Weekly Review and Outlook
Euro Weakens Further, Focus Turns to ECB


With the support of FOMC's signal to pause it policy easing cycle and a much better than expected Non-farm payroll report, dollar was generally lifted higher last week. On the other hand, there was another round of liquidation of long position in Euro which saw the common currency being sent lower. While markets are talking about the strength in dollar and weakness in euro, the biggest mover last week was again USD/CHF, which topped the biggest mover chart for the second week. The Swiss Franc was, on the one hand, dragged down by weakness in Euro, and on the other hand, pressured by return of risk appetite. Sterling and Aussie were indeed, relatively stable against the dollar as both pairs were supported by improved investors sentiments and carry trade buying in respective yen crosses. At least, both currencies still managed to stay in familiar range against the greenback. US data will take a back seat this week. Focus will be on ECB meeting and in particular, attention will be paid to Trichet's press conference.

The FOMC cuts the federal funds rate by 25bps to 2.00% as widely expected. Two members, Fisher and Plosser, voted against the rate cut, favoring no action. In the accompanying statement, the Fed described the cumulative 325bps cut as "substantial". Also, the Fed noted that "indicators of inflation expectations have risen in recent months." These were taken as affirmation to some analysts that Fed's is near a pause. However, Fed still noted that "economic activity remains weak" and "tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters." Also, the Fed still noted they will "act as needed to promote sustainable economic growth and price stability." After all, even though the consensus view is that Fed is close to a pause, opinion on the timing is still divided as today's statement left an unclear impression to part of the markets. That is, whether Fed will be on hold in June is still an uncertainty.

While the economic data released last week from US were still weak, they're at least better than market has expected. Even though a contraction of -20k in the job market was still recorded in the month of Apr, the Non-farm payroll contraction was much lower than consensus of -75k. Prior month's contraction was just slightly revised from -80k to -81k. Unemployment rate also gave market a positive surprise by dropping from 5.1% to 5.0% instead of climbing to 5.2%.

The closely watched Q1 GDP growth was unchanged at 0.6% annualized, which was above forecast of 0.4%. Personal consumption also beat expectation by growing 1.0% comparing to consensus of 0.6%. ISM manufacturing index remained unchanged at 48.6 in Apr. Though it's still a contractionary reading, it's at least showing that the contraction was not deepening. Price component also climbed from 83.5 to 84.5. Though, employment component is very weak, dropping sharply from 49.2 to 45.4, even lower than Feb's low of 46. Chicago PMI improved mildly from 48.2 to 48.3 in Apr.

Core inflation was stronger than expected as seen in core PCE's climbed from 2.0% yoy to 2.1% yoy. Headline PCE moderated from 3.4% yoy to 3.2% as expected though. Spending was another bright spot, doubling forecasts of 0.2% and grew 0.4% in Mar, up from prior 0.1%. However, income growth missed expected and slowed to 0.3%.

Other data saw construction spending dropped more than expected by -1.1% in March. S&P Case-Shiller home price index continued its sharp decline in Feb. Both the 10-city and 20-city composite indices recorded annual falls in excess of -12%. Conference board consumer confidence dropped sharply from upwardly revised 65.9 to 62.3 in Apr. Also, jobless claims came in much above expected at 380k.

From Eurozone, the biggest mover was Apr HICP flash which came in at 3.3%, moderated from prior 3.6% and missed expectation of 3.4%. Sentiments in the Eurozone deteriorates further with business climate diving from 0.79 to 0.44 in Apr while economic sentiment dropped from 99.6 to 97.1. Though, unemployment rate was unchanged at 7.1% in March. Germany gfk consumer sentiments improved unexpectedly from 4.8 to 5.9. Germany retail sales unexpectedly dropped -0.1% mom in Mar, with yoy rate dived to -6.3%. Eurozone PMI manufacturing dropped slightly from 50.8 to 50.7 while Germany PMI manufacturing was unchanged at 53.6.

BoJ left interest rates unchanged at 0.5% as widely expected. Inflation forecasts were revised up with FY08 core CPI up from 0.4% to 1.1%. FY09 core CPI is projected to be at 1.0%. However, growth forecasts were revised down with FY08 down from 2.1% to 1.5%. FY09 forecasts is projected to be at 1.7%. Governor Shirakawa said that the positive cycle in economy is weakening and downside risk is more serious than upside risks in FY08/09. Also, bank credit losses will likely be larger than forecasts but will not have serious impact on the banking system's stability.

Japan Manufacturing PMI dropped to 48.6 in Apr vs exp 49. Household spending dropped -1.6% yoy vs exp 0.5%. Unemployment rate dropped to 3.8% vs exp 3.9% in Mar. Industrial production dropped sharply by -3.1% mom vs exp -0.8% in Mar. Construction orders climb 6.4% but housing starts fell sharply by -15.6% in Mar. Retail sales unexpectedly rose 0.5% mom in March while the yoy rate slowed from 3.2% to 1.1%.

In the Treasury Committee hearing, BoE King said that the bank is likely facing "major challenges" in monetary and financial stability and it's a "difficult balancing act" in setting interest rates while economic growth slows and inflation is accelerating. Though, later in the financial stability report, BoE said that "risk appetite will return gradually in the coming months, " suggesting the worst of credit crunch is probably over. UK PMI manufacturing dropped slightly from 51.3 in Apr, and is mildly better than expectation of 50.8. CBI distributive trades report hit a shockingly low reading of -26 in April comparing to expectation of -3, down from March's +1. Mortgage approvals fell to the lowest level in nine years. Nationwide house price showed the first annual drop since 1996 by -1.0%. Apr Gfk consumer consumer confidence dropped sharply from -19 to -24, much worse than expectation of -20.

Swiss KOF indicate also dropped sharply from 1.54 to 1.20 in Apr. Canadian Feb GDP was disappointing by contracting -0.2% mom. PPI climbed 1.7% mom in Mar comparing to consensus of 0.9%. Australian retail sales rebounded stronger than expected by 0.5% mom in Mar. New Zealand trade balance unexpectedly turned to -50m deficit in March from prior 258m surplus. Prior driver was the contraction in exports from 3.71b to 3.44b.