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1. Dollar Gains Despite "Tame" U.S. Inflation Data
2. Small Business Confidence Down, First Time in 5 Months
3. U.S. Weather Affecting Oil, Natural Gas Prices
4. Economists Agree No Recession in 2007
1. Dollar Gains Despite "Tame" U.S. Inflation Data
The dollar gained broadly Friday, hitting two-month highs against the yen and
shrugging off tame inflation data as traders focused on key technical levels in
a thin, pre-holiday session.
The greenback fell briefly after a report showed core U.S. prices, excluding
food and energy costs, held steady last month. That data bolstered the view the
Federal Reserve may have to cut interest rates in early 2007 to counter slowing
economic growth.
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But a better-than-expected reading on U.S. consumer sentiment in December gave
the market reason to buy dollars by midmorning.
Traders also made a run for key stop losses in dollar/yen at the 118.55-60 yen
level, accelerating the dollar's rise. The dollar rose to 118.97 yen, its
highest level since late October, before trading back down to 118.76 yen, still
up 0.4 percent on the day.
"In thin markets, key technical levels usually trigger big moves," said Brian
Dolan, director of FX research at Forex.com in Bedminster, New Jersey.
He also added that U.S. economic data on Friday were mostly supportive of the
dollar, citing a generally positive University of Michigan consumer sentiment.
See
With activity expected to wind up early ahead of the Christmas holiday and
liquidity already quite thin, traders said the dollar's subsequent rally had
more to do with position-squaring than the market's outlook for U.S. growth.
"This is not signaling a new, fundamental move higher in the dollar," said
Ashraf Laidi, chief FX analyst at CMC Markets in New York. "When you see
short-lived selling followed by quick gains, that's not the market moving on
fundamentals."
But he said dollar selling may resume next year as the market absorbs several
recent reports showing benign inflation pressures coupled with data on Thursday
showing a sharp fall in mid-Atlantic area manufacturing activity.
The yen, meanwhile, continued to be under pressure as investors continued to use
the low-yielding Japanese currency to finance purchases of assets denominated in
higher-yielding currencies, a key theme in the currency markets in 2006.
The Bank of Japan held interest rates steady at 0.25 percent earlier this week,
and expectations for a move in January have receded.
"All other things being equal, people just want to sell the yen and buy other
currencies," said John McCarthy, vice president of FX at ING Capital Markets in
New York.
The euro was up 0.1 percent at 156.03 yen, not far from a record high at 156.42
yen. Against the dollar, the euro fell 0.3 percent to $1.3136.
Expectations for a rate rise in the euro zone by March have helped spreads
between euro zone and yen money market rates to widen by almost 20 basis points
in the past few weeks to their widest gap in three years.
While most high-yielding currencies have enjoyed the upper hand this year, a few
have come under heavy pressure.
The Icelandic crown tumbled to a five-month low versus the euro on Friday and a
one-month trough versus the dollar after Standard & Poor's downgraded Iceland's
sovereign debt rating.
Hungary's forint also fell against the euro after Moody's rating agency
downgraded the country's credit rating to A2 from A1.
Like Iceland, Hungary has high interest rates to fend off inflation, though
similarly high deficits make some investors wary of its growth potential.
© Reuters 2006.
Editor's Note:
2. Small Business Confidence Down, First Time in 5 Months
With just days left to the end of 2006, the results of the December Discover
"Small Business Watch" show a mixed bag of findings.
Small business owners remain optimistic about their outlook for the U.S. economy
in 2007, but their confidence in the nation's economy dipped in December from a
four-month high, according to the findings of the monthly Discover Small
Business Watch.
Findings of the survey of 1,000 small businesses with five or less employees
showed their economic confidence slipped to an adjustable 109.7 from a
four-month high of 114.6 in November.
Among the key factors cited by Watch that influenced small business owners'
concerns were an increase in the number of owners who experienced cash flow
issues in December; and the number of owners who planned to increase spending on
business development activities dropped slightly to 37 percent in December, from
39 percent in November.
