Category: Economics

In his speech today, Mario Draghi maintained the structure of his last talk. Constrained by the obvious reality, he had to admit the lent pace of recovery and the long list of problems that are not yet solved, as the weak conditions in the labour market and the economic slowdown. On the other hand, the accommodative position of the monetary policy together with the improvements made since mid-2012 and the banking union system should keep the stability of the euro zone.

The heart of Euro zone, Germany, is pumping the same weak and negative sentiment about the current economic situation, announcing a contraction of -0.1% in the industrial production as well as a decreasing trade balance (14.1B). It is difficult to expect positive results in an environment dominated by instability and lack of trust in the Government’s institutions. On the long term, we may be witnessing of improved conditions if the pace of restructuring is maintained.

Mining (down 15 to -28 points), retail (down 17 to -28 points) and manufacturing (down 13 to -27 points), one by one the most important sectors of activity in Australia are ceasing to work at previous standards. Thus, the business conditions went back to low levels from May 2009. The overall outlook is disappointing: weak employment conditions, decreasing demand, falling prices, low interest rates and a falling Australian dollar. These weaknesses may be explained by the global weaker conditions and low demand for raw materials.

The wholesaling numbers are considered to give a reliable idea about the evolution of the economy, as the history has been proved this relationship. In these circumstances, by the end of 2013 the economy of Australia is expected to run below the trend. Recent press conferences revealed the fact that a better controlled and supervised financial system is the main concern and the key to solve important issues with long term implications.

After the ECB press conference from last week and the good NFP for the United States, yesterday the Trade Balance and Industrial Production fell for Germany.

While already to the ground the Euro Area and the Euro currency take other kicks. Today it was announced that Greece will get the aid and everything seemed to be cooling down, Italy was downgraded to BBB from BBB+ by S&P.

The downgrade came after Asmussen brought other bad news for the Euro Area and knocked the Euro under 1.2800 with the US dollar. The German economist said that he would not rule out a new LTRO and that ECB forward guidance goes beyond 12 months.

Chart: EURUSD, H4

The price for the EURUSD currency pair seemed to be stabilizing under 1.2900 level. It did not last more than a day because after the statements of Asmussen and the downgrade of Italy the price fell fast under 1.2800 and hit a very good demand area at 1.2745. From here we can see a second reaction of appreciation.

The 14 periods RSI has drawn a positive divergence. This could be a signal that buyers will not give up right now, and that they now have backup. From 19 of June the price has moved inside two equal downward channels. At this point a drop under 1.2740 would be a signal that the price could accelerate on the downside. If the price will manage to get back up and break the trend line then we might see an interesting outcome.

 

As it looks now, in our opinion, the answer would be not yet. The FOMC meeting minutes showed that there are more members that agree with the tapering of the Quantitative Easing program, but it wasn’t specified the date for the start of the tapering. The speculated date was September this year, but it seems that the Federal Reserve has to see whether the unemployment rate is heading to 7%.

Chart: GOLD, H4

After the Minutes the dollar lost some ground, gold rallied to 1265$ per ounce but didn’t stay too much there. In less than an hour Ben Bernanke will have a speech and the investors will keep their eyes and ears focused on what the Fed’s chairman is going to say.

From the technical point of view, the price of gold encounter a good resistance area at 1268.00 level, that was tested 2 more times in the past 3 weeks, and could not pas. The bounce off 1265$ might mean that the pressure is still on the downside, even though it can be spotted an Ascending Triangle price pattern on the chart.

To wrap it up, during the speech of Bernanke we will look at the support 1243.30 and resistance 12568.45 key levels. Under the support the targets will be 1220.00, 1200.00 and 1180.00, while above resistance the price targets would be 1302.45 and 1350.00.

 

The press conference of Bank of Japan announced its optimistic view concerning the next 2 years period. In this matter, the latest data about Japan came better, together with the successful implemented quantitative easing, promise to keep Japan safe. Thereby, an increase in exports and public investments along with a moderate increasing in industrial production and accommodative financial conditions have great potential to lead in maximum 2 years to the targeted 2% inflation. The monetary stimulus activity has been shown to have great results so far and is being maintained for the moment with the possibility of adjustments. Moreover, the International Monetary Fund rised its forecast for Japan from 1.6% to 2% growth this year, becoming the only bright economy from the Group of Seven industrialized economies.

On the other hand, the slowing economy of China is posing serious problems, as well as the weak Europe, the fragile United States and the weakening of the commodity-exporting economies.

 

The Federal Reserve received today encouraging signals from the U.S. economy. The Consumer Price Index indicated a rise (0.5%) in the price of goods, mainly sustained by the higher cost of gasoline, fact confirmed by the Core Consumer Prices Index that was reported in line with expectations at 0.2% (the last index excludes the energy and food’s costs). It is important to see the inflation being kept under control but on the other side, low values of the index of prices are not much help for the economy. The industrial production has taken a balanced value, particularly sustained by more confident homebuilders. Since January 2006 the house building industry started to lose its pulse and now it seems that it may regain its rhythm.

