Dollar Strengthened in Wake of Late Wednesday’s Surprise Fed Discount Rate Hike

February 19, 2010

At 19:30 GMT yesterday after U.S. markets had closed, the Fed announced a 25-basis point increase in its discount rate to 0.75%.  The FOMC minutes this week had served notice that such a move could occur soon and would not be meant as a signal of tightening monetary policy but rather another part of an exit strategy from emergency liquidity provisions.  Investors were nevertheless surprised by how quickly this step was taken and expect more such moves, as the spread between the discount rate and the lower federal funds target is returned to a more normal width.  A statement was released by the Fed, providing more explanation of the the discount rate hike and two other collateral modifications.  Several central bank officials have commented on the move, delivering the message that it was technical in nature and not a tightening.  However, investors understandably see it as a major watershed.

The dollar retains gains of 1.3% against sterling, 1.0% against the kiwi, 0.7% relative to the Australian and Canadian dollars, 0.6% against the euro, 0.5% versus the Swiss franc and even 0.3% against the yen.

European stocks are showing more resilience than Asian bourses did.  Stocks fell 2.1% in Japan, 2.6% in Hong Kong, 1.7% in South Korea, 0.8% in India and 0.4% in Australia.  The Paris Cac, German Dax and British Ftse are off 0.5%, 0.4% and 0.2%, and a lower U.S. open is indicated.

Ten-year gilt, bund, and JGB yields rose by six, three, and two basis points.

Oil prices are 1.3% lower at $78 per barrel, while gold has declined 1.0% to $1107.80 per ounce.

Preliminary February PMI readings for the euro area, Germany, and France have been released, showing significantly better manufacturing scores than anticipated but sputtering growth in services.  These so-called “flash” indications represent about 85% of the information that goes into the final scores.  All the readings are above 50, implying likely positive GDP growth in 1Q10.

  • Euroland’s composite PMI printed at 53.7, the same score as in January and November and a bit below December’s 54.2 reading.  The factory index was 54.1, best since the start of the financial crisis in August 2007 and above a consensus estimate of 52.8 and readings of 52.4 in January, 51.6 in December and 48.2 last August.  The services PMI, however, faltered to a five-month low of 52.0 from 52.5 in January and 53.6 in December.
  • The German composite PMI score of 55.4 was 0.8 points better than January’s reading because of a 3.4 jump in manufacturing to a 32-month high of 57.1.  Analysts were looking for a 53.9 score.  The services PMI slid another half-point to a three-month low of 51.7.
  • The French composite index settled back 2.3 points further to 55.7, a five-month low.  Such had peaked in November at 60.2.  The manufacturing component printed at 53.6, a 3-month low, while services of 54.7 were at a 5-month trough and down from 60.9 in November.

The central bank in Russia, Bank Rossii, announced yet another 25-basis point cut in key interest rates, their 11th reduction since last April.  The previous drop was on Christmas Day.

German producer prices rose 0.8% in January, almost three times faster than expected, cutting their 12-month rate of decline to 3.4% from 5.2% in December and 7.8% last July.

British retail sales volume suffered a weather-related 1.8% slump in January, the biggest monthly decline since June 2008.  The on-year increase of 0.9% was a seven-month low.  Higher value-added taxation also weighed on spending.  Non-auto retail sales (down 1.2% on the month) fell more than twice as much as forecast.  The three-month period to January saw total sales fall to 0.5% below their level in the prior three months.

A measure of French business sentiment compiled by the government statistical agency remained at 91 in February, well below its 100 long-term average reading and also a couple of points worse than forecast.

Euroland’s current account posted its first seasonally adjusted surplus in December since July, a EUR 1.9 billion figure.  The 2009 deficit of EUR 59.0 billion was down from EUR 141 billion in 2008 and equal to roughly 0.7% of GDP.  The “Basis Balance,” which is the sum of the current account and portfolio and direct net investment flows, showed a surplus in 2009 of EUR 193.7 billion after EUR 18.2 billion in 2008.

Italian industrial orders climbed 4.7% in December, while industrial sales went up 1.9%.  Both results were pleasantly well above expectations.  The Greek current account deficit of EUR 3.2 billion in December was almost 20% wider than forecast, however.  Greece has the triple burden of very large ratios of its current account deficit, budget deficit, and government debt to GDP.  The first two ratio exceed 10%, and the last one is greater than 100%.

Austrian producer prices were unchanged in December and 1.0% lower than a year earlier.

The Bank of Japan’s monthly economic assessment was unchanged.  A pick-up in activity is attributed to policy support, and private domestic demand is still not in a self-sustaining recovery, according to monetary officials.

Japan’s all-industry index fell 0.3% in December.  A slight rise had been anticipated.  This supply-side measure of GDP was 1.6% lower than in December 2008.  It fell by 8.0% in 2009 after dropping 1.9% in 2008.  In December, industrial production rose 1.9% and 5.1% from a year earlier, but services dropped by 0.9% and 2.8% from December 2008.

There has been a military coup in Niger, a significant producer of uranium.

Singapore GDP increased 2.8% at an annualized rate last quarter and by 4.0% from 4Q08.

U.S. consumer prices are due today.  So are Canadian retail sales and that economy’s index of leading economic indicators.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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