Trichet Echoes Central Bank’s Vigilance

US Dollar
The US dollar opened this week with a quiet, somber tone as traders in the US observed the fifth anniversary of the terrorist attacks that have made September 11th an infamous day in history. With the solemn atmosphere the greenback was also open to some retracement after last week’s impressive advance, which was made all the more accessible with no planned data releases and a familiar thread of remarks through all three Fed speeches given by nonvoting members today. Starting things off early in the New York session, Boston Fed President Cathy Minehan gave her outlook on the US economy at a meeting with the National Association of Business Economists. Minehan projected a sub-4 percent pace of growth this year and below 3 percent in the following year. This prediction was accented however by a warning of vigilance regarding core inflation, which is still threatened by the delayed pass-through of higher energy prices. A little later, Cleveland Fed President abstained from discussing his views on the economy or monetary policy in his speech at a Las Vegas payments conference. A little more interesting for the currency market were comments made by St. Louis Fed President Poole, who could take over for retiring voting Atlanta’s Guynn next month, and will obtain voting rights next year anyways when duties are switched. Poole stressed the importance of long-term inflation expectations and commented on the need for the Fed to clarify its inflation objective. Tomorrow, data will be back on the menu with the US trade deficit expected to have grown slightly in July.

Euro 
In Europe, indicator releases scheduled for the day were competing with commentary from European Central Bank President Jean-Claude Trichet. The data flow out of the Euro-Zone began this morning with disappointing French factory numbers. Industrial production in the region’s third largest economy dropped 1.3 percent in July versus expectations of a modest 0.3 percent increase and a previous month’s downwardly revised 0.1 percent contraction. This data point represented the biggest drop in three months. According to the French Statistics Office’s numbers, the drop in the headline figure was in large part due to slower activity in the auto and electronics goods industries. Automakers cut production by 1.4 percent for the month as demand sputtered owing to expensive gas prices and industry leaders tried to work off excess inventories. This indicator’s importance is leveraged given the French Central Bank’s forecasted 0.4 percent contraction in GDP for the current quarter. In the three month’s ending in June, economic growth in the country hit a five-year high 1.1 percent. Some hours later, Eurostat reported the Euro-Zone’s second quarter current account balance. Though it received little fanfare in the currency market, the deficit contracted from 15.2 billion to 13.3 billion euros. Despite all this data, the market’s attention fell to comments made by Trichet in the bi-monthly G10 meeting. During the event, the head of the ECB suggested other central banks shouldn’t be complacent towards inflation pressures and emphasized the need for steadfast inflation expectations. These comments are consistent with Trichet’s remarks following the last rate decision when he mentioned the need for “strong vigilance” in regards to inflation pressures residing in the market.

British Pound
A number of British releases for the session stoked the selling pressure under the pound. Released simultaneously in the morning hours of the London session, indicators of producer prices, trade accounts and housing prices offered a decent amount of tradable data for the sterling. The biggest surprise from the mix was the easing in August’s PPI figures – from both the input and output components. Prices manufacturers pay for raw materials dropped 1.2 percent from the month before, the biggest decline in 20 months, while those received at the factory gate went unchanged for the first time this year. Together these indicators were revealing a clear slackening in inflationary pressures starting with the contraction in crude oil prices all the way to cheaper products for final consumers. This release was taken as a forewarning for a softer than expected CPI read come tomorrow, which would quickly squash speculation that rate shifts in the UK may be able to keep pace with those in Europe. Another fundamental concern for the sterling was the surprise bloating in the unfavorable trade accounts. Policy officials have recently voiced their hopes that trade may contribute to economic growth this period for the first time since 1995. A wrench was tossed into the gears however, as the visible trade deficit unexpectedly grew from 6.28 billion pounds to 6.34 billion pounds in July as exchange rates made British commodities more expensive on the global market. More concerning was the record 4.28 billion pound deficit the UK held with the EU 25, though officials say this figure is skewed somewhat by VAT fraud. Finally, drowned out by the weightier releases, the DCLG Housing Prices Index reported prices for the average UK residence grew 6.0 percent in July compared to 5.3 percent in the period a month ago.

Japanese Yen
Always the topic of concern for the Japanese economy and the yen, the potential for further interest rates cooled even further last night after growth revisions failed to brace optimism. The final read of gross domestic product for the second quarter went unchanged from its initial 0.2 percent print, leaving the annualized figure at 1.0 percent. Taken in historical terms, output in the three month’s ending June marked the sixth consecutive period of positive growth, though the most recent read was the slowest among the six. This does not provide the optimism policy officials need in determining whether another rate hike is needed this year to contain inflation that is still in its fledgling stage. Consistent with such sentiment, the deflator from the same period passed without revision in its original 0.8 percent decline. With no surprise from the growth numbers, the market turned to July machine orders, which provided more than enough shock value to counter the languid GDP release. For the month, bookings for machinery dropped 16.7 percent, the biggest decline in 20-years. Used as an indicator for planned capital spending, this report effectively dashed any remaining hopes that the central bank could still consider a rate hike in the coming months based on the merits of economic growth in the absence of inflation.