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About GAIN: News & Events |
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RESEARCH NOTE: September Beige Book Preview
Brian Dolan, Chief Currency Strategist
Jacob Oubina, Currency Strategist
Tomorrow (Wednesday, Sept. 3) at 1400ET/1800GMT the Fed's Beige Book will be released in advance of the September 16 FOMC meeting. The Beige Book is one of the timeliest updates on the US economy. As a result, the Beige Book holds significant potential to move investor sentiment and market prices, including the USD against other major currencies.
Summary Outlook:
We think the Sept. Beige Book update on the US outlook is likely to closely resemble the July Beige Book. Of the areas where changes are most evident, declines in commodity prices suggest an easing of inflation pressures, which should reduce the urgency for the Fed to raise rates to combat inflation. Other economic sectors, outlined below, have the potential to see some modest improvement, but the final impression should be that the Fed remains on hold for the foreseeable future.
Market Strategy:
We think reduced expectations of a Fed rate hike will be stock-market friendly, and this is the most likely source of a currency market reaction to the Beige Book. Also, given our view that the Fed is on hold for the rest of 2008 at the minimum, the effects of the Beige Book are likely to be very short-lived. But if the inflation comments are more benign, we think a positive stock market reaction would be supportive for the JPY-crosses, so we would look to selectively buy EUR/JPY, GBP/JPY and AUD/JPY in advance of the report. We would also look to close out such positions before the end of the day.
A Closer Look:
Here is how we expect the characterizations of consumer spending, inflation, real estate and lending to have evolved.
- Consumer Spending: Consumer spending is likely to be characterized once again as "sluggish" in the upcoming Beige Book. The latest personal consumption expenditures report showed a meager 0.2% increase in spending for July, down from 0.6% the prior month. We expect that as the impact from the rebate checks dissipated, spending was reduced. That said, a large portion of the stimulus was also saved and the latest down-leg in energy prices augurs for a potential upside surprise in US consumer spending heading into 4Q.
- Inflation: The biggest change in the entire report is likely to come in the area of prices. Last time around, prices were noted as being "elevated" or even "increasing" in some cases. The fact that oil has plunged nearly 20% since mid-July -- the end of the period covered by the last Beige Book -- we expect this characterization to differ quite a bit. We expect adjectives such as "moderating" or "declining" to emerge. This anecdotal evidence of slowing inflation pressures should help solidify views about a Fed on hold through the balance of 2008. US stocks will love the lower rate hike risk and the evidence that the profit margin squeeze is being somewhat alleviated.
- Real Estate & Lending: Real estate continued to plague the US economy, but likely to a lesser extent. While the overall characterization of "still weak" will probably prevail, some signs of improvement should be present. Indeed, the continued decline in home prices to an annual rate of about -16% has managed to spur sales in the latest month. Existing home sales continued to show stabilization in July, rising 3.1% on the month, while new home sales managed to increase by 2.4% in the same period. Lending, meanwhile, is likely to remain weak as loan standards remain tight and rates relatively lofty.
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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Overview