The Markets Save it for Today

Good day… And a Fantastic Friday to you… The dollar had the upper hand yesterday on better than expected inflation and consumption reports. Not much direction in the markets overnight, so I guess it’s up the U.S. traders to round out the week.

We’ll start off with the final revision of fourth quarter personal consumption coming in stronger than originally anticipated. The dollar rose as the Commerce Department’s report showed that consumer spending was revised up to an annual pace of 2.3% from the prior estimate of 1.9%, but is still lower than the third quarter figure of 2.8%. Economists are already expecting first quarter spending to slow down in the neighborhood of 0.5%.

The final GDP numbers for the fourth quarter came in as expected at 0.6%, but it did reveal that the economy would have actually contracted without a boost from exports. Excluding an improvement in trade, the economy shrank at a 0.4% annual pace. It looks as though the weak dollar has done some good, but we’ll see if it’s enough to offset the slowing economy when the advance reading of first quarter growth is released on April 30.

The figures today also included a first look at corporate profits for the quarter. Profits from current production dropped 3.3% to an annual rate of $1.57 trillion, which marks the second consecutive decline. The figure may be understated because the government doesn’t take into account asset write downs and loan loss provisions in calculating current quarter profits. It looks like slower consumer demand and spending is starting to leave a mark on the corporate world.

With fourth quarter inflation coming in lower than originally anticipated, it gave some the urge to buy dollars yesterday. Core PCE for the last three months of 2007, which excludes food and energy, came in at 2.5% as opposed to the previous annual projection of 2.7%. This morning we have inflation data for February, which is also expected to improve and may spillover to support the dollar today. February’s core PCE is expected to come in at 0.1%, down from January’s 0.3%.

Sweden’s trade surplus widened to a two-year high of 17.1 billion SEK ($2.9 billion) last month from a year earlier, as exports picked up for a third month running. Exports increased by 18% in February while imports rose by 12%, indicating that trade will make a significant contribution to growth in the first quarter. The Swedish economy grew at a faster than expected pace in the fourth quarter and retail sales surged 1.7% from January. Given these positive notes, the SEK continues to be one of those currencies that seem to have the right stuff going forward.

New Zealand’s fourth quarter GDP grew 1% from the third quarter and expanded at an annual pace of 3.7%, which is the fastest pace in three years on increased exports of butter, cheese, and crude oil. The caution light is still on, however, because of its involvement in the carry trade along with its high current account deficit.

While we’re in that part of the world, Japan’s consumer prices rose at the fastest pace in a decade in February as companies passed on higher costs of oil and food to households, with prices climbing 1% from last year. Excluding energy and food, Japan’s consumer prices fell 0.1% and Parliament’s decision on whether to extend a higher tax on gasoline may also affect consumer prices, as the abolishment may lower core prices by 0.4%.

With not much in the way of action in overnight trading, the results of consumer spending and PCE may determine how we end the week. Spending by U.S. consumers is expected to rise at 0.1% last month, down from January’s 0.3%, as falling home prices, record energy costs, and a shaky job market hinders spending. The inflation reports are expected to show a drop in inflation last month, vindicating the Fed’s decision to focus on reviving growth at a time when prices were accelerating. It’s just difficult to say that inflation is under control at this point as rising oil is causing price increases on just about everything.

The euro (EUR) is trading back above the 1.58 handle, as European Central Bank council member Axel Weber said the bank will raise interest rates if needed to curb inflation, even as a global credit squeeze threatens to dampen economic inflation. He went on to say that while the current rate of 4% is helping to contain inflation, the ECB will act if its price stability goal is threatened. The markets at this point like to see this type of hawkish stance, so we have the euro trying to get a fire lit under the rest of the currencies this morning.

Currencies today: A$ ..9218, kiwi .8047, C$ ..9846, euro 1.5826, sterling 2.0010, Swiss .1.0055, ISK 77.82, rand 8.0110, krone 5.0771, SEK 5.9305, forint 162.45, zloty 2.2263, koruna 15.9620, yen 99.87, baht 31.44, sing 1.3785, HKD 7.7816, INR 39.91, China 7.0122, pesos 10.7008, BRL 1.7405, dollar index 71.56, Oil $106.86, Silver $18.3750, and Gold… $945.50

That’s it for today… Again, I want to thank Chuck for letting me fill in and say this has been an awesome experience. I also want to thank all of you for your kind words and encouragement, they are very much appreciated. I had a serious case of writer’s block this morning, I guess Bagel Friday in the office consumed my thoughts… Anyway, enjoy the day and have an excellent weekend. Thanks again Chuck!

Mike Meyer
March 28, 2008