Weekly Market Overview (06/25/2007)

[pnxforex]

Housing, Production, and Interest Rate
By PNXFOREX

The sentiment of the U.S. market has not been optimized. Last week, the market engaged both “sub prime mortgage worry” and “Yo-yo like key interest rates movement”. To simplify the process, let’s forget about housing and production and focus solely on interest rate movement, and use it as reasoning tool to explain the rest of the market and what should be expected to happen in the upcoming week.

There will not be any surprise on the interest rate decision that the “Rate” will remain unchanged at 5.25%, despite the current abnormal bond yield movement and less than anticipated economic data. Reason is fairly simple, the impulsive yield move and worst than expected sub-prime mortgage issues took everyone’s surprise including the members of FOMC. Only a few days remaining to Thursday, this will leave Fed no time to conduct and perform a rational, yet comprehensive studies to conclude the outcome. Moreover, since in the earlier day of June, Majority of the market is waiting for a rate cut, which they believe that the Fed will imply loosen monetary policy and stimulate the money supply into the market results fueling economic activity as whole. In the passed two weeks, expectation on the interest rate is gradually moving from Rate Cut, to Rate Unchanged or even Rate Hike in the upcoming rate decisions in the remaining year. Follow the shift of the rate anticipation, Fed need to clarify the direction by giving clear signal of “what’s next” not in this statement (reason was given above) but in next FOMC statement or thus, other media. Recent surging bond yield, has brought the mortgage rate into a higher range with 15 year Mortgage penetrate 6% at 6.04% compare with 5.61% month ago and 30 year Mortgage lands at 6.35% compare with a month prior at 5.90%. This syndicates the Real-Estate market current downtrend shows no sign of improvement. Higher mortgage rate might further impact the RE market to reinforce the descending trend line.

Higher borrowing cost (higher interest rate) and pricier energy price lead to higher price burden on manufactures. U.S. Core Durable Good Order m/m is expected to drop to 0.2% from previous 1.9%. In addition, Chicago PMI is look forward to a 3.7 drop from 61.7 to 58. Quarterly GDP is anticipating a slight improvement from 0.6% to 0.8% and GDP Deflator is expected to remain at 4.0%, in consequence, quarterly Real GDP will show some improvement. Despite GDP data shows slow growth in economy but monthly leading indicator, Durable Good Order reflects more an up-to-date economic health. Nonetheless, on Friday, the m/m Core PCE Price Index has indicated the domestic inflation heating up slowly (favor in rate hike), if the actual data inline with or higher than the consensus, the probability that Fed is going to cut back the rate will be less favored.

In conclusion, USD is likely to depreciate against other majors upon Interest Rate Statement release. On Thursday, if the Interest Rate statement clearly states the Fed attitude toward the current and future market, reversal of Greenback could be seen. Focus on fighting inflation will give a positive sign of USD.

P.S. There is a possibility that China will announce another interest rate hike decision if the domestic Equity Market rebounds strongly from the recent market adjustment.