Another key finding of the poll showed 70 percent of the respondents indicated
an increase in the minimum wage to $7.25 per hour wouldn't impact their employee
costs.
In addition, the survey found that 57 percent of consumers are willing to pay a
higher price at small businesses that meet minimum wage regulations, while 52
percent of consumers would expect prices to rise if the minimum wage is
increased.
Sastry Rachakonda, director of Discover Business Card, said the poll findings
"highlight the challenges that small business owners face. They expect rising
cost pressures yet they also have to consider employee expectations around the
size of their wage increases."
Editor's Note:
3. U.S. Weather Affecting Oil, Natural Gas Prices
Warm temperatures in the United States have depressed natural gas prices and hit
shares of oil services companies, so forecasts for the coming weeks will be key
in determining whether those stocks continue to shed this year's gains, analysts
said.
So far this year, the Philadelphia Stock Exchange index of oil services
companies — companies that provide seismic data gathering, wellhead services and
drilling rig operations to oil and gas producers — has underperformed the
Standard & Poor's 500 index for the first time in three years.
The S&P 500 is up 13.2 percent, while the oil services index, which includes
companies like Schlumberger Ltd., Halliburton Co. and Noble Corp., has gained
11.5 percent.
While the year's double-digit gains are impressive, they pale compared with the
outsize advances the index has logged in recent years. It climbed 47 percent in
2005 and 32 percent in 2004.
"The fundamentals are extremely strong for the group, but the sentiment has
gotten negative with the weather," said Mark Urness, equity analyst with New
York-based Calyon Securities. "And the jury is still out."
U.S. natural gas futures are trading at less than half of last December's record
high price of $15.78 per million British thermal units, as unseasonable weather
keeps storage near record high levels.
And the National Weather Service on Dec. 21 forecast above-normal temperatures
for most of the northern half of the nation over the next eight to 14 days, with
seasonal or below readings expected for the rest of the country.
Dan Pickering, an analyst with Pickering Energy Partners Inc., wrote in a note
to clients Friday that the next three weeks would be key for energy stocks,
including oil services shares. He wrote that the "warm weather was killing rally
efforts."
If temperatures stay above normal, investors should look to more defensive
stocks that have less exposure to natural gas and to the United States,
including Baker Hughes Inc., Schlumberger and Transocean Inc., Pickering said.
And even though falling natural gas prices are dogging oil services shares now,
Urness at Calyon said growth in capital spending by production and exploration
companies and global oil demand should push the oil services index up 30 percent
to 35 percent in the next 12 months.
On Dec. 22, the index was down 0.32 percent to 202.43. So far in December, it is
down about 4 percent.
© Reuters 2006.
Editor's Note:
4. Economists Agree No Recession in 2007
Economists and policymakers typically disagree about a lot of things, but when
eight leading economists were asked their predictions for the coming year, they
concurred there is no recession in the country's future.
Even so, the economists' say there will be a slowdown in the economy — their
median forecast shows as growth rate of 2.6 percent in 2007, measured from the
fourth quarter 2006 to the fourth quarter 2007. Although that would be the
slowest growth since early 2003, it's still only a bit slower than the 3 percent
growth over the past four quarters.
A majority of the eight economists queried forecast the Fed will ease monetary
policy next year as the agency deals with below-trend growth, but some of them
think the Fed will have to raise rates to keep inflation from flaring up. Five
of the economists though see the Fed cutting rates.
Of course the big question on everyone's mind was what will be the continuing
slumping housing market's affect on the economy. On that issue, all the
economists agreed the likelihood of the real estate market returning to what it
was at its record high a few years ago is unlikely. Total starts of new homes
are expected to be the weakest since 2001, and construction of new homes should
bottom out about mid-way through 2007, they predict.
Even so, one economist says "housing will not be the center of all economic
conversation" a year from now.
Still, another added that housing is the primary risk to a sanguine economic
forecast for 2007.
Editor's Note:
Editor's Notes:
