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Market commentary and insight
Market commentary and insight looks at key underlying themes in the markets and the trends that are likely to develop.
Archive market commentary and insight
Doubts over US rate cuts? : 27-09-07
The latest jobless claims data was again lower than expected with the number of initial claims falling to 298,000 in the latest week from a revised 313,000 previously. The headline figure has fallen to the lowest level since May 12 while the four-week average figure is also at the lowest level since the beginning of August.
September's data does not indicate that there has been widespread damage to the wider economy from credit and housing-related difficulties.
The fourth quarter could still prove troubling for the US economy, but there is likely to be some reduction in speculation that the Federal Reserve will cut interest rates again both in October and December.
Pressure for ECB intervention : 24-09-07
The 1.40 level for EUR/USD has, over the past few years, been seen as an important pain threshold for the Euro-zone industrial sector. Below that level, the situation is certainly uncomfortable, but bearable, while there are much higher risks of serious damage to the industrial economy once the Euro pushes above this level.
A very important factor is the workings of the ECB and the differences with other major central banks. In the US, currency policy is determined by the Treasury and the Federal Reserve acts on the Treasury’s instructions in currency intervention. The Japanese Finance Ministry also has effective control of exchange rate policy.
The situation in Euro-zone is different as the ECB has sole control of the Exchange rate fund. Although the ECB will certainly consider requests from ECOFIN finance ministers, it does not need to heed these requests and can refuse to intervene. This stance helps explain the rarity of ECB-led intervention with the last occasion seen almost exactly seven years ago when the Euro was on the rocks below 0.85 against the dollar.
Overall, concerted ECB-led intervention is likely to be sanctioned if the dollar weakens rapidly to the 1.50 level against the Euro.
UK economic pressures will increase: 12-09-07
There are likely to be increasing fears over the UK housing sector in the short term.
This week, a specialist mortgage lender has gone into administration while UK mortgage rates have started to increase due to the impact of rising money-market rates as the Bank of England is still battling to keep money-market rates down.
In addition, mortgage lenders are adopting tighter lending standards, especially for sub-prime and first-time borrowers and this will curb housing-market activity.
With underlying debt levels at very high levels, there are growing risks of a slowdown in the UK economy with the possibility of an interest rate cut on a three-month view.