Week In Review September 18-23

The Fed’s magic bullet is failing to improve consumer confidence. Bernanke and company did what was expected of them this week and announced a new plan to stimulate growth by implementing “Operation Twist”. In the process, they defied Republican demands ‘to refrain from new actions’. This 50-year old initiative has the market worried that the Fed has very few options left in its arsenal to kick start growth in the US economy. Blood has been spilt and more is expected if the G20 finance ministers and the IMF do not step up to the plate this weekend.

Below are the highlights of the week:

EUROPE

• EU: Ecofin meeting yields no significant news last weekend
• GR: Greek Prime Minister George Papandreou scheduled a cabinet meeting to pass more stringent austerity measures to satisfy the IMF/EU requirement for the next tranche of aid.
• ITL: S&P’s one notch downgrade of Italy to “A” contributed to weaker risk appetite.
• GR: Rumor that Greek Prime Minister Papandreou is considering a referendum on whether Greece should exit the EMU-obviously denied.
• GER: Economic Expectation index fell again -43.3 vs. -37.6.
• IMF: Cuts Global growth estimates for this year and next to +4% from +4.2% and +4.3% respectively.
• GR: Finance Minister has said there are plans to continue discussions with IMF officials during the G20 meetings today and the IMF meetings this weekend.
• IMF: Mission seems scheduled to return to Greece next week.
• CHF: EURCHF has been well-supported amid market discussion that SNB may announce an increase in its floor level to 1.25
• UK: BoE MPC minutes revealed a shift in the direction of new QE. Most members judged the probability of QE has increased-potential action next meeting. GBP remains bearish.
• EUR: Flash PMI’s printed below 50, weaker than even low expectations. The composite fell to 49.2 from 50.7, the manufacturing PMI deteriorated further to 48.4 from 49, and the services PMI fell to just 49.1. Weakness was primarily driven by France, despite German new manufacturing orders declining for a third consecutive month. Suggests a risk of “no growth” for the second half of the year and the potential for a negative quarter.
• G20: Pledges necessary steps but without specifics.The communiqué delivered nothing new and suggests European policy is waiting for passage of EFSF enhancement. Governments will “take all necessary actions to preserve the stability of banking systems and financial markets as required”.
• EU: European Commission downplays need for bank recapitalization plan. Analysts expect Europe to wait until next month to introduce a comprehensive solution.
• EU: Dutch central bank chief Klaas Knot says less certain about ruling out Greek default. This implies further downside for asset prices and flight to dollar unless G20 can surprise us this weekend.

Americas

• USD: US housing starts fell -5% to +0.571m and building permits advanced by +3.2% to +0.620m.
• CAD: Leading indicators registered a flat reading last month, missing expectations for a +0.2% month-over-month advance. Six of the ten components advanced, as expected, both housing (-0.7%) and equity markets (-2%) weighed on the results.
• CAD: Wholesale trade figures for July (backward looking) showed a +0.8% rise on the month, just shy of the +0.9% the market was expecting.
• CAD: Core-CPI accelerated in August (+0.4%), mostly on the back of insurance premiums and food.
• US: Existing home sales blew analysts estimates out of the water by rising +7.7% to +5.03m units, m/m, from +4.71m and in stark contrast from the MBA and NAHB surveys. Easing of restrictions on foreclosures is being blamed.
• FOMC: Stands pat on rates and introduces “Operation Twist”, where they buy long and sell short. Post announcement-the risk market has been decimated as the program does not really provide new liquidity to the financial system. The vote was 7-3 in favor for the new initiative. The innovative effort is an ‘experiment without a direct precedent’.
• CAD: Inflation in Canada rose above the BoC comfort level last month as higher prices for gas and food pushed the rate up four notches to +3.1%, y/y. Core-inflation also saw a sizable increase to +1.9% from +1.6%.
• USD: Weekly initial claims dropped by-9k to +423k and marginally above a consensus +420k estimate. The prior week’s number was revised up +3k to +432k. These levels still suggest a very weak labor market.
• CAD: Retail Sales fell twice as much as expected in July (-0.6%), marking the first decline in four-months and the deepest decline in 18-months. It followed a strong gain of +1.6% in the month before.
• CAD: Governor Carney this week applied the expected ‘dovish’ tone on the Canadian economy, explicitly noting ‘the need to withdraw monetary stimulus has diminished’. Loonie trades at a premium outright, weakest levels in nine-months.

ASIA

• NZD: Services PMI fell to 53.9 in August from 54.5 in July, while the Westpac New Zealand consumer confidence index was stable at 112 in Q3.
• CNY: There were rumors that some Chinese state banks have stopped spot and derivative FX trading with several European banks due to the debt crisis in Europe.
• KOR: BoK intervenes in its currency market, buying Won. Weakness in the KRW is ‘weighing on the overall bond market sentiment, as its sharp losses could spur foreign investors’ profit-taking or stop-loss sales in local treasurys’.
• Asia: Analysts The tone of Asian intervention increasingly suggests a policy shift in preparation for a significant export downturn.
• AUD: RBA September policy minutes continue to signal policy rates on hold, they were in line with the neutral post policy meeting statement.
• Asia: Central banks in IND, KWN, MYR, and PHP all sold USD this week.
• JPY: Japan’s trade balance was a weak Â¥775b in August. Market expected a Â¥300b deficit. Exports grew only +2.8%, y/y, less than the +8.0% expected mainly due to weakness in Asia, while import growth surprised strong at +19.2%, y/y, due to higher volumes of energy imports.
• AUD: Westpac’s Leading index rose +0.5% in July, the strongest for five-months.
• NZD: Current account deficit was NZ$921m in 2nd Q, larger than the NZ$671m expected.
• CNY: The HSBC China manufacturing PMI fell to 49.4 this month from 49.9 and weaker than the usual seasonal pattern. Chinese industrial production growth is moderating.
  SGD: CPI inflation accelerated unexpectedly in August to +5.7%, y/y from 5.4%, driven by transport and housing. With inflation remaining stubborn, it is going to make it difficult for the MAS to ease policy significantly.

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