[B]Talking Points
• Swiss Franc: CPI hits 12-year high on energy costs
• Euro: Services PMI shows slowing growth, but expectations remain strong
• British Pound: Gains footing at 1.97, rebounds for test of 1.98
• US Dollar: Major event risk from US non-farm payrolls, ISM non-manufacturing[/B]
The US Dollar did something rather unusual this morning: it strengthened. Indeed, EURUSD was pulled down towards support at 1.47 while USDCHF crept higher for a test of 1.1150. On the other hand, the British pound actually managed to garner a bid tone as the plunge in the GBPUSD and GBPJPY pairs ran into sturdy support levels and recovered slightly. However, how long Sterling can hold its ground for remains to be seen, as the currency stands on shaky ground in both fundamental and technical terms (For more resources dedicated to this currency please visit the new British Pound Currency Room).
Looking at this morning’s economic data, Swiss CPI grew 0.2 percent during the month of December, pushing the annual rate of growth to a 12-year high of 2.0 percent on the back of energy price gains. Indeed, Swiss National Bank President Jean-Pierre Roth said in mid-December that rising energy prices would “likely” push inflation above the bank’s 2 percent ceiling in the first half of 2008 for the first time in nearly 13 years, though he indicated the rise would be “temporary” in nature. The SNB anticipates that slowing economic growth will put a cap on building price pressures, but with oil and other commodity costs skyrocketing as we start out 2008, softer expansion may not do the trick and the central bank may consider enacting one more round of rate normalization this year. However, this may only be possible if the instability in the financial markets dies down.
In other news, growth in the Euro-zone services sector slowed in line with expectations during December as PMI eased to 53.1 from 54.1 in November. A breakdown of the index shows that near every business component has fallen, including employment, new business, input prices, and outstanding business. Nevertheless, all of these readings were above the critical 50 boom/bust level, signaling expansion. Meanwhile, business expectations and prices charged actually edged slightly higher, which may suggest the service-oriented businesses remain optimistic for their prospects in 2008, as improving labor market conditions continue to fuel consumption growth.
By far the biggest piece of news for today will be the US non-farm payrolls report, as it will lead the markets to decide whether a US recession is simply a mere possibility or a fact just waiting to be confirmed by dismal GDP figures. We speculate that non-farm payrolls will prove disappointing, as nearly every other employment indicator for the month of December points to deteriorating conditions. For more on this, check out the NFP Preview we published yesterday. If this is indeed the case, the impact on the US Dollar, Treasuries, and the Dow (when it opens) will be immediate as the markets ramp up speculation that the Federal Reserve will cut rates by a drastic 50bp on January 30, as fed fund futures are already showing a 100 percent chance of a 25bp cut.
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