Bernanke ‘Hawk or Dovish’ today?

The USD$ is mixed in the O/N trading session. Currently it is higher against 8 of the 16 most actively traded currencies in a ‘subdued’ trading range.

All US economic data was ‘no good’ data as the two day FOMC meeting got under way yesterday. Bernanke has been playing ‘Russian roulette’ signaling higher rates while US growth stagnates. The market will get their just desserts at 2.15pm this afternoon with capital markets believing that policy makers will remain on hold for the foreseeable future (2.00%). It is expected that they are to keep rates on hold and avoid any signal that rate rises are imminent, while indicating some increased concern about inflation. The market is also concerned that Bernanke under his breath will mention the ‘dollar’.

US equities and the ‘buck’ came under intense pressure again yesterday with weaker consumer confidence and plummeting house prices, which do not signal a turnaround for the US economy any time soon. A private survey from Case/Schiller index showed that house prices in 20 of the largest metropolitan areas in the US had the largest decline on record for the month of April (20 years). This is added to the pile of evidence that the housing recession is far from over, as individuals net worth continues to be eroded. Mortgage defaults and foreclosures continue to add to housing inventory on the market, combine this with stricter loan practices for potential buyers equates to a ‘no solutions’ any time soon.

US consumer confidence plunged this month, registering a new 16-year low of +50.4, as both the ‘present and expectations’ components both fell m/m. Analysts believe that this would suggest that consumers are most likely to tighten their belts again once the ‘tax rebate’ cheques work through the system (What about a rate cut in the works later in the year?-Bernanke maybe backing himself into a corner). This does not bode well for future US GDP in the month’s ahead. As if this was not bad enough, the labor differential (jobs plentiful – jobs hard to get) also dropped to -16.4 (not a good sign for future unemployed investment bankers we continue to hear about). Inflation expectations remained at +7.7% (the first time it has not increased since the New Year). Perhaps consumers are reassessing their inflation expectations given all of the recent economic data and hawkish talk by Bernanke and Co. Remember, one month does not make a trend!

The US $ currently is lower against the EUR +0.12%, CHF +0.08% and higher against GBP -0.09% and JPY -0.08%. The commodity currencies are mixed this morning, CAD -0.06% and AUD +0.13%. The loonie remains contained in a tight trading range ahead of the FOMC announcement this afternoon. Weaker US consumer data yesterday initially gave the currency a boost and even stronger commodity prices could not continue the momentum. Traders are happy to see what the initial market reaction will be after the FOMC announcement. Canadian fundamentals are not that ‘hot’ either and with over 70% of Canadian exports heading south of the border the loonie over time must be affected by its ‘association and proximity’ to their largest trading partner. Last week BOC governor Carney said that policy makers will not be ‘complacent’ even if it means surprising investors like he did earlier in the month by holding rates steady and not even hinting to the market through his original policy of transparency. The AUD$ remains robust (0.9557) as traders continue to speculate that the RBA will maintain their interest rate advantage (7.25%) over the US as the Fed is expected to delay hiking borrowing costs (2.00%) today, one should expect stronger bids on pull backs.

Crude is higher O/N ($137.39 up +39c). Crude oil prices remained close to home yesterday as geo-political concerns in Nigeria and Iran remain foremost on everyone’s radar. The Saudis intentions to boost production outlined in Jeddah at the weekend have done little to ease crude oil prices. Market perception that high-quality crude has been taken off the market because of the problems in Nigeria; while the Saudis are offering barrels that are most likely of inferior quality has kept prices elevated. Attacks on a Royal Dutch Shell platform and a Chevron pipeline last week have halted +300k barrels a day of Nigerian output. Analysts are anticipating that the disruption could halt deliveries for as long as 6 weeks. Saudi Arabia is expected to increase production beyond the +200k barrel a day already promised, but speculators have deemed this not to have a negative impact on prices. Some OPEC members believe that the Saudis solution of pumping more is ‘illogical’, as refineries do not need more crude. Record prices continued to be blamed on speculative investors, the subprime credit crisis and geo-political concerns (Nigeria, Iran etc) rather than a shortage of supply. Gold recouped some of last weeks losses ($891) as the USD$ faltered and traders continued to speculate that ‘Gentle’ Ben will not raise borrowing costs any time soon on the crest of weaker US data. All this has boosted the appeal of the yellow metal as an alternative investment.

The Nikkei closed at 13,829 down -19. The DAX index in Europe was at 6,551 up +15; the FTSE (UK) currently is 5,639 up +4. The early call for the open of key US indices is higher. Yields of the US 10-year bond eased 6bp yesterday (4.11%) and are little changed O/N. Treasury prices rallied after yesterday’s 16-year low print for US consumer confidence. This has convinced traders to pare bets that the Fed will raise O/N borrowing costs to combat inflation (2.00%) amid signs that an economic slowdown will deepen in the 2nd half of the year. All eyes will be on this afternoon’s 2.15pm FOMC rate announcement.

Trichet told the ECB this morning that ‘upside pressures to prices have intensified further’ and that the Cbank is on alert, signaling it may proceed to raise interest rates next month (4.00%). India with inflation running over 11% (the worlds 2nd fastest growing economy after China surprisingly hiked borrowing within a month by 50bp to 8.50% and increased bank reserve requirements to combat inflation). The ECB policy makers of course are worried that companies will raise prices and workers will demand higher wages to compensate for the increased cost of living. Not the same issue in US. Only time will show if Bernanke masquerades as hawk or dove this afternoon.

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