Not-So-Confident Consumers

Good day… And a Happy Wednesday to you… If action is what you were looking for, then yesterday did not disappoint:

It all started with the Icelandic central bank unexpectedly raising rates at an emergency meeting, which I briefly touched on yesterday. At that point, it seemed like the dollar’s fate was pretty much sealed for the day as the currencies were already in a lather. When U.S. consumer confidence took a nosedive, the warm and fuzzies that some had on the economy were put in the back of the closet.

Consumer confidence fell considerable more than expected in March as the outlook for the economy dropped to the lowest level since Richard Nixon was president back in December 1973. The Conference Board’s confidence index fell to a 5-year low of 64.5 from a revised 76.4 in February. A pull back in consumer spending is what many feel will result, especially with a deteriorating labor market and income growth barely keeping up with inflation.

The second part of the one-two combination, the results of the January S&P/Case Shiller home price index, kept the dollar on the canvas for a ten count. The report showed a record drop of 10.7%, after a 9% year on year decrease through December 2007 and has seen 13 consecutive months of decrease confirming the housing recession is deepening.

The U.S. currency dropped the most since January 2006 against the euro (EUR) yesterday after the confidence report raised concern that the Fed won’t be able to shake a recession. More economists are now looking for a 0.50% rate cut to 1.75% at its next meeting on April 30. With that being said, there are some who are looking for the euro to rise up to 1.6250 over the next few weeks.

Aside from Iceland’s (ISK) rise of near 5%, most of the other major currencies posted at least 1% gains against the dollar. The Norwegian krone (NOK) rose about 2% as they enjoy a 3% interest rate differential over the dollar, which represents the third highest rate among the Group of Ten, trailing only Australia and New Zealand.

The Norwegian economy remains strong and is one of those positive balance of payment currencies with strong fundamentals that Chuck has been talking about for a couple of years now. Given that Norway’s central bank has signaled it will continue to raise rates in an environment of global rate cuts, is another factor for its continued potential rise.

The Swiss franc (CHF) erased its losses, gaining 1.5%, as a gauge of Swiss consumption rose to the highest level in eight months in February on increased hiring and wages. Domestic spending is set to become the main engine of Swiss growth this year as a slowing international economy erodes demand for exports, according to the KOF Institute. With private consumption estimated to outpace last year’s figure, chances of a Swiss rate cut are falling.

Getting back to the euro, we saw German business confidence unexpectedly rise for a third month in March, suggesting Europe’s largest economy is coping with near record oil prices, a surging euro, and the global credit squeeze. We also had Trichet talking about inflation this morning and remaining on the hawkish side. He said that inflation will stay significantly above the ECB’s 2% target for most of this year and the euro’s economic fundamentals are sound. With expectations of continued growth, investors are starting to reduce their bets of a rate cut in the near future and pushing the currency back into the 1.57 handle today.

Japan’s export growth unexpectedly accelerated in February as demand from emerging markets helped automakers ride out the U.S. slowdown. Exports, which contributed more than half of the economy’s expansion last quarter, climbed 8.7% from a year earlier as a result of increased Chinese demand.

As mentioned before, February’s durable goods figures are to be released this morning and are expected to show a gain from January’s numbers. If these figures disappoint and new home sales come in lower than forecast, we could see another tough day for the dollar, especially with the euro and Swiss franc up nicely this morning along with gold just under $950, silver over $18, and oil rising higher.

Currencies today: A$ .9228, kiwi ..8090, C$ .9897, euro 1.5736, sterling 1.9970, Swiss 1.0027, ISK 76.36, rand 8.0608, krone 5.1257, SEK 5.9748, forint 163.39, zloty 2.2438, koruna 16.2850, yen 99.11, baht 31.40, sing 1.3787, HKD 7.7819, INR 40.1425, China 7.0290, pesos 10.7049, BRL 1.7345, dollar index 72.276, Oil $102.48, Silver $18.14, and Gold… $948.89

That’s it for today… It’s finally nice to see regular season baseball on SportCenter as the Red Sox and A’s opened the season in Japan last night. Spring has officially started in my book. I’m running a bit late this morning, so I keep it short. Have a Wonderful Wednesday.

Mike Meyer
March 26, 2008