Thursday, November 13, 2008

FOMC Cuts by 50-bp, Signals Further Easing

The Federal Reserve cut its benchmark lending rate by 50-basis points to 1% by unanimous vote and also lowered its discount rate by 50-basis points to 1.25%. The currency markets were heavily pricing in the aggressive move with the greenback tumbling against the euro and sterling heading into the decision. The dollar fell by over 700-pips versus the pound from 1.5765 to 1.6473 while dropping from 1.2583 to 1.2990 against the euro.

In the accompanying FOMC policy statement, the Fed delivered a somber assessment of the economy saying “the pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures”. The statement also paved the way for additional policy easing at the next meeting in December, revealing expectations for inflation to continue to moderate over the coming quarters. The Fed said “the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit”. Accordingly, we look for the FOMC to slash rates again in December with a 25-basis point cut bring the year-end benchmark lending rate to 0.75%.

The economic reports released earlier in the session saw headline durable goods orders for September rise by 0.8% reversing from a steep 4.8% decline a month earlier. The excluding transportations figure improved to -1.1% from -3.3% previously. Several key reports are slated for release in the Thursday session, with weekly jobless claims, Q3 advanced GDP, and Q3 core PCE. Weekly jobless claims are seen largely unchanged at 475k, from 478k a week earlier. The advanced Q3 GDP reading is estimated to post a 0.5% decline compared with a 2.8 gain previously.

Yen tanks amid Global Equity Rally

A rebound in the global equity bourses prompted traders to dump the yen across the board. The Japanese currency sold-off sharply from 114.42 against the euro to 122.57 and tumbled to 153.40 from 142.90 versus the sterling. Meanwhile, the greenback was initially higher versus the euro and sterling, hovering near its one-year highs around the 1.24 and 1.55 levels, respectively.

The Conference Board’s October consumer confidence index plunged to a record low at 38.0, sharply missing consensus estimates for a decline to 59.8 from a revised 61.4 from September. The present situation component sank to its lowest level since 1992 at 41.9, posting a steep drop from a month earlier at 61.1. The Case-Shiller home price survey fell by 1.0% in August versus the 0.9% decline in the previous month and posted a steeper 16.6% drop compared from a year earlier at 16.3%. Meanwhile, the Richmond Fed manufacturing survey deteriorated to -26 in October, versus -18 a month earlier. However, the services index improved to -10, up from -15 from the previous month.

The sharp declines in consumer confidence further support calls for a 50-basis point rate cut when the FOMC announces its policy decision tomorrow afternoon. The results for the Fed’s two-day meeting will be released on Tuesday at 2:15pm. We anticipate the FOMC to deliver a 50-basis rate cut, lowering its benchmark lending rate to 1.0%. The accompanying statement will likely emphasize further downside risks to growth and pave the way to another 25-basis point rate cut at its December 16th meeting to 0.75%.

JPY Rallies on Safe Haven Flows

Burgeoning fears of a potentially severe global economic recession continued to prop the dollar and yen higher amid sentiment that the ECB and BoE will need to aggressively ease policy to stimulate their economies. Safe haven flows propped the greenback to 1.2729 versus the euro and 1.6046 against the sterling, while the yen surged to 123.17 to the euro and 154.61 versus the pound. Global equity bourses extended recent losses, with the Dow Jones and Nasdaq trading under heightened volatility and whipsawing by the afternoon session.

Weekly jobless claims released earlier in the session unexpectedly crept higher, edging up to 478k, versus 461k in the previous week. On Friday, the data slated for release include September existing home sales, which seen up slight at 4.93 million units.

EUR, GBP Plunge to Multi-year Lows

Global recessionary fears dominated the market headlines in the Wednesday session, with US equity bourses posting steep losses, crude oil slumping beneath the $70 per barrel level to $67.12 and spot gold at a one-year low to $774.57 per ounce. The greenback and yen benefited from continued safe-haven flows, posting steep gains versus the euro and sterling.

The dollar surged to 1.2737 against the euro for the first time since November 2006. Although the FOMC will likely cut rates by 50-basis points to 1.0% when it meets next week, markets anticipate more aggressive policy easing from the ECB in the near-term to support the struggling economy.