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Research Note: March 4, 2009 Fed Beige Book Release
Brian Dolan, Chief Currency Strategist
Jacob Oubina, Currency Strategist
Summary Outlook: The Fed's Beige Book report, prepared for the March 18, 2009 FOMC meeting and scheduled for release at 1400ET on Wednesday, March 4, is likely to highlight ongoing deterioration in the US economy at the start of the year. We see little scope for improvement outside of credit conditions, which may be characterized as stabilizing by some measures. We think the overall market response is likely to be muted and most strongly felt by US stocks.
Trading Strategy: Following our expectations that the primary market reaction will be in US stocks, we expect the FX reaction will flow from stocks, with the JPY-crosses (e.g. EUR/JPY or AUD/JPY) the most likely conduit for any reaction. If stocks take the Beige Book badly, we would look for the JPY-crosses to come under selling pressure. But if shares are able to shrug off the Beige Book, we would expect JPY-crosses to gain. Importantly, we think markets have become largely numb to weak economic reports and forecasts and that any downside moves may prove short-lived. In this sense, we would prefer to be buyers on weakness in the JPY-crosses rather than participating in any selling after the initial Beige Book headlines hit the street. On a tactical level, we would note that the following JPY-crosses are currently trading above their Ichimoku clouds, generally biasing them to the upside: (EUR/JPY, cloud top 121.52; GBP/JPY, 133.74; AUD/JPY, 62.28; and CAD/JPY, 74.42). We would look to use the area around the cloud tops as opportunistic buying levels, using a 50-70 pip stop loss exit for protection.
Research Analysis: The latest Beige Book will cover economic activity from early January through late February and here is how we expect some of the more important components to have evolved.
Consumer spending continued to decline in the last two months. The recently released personal income and spending report showed real consumption falling at a -1.6% annual rate in January. Meanwhile, consumer expectations for the economy sank to a new record low of 27.5 in February from 42.5 prior. Expectations lead spending over time because of the fact that people are more willing to spend now if things are likely to get better in the future - the permanent income hypothesis. An ominous statistic in that personal income and spending report was the 5% savings rate, a new 14 year high and an indication that consumers continue to hunker down. In sum, the evidence continues to point to a more frugal US consumer whose confidence about the economy remains at all time lows - not a prescription for robust spending going forward.
Employment looks to have worsened as well. Nonfarm payrolls contracted by a whopping -598K in January, a new cycle low. The unemployment rate jumped to 7.6% from 7.2%, much faster than what was anticipated. The evidence we have in hand for February suggest things got even worse over the last month. Initial jobless claims jumped by 642K on average per week in the month, while continuing claims popped over 5.1 million after an average of 4.7 million in January. This coupled with record new lows in the employment sub-components of major manufacturing surveys suggests we could get a nonfarm payroll decline in the order of -725K for February. As such look for the characterization of employment to be bleak to say the least.
Credit markets are likely to be evaluated as mixed over the last couple of months. Interbank lending continued to improve at a moderate rate with TED spreads (3-month Treasury/3-month Libor spread) falling about -30 basis points to 100 and much closer to a normal 50 spread. Baa corporate spreads also narrowed -50 basis points and are sitting near 530 at last look. However they remain well above a normal 200 spread and this will continue to crimp business borrowing in the foreseeable future. The other rub for credit markets is that US equities have declined nearly -25% since the period covered by the last Beige Book and this surely weighed on company capital and hampered their ability to borrow.
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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