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Research Note: Jan. 14 Beige Book Outlook
Jacob Oubina, Currency Strategist
Summary Outlook:
(Jan. 13, 2009) The Fed's Beige Book, which is due to be released tomorrow at 1400ET/1900GMT, is likely to continue to harp on the rapid deterioration in the US economy. Fed Chairman Bernanke's comments earlier today provided more of a mark-to-market in terms of the Fed's outlook and as such the price action around this report will probably be rather limited. Bernanke highlighted the fact that toxic assets remain a barrier to capital raising and that fiscal stimulus alone will not spur a lasting rebound in the economy. He also expects inflation to continue to moderate in the months ahead. It is hard to imagine a scenario where the Beige Book would be even more negative than the Chairman's somber assessment, but this is clearly the risk going into the number.
The trading strategy will once again focus on the price action in risk trades. Indeed, if currencies behave as they did on Bernanke's recent comments, we would look for a higher USD, lower EUR and overall heavy JPY crosses. Given that much of the headline reaction is likely to dissipate minutes after the headlines hit -- as markets realize that little has changed in the context of the US slowdown -- we would look to take advantage of a potential knee-jerk reaction. Going short EUR/USD and the JPY crosses into the release could be an idea. We would look to protect any potential profits via tight trailing stops, anticipating a relatively quick reversal. More positive than expected headlines will likely see little price action as the market will probably deem this as dated information.
Research Analysis:
Here is how we expect the characterizations of consumer spending, employment and credit markets to have evolved:
Consumer spending probably continued to weaken as evidenced by what looks to have been a dismal holiday shopping season. Purchases of big ticket items like appliances, electronics and autos likely continued their downward spiral while discount stores still benefit from the trade-down effect. The anecdotal evidence provided for this category will probably be overshadowed by what looks to be a very weak December retail sales report due out in early NY trading.
Employment surely deteriorated further in the period. Indeed, nonfarm payrolls showed a net decline of nearly -700K in the recently released December report. This, coupled with the upswing in the unemployment rate -- to 7.2% from 6.7% -- and grind higher in continuing claims suggests a pretty bleak assessment of the US labor situation is in store here. On the inflation front, wage pressures are expected to remain relatively subdued. The bright spots here will probably once again be gains in the health care and high skill spaces.
The evaluation of credit markets is likely to be mixed. Improvements in the interbank lending market will duly be noted as TED spreads (3-month Treasury/3-month Libor spread) have fallen precipitously over the last six weeks. However, an area of concern remains in the corporate space. Baa corporate spreads remained elevated and show no signs of heading lower any time soon. This will continue to crimp business borrowing which will in turn be a thorn in the side of the US economy as we muddle our way through the first half of 2009.
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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