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About GAIN: News & Events |
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RESEARCH NOTE: April 15 Beige Book Outlook
Jacob Oubina, Currency Strategist
Summary Outlook: (April 14, 2009) The Fed's Beige Book report, prepared for the April 29 FOMC meeting and scheduled for release at 1400ET on Wednesday is likely to highlight ongoing weakness in the US economy. However, recent musings from various Fed officials suggest that the Beige Book could note the pace of deterioration as slowing and potentially highlight some signs of stabilization. While the overall market response is likely to be minimal, a much rosier than expected outlook could see risk trades rally.
Trading Strategy: The most notable reaction is likely to come in US equities, with a brighter economic forecast potentially eliciting a substantial rally in shares. Thus the commensurate FX reaction will mostly play out in the JPY crosses. If shares rally on the back of positive economic headlines, we would look for the recently beaten-down yen crosses to follow higher as well. Weaker than expected headlines are likely to see a more muted reaction in both stocks and the yen crosses, as much of the sticker-shock from bad news already looks baked in the cake. Thus, establishing long EUR/JPY and USD/JPY positions on further deterioration ahead of the release makes sense in our view. EUR/JPY is flirting with 131 support currently while USD/JPY is testing just below the 200-day SMA by 98.95 as well. If both manage to close above these crucial support zones, we would not be surprised to see a recovery back to the middle of the week's range of EUR/JPY 132.70/133.00 and USD/JPY 99.70/100.00 in relative quick fashion. We would establish tight 50 pip stops to protect against the risk of extremely weak headlines, which would be detrimental for risk trades.
Research Analysis: The latest Beige Book will cover economic activity from late February through early April and here is how we expect some of the more important components to have evolved.
Consumer spending was a mixed bag. The February retail sales report showed a +0.9% monthly increase in core retail sales (ex gas, building materials and auto dealers) but March subsequently gave it all back by declining -0.9% on the month. Both periods were apparently influenced by seasonality adjustment issues and as such will be read as offsetting one another. The overall analysis might be of a "stabilizing" consumer environment, which would be very positive for equities.
Employment worsened some more. Indeed, jobless claims (the timeliest indicator) jumped to an average of about 650,000 after running at about 580,000 during the prior Beige Book period. The unemployment rate also made a fresh cycle high at 8.5% and leading indicators of employment continued to deteriorate. The further declines in hours and temporary employment should duly be noted as signs that the worst is potentially not yet over in this space.
Credit markets are likely to be evaluated as mixed. Interbank lending remained relatively unchanged with the TED spread (3-month Treasury/3-month Libor spread) averaging about 104 basis points over the period - similar to the prior reporting span. Baa corporate spreads widened on average to 564 basis points from around 545 prior. They remain well above a normal 200 spread and this will continue to crimp business borrowing in the foreseeable future. The average 30-year mortgage rate did slip to an average of just above 5.0% from around 5.3% in the prior report and this probably helped ease tensions somewhat on the real estate credit front.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
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