame globally, consequently affecting overall commodity prices. The low level of global growth along with China missing its GDP estimates and high unemployment in the US and the Euro zone have been a major drawdown to global inflation expectations.
Europe & UK
Weak Euro Zone Outlook for Decade
In an interview with a US newspaper, Jens Weidman of the Bundesbank signaled that the ECB could reduce interest rates if incoming economic and inflation data suggest it is warranted. However, he warned that such a move would not turn around the Euro bloc’s economic fortunes, instead pinning responsibility on elected leaders to find ways to kick-start growth and channel money to small businesses. Overcoming the crisis and the crisis effects will remain a challenge over the next decade,” he said, in contrast with recent comments from EC President Barroso that the worst of Europe’s crisis is over.
Weidman also endorsed the recent agreement between Cyprus and its international creditors to impose steep losses on large depositors at its biggest banks. “The Cypriot case shows that it’s possible to wind down banks. “This is in principle a good thing, because it means that taxpayers don’t always have to step in to bail out banks,” he said.
In his final comments, he mentioned the Euro’s current level “reflects that there is confidence in the Euro zone and finally urged policy makers around the world to respect commitments they have made to refrain from manipulating their exchange rates for economic advantage.
After these comments, the market started pricing a potential interest interest rate cut in the next ECB meeting, causing the Euro to reach a low of 1.3001 during the week.
UK Retail Sales Disappoint
UK retail sales were weaker than expected in March, with headline sales falling -0.7 percent month on month versus -0.6 percent economists estimates. Ex-auto fuel sales fell -0.8 percent mom versus -0.6 percent consensus. Looking at broader trends sales are up 0.5 percent quarter on quarter in Q1, meanwhile, survey based indicators of sales have been mixed, with the CBI( Confederation of British industry) reporting falls while the BRC (British Retail Consortium) was upbeat. Analysts continue to expect the recovery in sales to continue but also downside risks to real spending if inflation rises.
Asia
IMF Lagarde Says Japan Policy Moves Are Not Enough to Ensure Recovery
Christine Lagarde of the IMF warned this week that an “uneven recovery is also a dangerous one” for the global economy as the IMF downgraded its growth forecasts for 2013, while holding out the prospect of relief late in the year. According to the IMF, the world economy is running at three speeds, with emerging market and developing economies still strong, but the US doing much better than the Euro zone among advanced economies. In the report, the US is expected to grow 1.9 percent this year and 3 percent in 2014, while the Euro zone is expected to contract by 0.3 percent in 2013 and grow only 1.1 percent in 2014. China is expected to grow by 8 percent in 2013 and 8.2 percent in 2014 although significantly lower than the past decade.The Peninsula
