In focus this week was Ben Bernanke’s semiannual testimony to the House Financial Services Committee. He warned that the weak housing market will probably cause some bank failures and reinforced the view that the US Federal Reserve will continue to cut interest rates.
The economic data was all negative this week. US data showed that consumer confidence and housing prices had continued to slide. Consumer confidence for February fell to 75, which, with the exception of the start of the Iraq War in 2003, was the lowest reading in 15 years. Also, home prices in 10 major metropolitan areas in the 4Q were down 8.9% compared to a year earlier.
The Commerce department reported a 5.2% drop in durable good orders which is the biggest contraction in a year. This is expected to have an impact on the US consumer and further supports a slowing US economy.
New home sales were down by 2.8%.
Japanese industrial production figures for January were down 2%; the market was expecting 0.6%. Supermarket sales were down for the 25th consecutive month in January with a fall of 1.7%.
China is slowly showing signs of opening up its capital market. JP Morgan and Standard Chartered have been licensed to underwrite debt to the Ministry of Finance. They join HSBC as the only other foreign bank to receive primary dealer status. Bankers are saying that China is continuing to open up its domestic capital markets. The new underwriting licenses come amid an unusual rally for Chinese bonds. Although inflation has been rising, bond prices have been rallying. Usually high inflation results in lower bond prices on the expectation for interest rate hikes. However, market watchers are thinking that China will move to curb inflation using other moves, not through interest rate hikes.
Germany’s import price index rose 0.8% with inflation remaining above targets and supporting the case for a rate hike from the European Central Bank. The German IFO Report showed that business confidence was stronger than expected with a reading of 104.1. This sparked speculation that the slowdown in the US may be contained there and may not lead to a global slowdown.
In France, consumer sentiment fell to a 13 month low.
The European PMI for services and manufacturing came in at 52.3 suggesting expansion.
Stock markets this week once again took their lead from the US with most major markets recording falls for the week.
With the focus on US interest rates at the moment and Ben Bernanke’s comments this week supporting the case for more rate cuts, inflation based assets are outperforming. We’ve see record prices for oil, gold and currencies outside of the US. We’ve seen gold rise 34% and oil 25% since the Fed started cutting rates in September. With interest rates set to fall again in the US inflation based assets will continue to outperform. We’ll probably see more increases in oil, gold, foreign currencies, resources, mining and basic materials.
Head of Fundamental Analysis
HUBB Financial Group