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July08 U.S. Rebound to Continue
Dissatisfaction is mounting in Europe, as the European Central Bank (ECB) is still favoring inflation over growth, despite clear signals of economic contraction. In reality, ECB decision to rise rates could only be a temporary medicine against increasing commodity prices and might hurt Euro zone growth over the medium term. The Federal Reserve, at the contrary, is willing to do whatever is necessary to bring the economy back on track and some help could emerge from crude oil prices receding from recent stellar levels.
Much work needs to be done, but some light is passing through
There are no miraculous solutions for the U.S. economy, but some light is passing through a cloudy sky. In June, as an example, new home sales fell 0.6%, while Inventories declined to 10.0 months of supply from 10.4 months and median prices increased 1.4% month on month, but still 2.0% below the level of one year ago. In addition, the final University of Michigan consumer sentiment index printed 61.2 in July from 56.6. Current and future conditions both rose. The first to 73.1 from 69.5 and the second to 53.5 from 48.3. Lastly, durable good new orders moved up 0.8% in June (-0.3% expected). In reality, despite some positive numbers, the worst is not over for the U.S. economy yet. Downside risk to growth remains elevated, unemployment is increasing and household wealth is shrinking in the U.S. Credit cards have helped consumers to find liquidity (credit card usage is about 8% from 2%-3%) thus far, but the trend could not last for long with banks becoming more demanding on credit card standards. In addition, home vacancies touched a record high in the first part of 2008, while foreclosures doubled year on year. Housing numbers are swinging from month to month and this pattern should continue until a concrete rebound will take place. Nonetheless, housing down trend is entering into a crucial period, since many levels of support are converging and they could all meet between the end of this year and the first months of 2009.
Cyclical components favoring the U.S dollar over the short/medium term
While the Federal Reserve is doing anything possible to bring the economy back on track, the European Central Bank is still favoring inflation risks over growth. As a result, dissatisfaction is mounting among leading European nations. After Italy and Spain, which are asking ECB to be more sensible to the economic slowdown, also France is demanding more transparency. In reality, ECB decision to rise rates could only be a temporary medicine against increasing commodity prices and might hurt Euro zone growth over the medium term. Let see why. The Euro zone Producer Manager’s Index (PMI), as an example, fell below 50 to 47.8 from 49.3, while Euro zone industrial new orders declined 3.5% month on month in May, down 4.4% from the previous year. In July, the German IFO business indicator, which surveys about 7000 business leaders, slid to 97.5 from June’s 101.3. In France, consumer spending moved down 0.4% (-0.6% expected) month on month in June. Then, unemployment rate rose to 10.4% in Spain from 9.6%. Finally, In Italy, consumer confidence, calculated from a survey of 2000 families, is at 95.8 from 99.9, the lowest level of the past fifteen years. The U.S. dollar could benefit from the positive momentum shifting from Europe back into the United States. In fact, the greenback seems to the designing a large double top formation, which should be confirmed by a move below 1.5240 to become effective. In that case, the next objectives could be 1.51. 1.46, 1.38. In addition, since 1972, the U.S dollar has shown the tendency to bottom, within a long term bear market, every 2/3 years: 1974, 1978. 1988, 1991, 1992, 1995, 2004, 2007(?). Subsequent rebounds extended for about 15%/20% from the lows. However, It should only be a temporary correction, since the long term trend is still in favor of the European currency.
Angelo Airaghi Profits On The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed, neither the information presented nor any opinion expressed constitute a solicitation of the purchase or sale of any forex, futures or commodity product. Those individuals acting on this information are responsible for their own actions. Forex, futures and commodity trading my not be suitable for all recipients of this report. The risk of loss in trading forex, futures and options can be substantial. Each investor must consider whether this is a suitable investment. All recommendations are subject to change at any time. past performance is not a guarantee of future results
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