The positive outlook was maintained by the speech of one of the FOMC members today. Even if the growing rate is not as high as expected, it is stable and represents the ground for the monetary policies that are implemented. If the economy is continuing at this pace, the tapering of QE3 is expected to start later this year with an end in the first quarter of 2014. Further improvements are expected especially in the job and housing market. It is important to remember the fact that United States is seriously affect by the global negative sentiment (recently, the IMF revised down its global growth projections) and the fact that economies like China are slowing down.

 

Ben Bernanke had a very clean speech, emphasizing all the possible scenarios and the correspondent solutions. He didn’t said that the QE3 is going to be ended at a certain point for sure but neither he said that QE3 will continue for an undetermined period. The key factors of this equation are the signals of the American economy, especially the labor market and inflation. Lately, the U.S. enjoyed positive results and the rising star that lead to such positive news is the housing market.

As for the rest of the year, “a highly accommodative monetary policy will remain appropriate for the foreseeable future”. At a certain point, trying to soften the effects of its last speaking, Ben Bernanke gave the impression that the indulgent measures are of need so the QE3 program and the “forward guidance” represent the main 2 tools which need important reasons before being removed (key levels are expected in the labor market <<6.5%>> and inflation <<near the 2% target>>).

In order to properly end his speaking, Ben Bernanke wanted to notify the investors that “the Committee would be prepared to employ all of its tools, including an increase in the pace of purchases for a time, to promote a return to maximum employment in a context of price stability.”

If we are to compare the pro QE3 attitude of Ben Bernanke today and the contra QE3 ideas that Esther George transmitted yesterday ,as a representant of half of the FOMC members, which would be the most probable scenario? We should wait the tomorrow’s report where the chairman of Fed is expected to take a more clear position.

 

As I mentioned in my early statement, Ben Bernanke didn’t manage to really impress the markets neither yesterday nor today. Maybe the only factor that would make a difference is the fact that yesterday the chairman of Fed made it clear that is very flexible in taking decisions while today his attitude may have shift more towards a dovish one, with the promise that even if by the end of next year the QE3 will be ended, the Fed will keep its policy highly accommodative.

The manufacturing in Philadelphia increased considerably at values last met in March 2011, possible marking the start of an upward trend for the American economy. Last month, only 334.000 individuals filled an unemployment insurance, leading the labor market to the greatest shape since May. In an attempt to approach the situation of gold, Ben Bernanke highlighted another positive aspect of the current economic situation, the fact that investors feel safer now and they don’t make safe deposits as much as in the near past. For all that, taking in consideration a more consistent period of time, the data are mixed, so it’s too soon for the Fed to take a firm position concerning the QE3. Along with close supervision of the evolution of the economy, gradual steps will be made and changes of situations can occur.

President Obama expressed his satisfaction regarding the evolution of the American economy and highlighted the importance of the wellness of the middle class in order to have the economy running at optimal parameters. Also, the creation of jobs represents the main concern, giving the fact that creating jobs is the nucleus of the American economy. If Americans work hard, every field of the economy will run smoothly. In order to rich this point, reforms are needed and consumers need to understand and accept further changes in this regard.

As the spotlight is the unemployment rate problem, further measures are considered: a revolution of the manufacturing industry, a new tax credit, plans for rebuilding the infrastructure, simplifying of the tax code , simplifying the procedures for investments and starting small businesses, large investments in renewable energy (wind and solar energy), rising the minimum wage.

On the other side of the planet, the interest rate of Australia is likely to be lowered again, the second time this year, as the latest inflation data doesn’t look disturbing (currently 2.4%, dropping from 2.5% in the second quarter of the year). The governor of RBA believes that there is still room for this move and further depreciation of the currency is not a surprise. The consumption still needs to be stimulated and the consumers need to trust their economy enough to start investing in more risky assets. As a measure of fighting the decreasing trend that the Australian economy is following lately, especially because its main exporter China is slowing as well, the Central Bank is willing to boost employment by residential constructions. Today, the building approvals were reported down to -6.9% a considerable drop that seems to darken the overall picture.

 

As Willian C. Dudley indicated in his last speech, the FOMC members decided that the time to discuss the tapering of the QE3 program has come. Even if there are still doubts concerning this decision, FOMC members decided that risks of an economic downturn have diminished since the Fed started to run this bold program. Yesterday, Moody’s Investors Service started the positive data string with revising its outlook to stable from negative, decision that has been postponed for 5 years before being implemented.

The decision of the rating agency doesn’t necessarily reflect a real improvement of the economy. Actually, it reflect an impulse given to an economy that recovers at a slower pace that before (the labour market started to recover, but not as expected). Economists keep being positive and expect an improvement in the second half of this year, but is difficult to ignore real facts that make these expectations difficult to be accomplish. Thus, high prices on oil, slow growth in exports and increased mortgage rates represents factors that will most probably lead to a poor growth of the economy.

Concerning the outlook for the inflation, the oppininons are devided. The highly accommodative monetary policy supproters (that now had remained less) believe that the inflation is far from reaching the target, while other oppinions are reflecting big expectations about a suitable inflation in short time. Follow the reports on the U.S.’s economy for the next short term in order to understand if the QE3 will be reduced by the end of this year or by the middle of 2014 but, in all cases, this program will be over soon.