New Overnight Developments Abroad: Sterling Strengthened Further

January 27, 2009

Sterling rose another 1.1% against the dollar and is trading 4.7% above last Friday’s low of $1.3502.

The U.S. currency otherwise is narrowly mixed, with no change against the yen, gains of 0.2% against Canadian dollar and 0.1% versus the Swiss franc, and losses of 0.4% against the Australian dollar and 0.2% relative to the New Zealand kiwi.

Asian stocks climbed sharply. The Nikkei rose 4.9%. stocks advanced 3.8% in India, 1.9% in Thailand, 1.6% in Indonesia, and 3.0% in Australia. Several markets remained closed for the Chinese Lunar New Year. In Europe, by contrast, stocks are trading considerably lower, with drops of 1.4% in Switzerland, 1.3% in Italy, 1.2% in Britain, 1.0% in France, and 0.7% in Germany.  The 10-year JGB yield rose 3 basis points to 1.25%.

Oil recovered 1.1% to $46.23 per barrel, but gold settled back under $900, falling 1.4%.

Japanese corporate service prices fell by 0.5% in December and posted a 12-month decline of 2.5% after falling 2.0% in the year to November.

Minutes from the Bank of Japan Board meeting last month that cut its target rate by 20 basis points confirmed a reluctance to cut further and reintroduce ZIRP (zero interest rates) and calls to promote corporate finance and shift emphasis to longer-term interest rates.

The German IFO index of business conditions and expectations unexpectedly firmed 0.3 points to 83.0 in January, still a very low level. The highest IFO reading in 2008 had been 104.6 in March. Current conditions worsened another 2 points to 86.8, but expectations went up 2.5 points to 79.4. Manufacturing, construction, wholesaling, and the retail sectors all recorded net improvement. A separate IFO index for services had a similar profile, rising to -8.6 from -14.5 in December, with expectations better but current conditions worse.

German import prices fell more sharply than expected in December, dropping 4.0% from November and by 5.1% from December 2007. Non-oil import prices were unchanged from a year earlier.

Italian consumer sentiment recovered unexpectedly to a four-month high of 102.6 in January from 99.6 in December.

Australian producer prices in the fourth quarter were under much greater upward pressure than assumed, jumping 1.3% from 3Q and by 6.4% from 4Q07. The culprit was a steep drop in the Ozzie dollar that boosted import prices by 14.8%. The presumed future trend in inflation remains down, nonetheless. A separate release revealed improvement in Australian business conditions of 11 points to -6 in December and business sentiment of 10 points to -20. These rises reflect fiscal and monetary stimulus.

Euroland’s current account deficit widened to a seasonally adjusted EUR 16.0 billion in November from EUR 6.0 billion in October. The unadjusted balance was in the red by EUR 61.0 billion in the 12 months to November after a EUR 47.0 billion surplus in the previous 12 months. The basic surplus (current account plus portfolio and direct investment flows) narrowed to EUR 47.9 billion in the last 12 months from EUR 133.0 billion in the prior 12 months.

French housing starts and permits respectively fell by 16.0% and 11.1% in the year to 4Q08 and by 15.7% and 16.7% between December 2007 and December 2008.

Tim Geithner’s job as New York Fed President reportedly will be filled internally by William Dudley, previously head of the Bank’s markets group. The NY Fed president is the second most powerful job in the Federal Reserve System, with permanent voting rights on the FOMC. Paul Volcker held that slot in 1975-9 before becoming Fed Chairman.

The British CBI distributive trades index, like the IFO reports, unexpectedly bounced up in January, rising to -47 from a series low of -55 in December. The orders component rose to -51 from -58. These results remain extremely depressed.

The Canadian annual budget at 21:00 GMT today will show a C$ 34 billion deficit next fiscal year, with increased spending in a number of areas including road infrastructure and job training, plus steps to promote bank lending.

From the United States today arrives the monthly Case-Shiller index of house prices, the Conference Board gauge of consumer confidence, the Richmond Fed index, and weekly chain store sales. A two-day FOMC meeting also begins.


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