Expert Analysis of Today's Market

• The dollar fell against most major currencies on Wednesday after the Federal Reserve cut interest rates 25 basis points and said “[t]he substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time.” The Fed’s statement indicates that the Fed now sees more balanced risks to the US economy. The Fed cited both downside risks to the economy and inflation risks. The yen recovered against the dollar as US stock markets shed their earlier gains reducing appetite for carry trades.


• The EUR/USD was higher; however, close to a 3-week low as the Fed kept its option open. The market had expected a slightly more hawkish Fed stance. We do not believe the Fed will cut the federal funds rate any further. The EUR/USD will possibly be pressured by declines in European growth and interest rate advantage. The pair will likely test the 1.54-area support. There is resistance in the 1.58-area.

Financial and Economic News and Comments

US & Canada

• The US Q1 2008 real GDP rose at a 0.6% q/q annual rate and grew 2.5% y/y, the Commerce Department said. The strongest components were inventories and consumption. Rising inventories can result from either anticipation of future strong sales or disappointing present sales; at this time, an unintended buildup was possibly the cause. The weakest component was home building, which subtracted 1.23 percentage points from the real GDP growth rate. Overall, consumer spending contributed 0.68 percentage points to GDP. International trade gave only a small boost to the economy, adding 0.22 percentage points to GDP. Inventories rose $1.8 billion, boosting GDP by 0.81 percentage points. Overall investment reduced GDP by 0.7 percentage points while government spending contributed 0.39 percentage points to growth. Real final sales of domestic product, which is GDP less the change in private inventories, declined at a 0.2% annual rate in Q1.

• Price inflation gauges eased in Q1 2008. The price index for personal consumption expenditures rose 3.5% y/y after increasing 3.9% y/y in Q4 2007. The PCE price gauge excluding food and energy rose 2.2% y/y after increasing 2.5% y/y.


• US companies unexpectedly added 10,000 workers in April after private payrolls rose by a revised 3,000 in March, the ADP Employer Services reported.


• The Bureau of Labor Statistics of the US Department of Labor reported that total compensation costs for civilian workers increased a seasonally adjusted 0.7% q/q in Q1 2008 after rising 0.8% q/q in Q4 2007. Wages and salaries rose 0.8% and benefits rose 0.6% in Q1 2008 after both wages and salaries and benefits increased 0.8% in Q4 2007.


• The Chicago PMI unexpectedly rose to 48.3 in April, still indicating contraction for a third straight month, from 48.2 in March, the National Association of Purchasing Management-Chicago said. New orders fell to 53.0 in April from 53.9 in March and prices paid fell to 82.9 from 83.9. The PMI averaged 54.4 last year.

• The Federal Reserve, as forecast, cut the key interest rate by a 25-basis point to 2% and indicated it is ready to pause after seven rate cuts since September. “The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time,” the Federal Open Market Committee stated. “The committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.”

Europe

• The euro-area infation CPI rose a slower-than-expected 3.3% y/y in April, down from a record high 3.6% y/y in March, an early estimate by Eurostat showed.


• A European Commission monthly survey showed that selling price expectations among businesses eased in April to 12 from 13 points, but consumer inflation expectations for the next 12 months picked up slightly to 28 from 26 points.


• The European Commission said its euro-zone economic sentiment indicator fell to 97.1 in April, the lowest level since late 2005 and below the long-term average, from 99.6 in March. The industrial confidence component of the indicator was down in the euro area at -2 in April compared with 0 in March while consumer confidence was unchanged at -12. The commission said the decline in the overall economic sentiment indicator was mainly due to the marked drop in sentiment regarding services and retail trade. The commission’s euro-zone business climate indicator declined to 0.44 in April from 0.79 in March.

• The number of jobless people in Germany in April fell month-on-month by an unadjusted figure of about 94,000 to 3.414 million, the Labor Office said. The unadjusted jobless rate fell to 8.1% in April from 8.4% in March. The number of jobless people in Germany fell a seasonally adjusted 7,000 from March. The adjusted jobless rate was 7.9% in April, unchanged from March. The Bundesbank separately reported that the adjusted total jobless figure fell to 3.299 million in April from 3.306 million in March. “The favourable development continues to be based on the solid economic situation,” Labor Office head Frank-Juergen Weise said, adding that companies’ demand for workers remains on a high level.


• The UK average house price fell 1.1% m/m in April to £178,555. The average price fell 1.0% y/y or £1,759, the first year-on-year drop since March 1996, building society Nationwide said. Nationwide chief economist Fionnuala Earley said the fall in UK house prices reflects the steep decline in mortgage approvals seen over the past six months.

Asia-Pacific

• Japan’s economy will grow 1.5% in the year ending March 31, less than an October estimate of 2.1%, the Bank of Japan said in its semi-annual outlook. Core CPI, which excludes fresh food, will rise 1.1%, compared with an earlier estimate of 0.4%. Core prices won’t deviate much from the BOJ’s 0-2% range for price stability, the BOJ said.


• The BOJ kept the key lending rate unchanged at 0.5%. “The outlook for economic activity and prices is highly uncertain,” the BOJ said. “It is not appropriate to predetermine the direction of future monetary policy.”


• Japan’s factory output fell 3.1% m/m, the fastest pace in five years in March, after rising a record 1.6% m/m in February, the Trade Ministry said.


• Japan’s unemployment rate fell to 3.8% in March from 3.9% in February. The job-to-applicant ratio showed that the number of positions available for each applicant slid to 0.95, the lowest in almost three years. Household spending declined 1.6% in March from a year earlier.


• Japan’s housing starts tumbled 15.6% in March, halting five months of improvements, the Land Ministry said.

FX Strategy Update