Research Note: July 29 Fed Beige Book Release

Summary Outlook: Tomorrow at 1400EDT/1800GMT, the Fed will release its Beige Book summary of US economic developments ahead of the August 12 FOMC meeting. We think the overall tone of the report is likely to further undermine short-term sentiment, given the rather meager improvements in recent data and the overhang of weak longer-term components, such as unemployment and consumer spending (see Research Analysis below). We think the Beige Book will lead to further selling of so-called risky assets (e.g. stocks, commodities, and the JPY-crosses, such as EUR/JPY, AUD/JPY, etc.). However, weaker than expected US July consumer confidence released on Tuesday has already seen a significant unwinding of long risk trades, especially in the JPY-crosses. The drop in the JPY-crosses comes against the backdrop of overweight 'long-risk' positioning (i.e. long JPY-crosses), so we think the downside shake-out has more room to run. On the technical front, EUR/JPY and GBP/JPY have fallen back inside their Ichimoku clouds, suggesting a failure from above the cloud and a rejection lower. They have also broken below trendline support for the move up since July 13.

Trading Strategy: Rather than chase the JPY-crosses lower after Tuesday's sell-off, we will look to use remaining strength to establish short positions prior to the Beige Book, focusing on EUR/JPY and GBP/JPY.

EUR/JPY: We look to sell between 134.30/80; stop loss above 135.20; take profit between 132.00/50.

GBP/JPY: We look to sell between 155.80/156.50; stop loss above 157.00; take profit between 153.50/154.00

Research Analysis: The current Beige Book will cover economic activity from early June through late July and here is how we expect some of the more important components to have evolved.

US consumer spending remains depressed. The June retail sales report showed a -0.1% monthly decline in "control" retail sales. This number strips out the volatile gasoline, building materials and auto dealer components and offers a clearer picture of the underlying trend. The three-month annual rate plunged to a dismal -2.7% from -0.3% and was the worst since February. More recent data suggest no change in the downward trend. Chain-store sales were running at a dreadful -5.6% annual rate as of July 25 and this is down from a -4.4% pace at the end of June. Furthermore, the recent decline in consumer confidence - to 46.6 from 49.3 last month - points to continued weakness in the months ahead.

The employment situation is showing little signs of improvement. While initial jobless claims have corrected sharply lower in the first few weeks of July, the reports were riddled with statistical adjustment problems. The earlier than usual auto layoffs in June meant that July witnessed much smaller seasonal declines in that space. This threw a wrench in the government's adjustment process and thus the better numbers are merely a mirage. The potential for a rebound back above the 600K level is extremely likely in the weeks ahead. More evidence of continued deterioration came from the Conference Board's consumer survey. The labor differential--which measures jobs plentiful minus jobs hard to get-- slipped to -44.5 in July from -40.3 the prior month and is the lowest now in 17 years. Indeed, the evidence continues to point to an unemployment rate above 10% sooner rather than later.

Credit markets are still on the mend and the improvement will be duly noted. Interbank lending is well back to normal and the TED spread (3-month Treasury/3-month Libor spread) has collapsed down to just 31 basis points. This is well below the two-decade average of 49 basis points and miles away from the 464 crisis highs. Corporate lending is still troubled and the spread between Baa corporate paper and Treasuries remains high at 351 basis points, well above a normal 220 - thus it is still expensive for businesses to borrow. In an environment where revenues are underperforming this is not a welcome development. Consumer lending likely remained subdued both from tight lending standards and an overall lack of borrowing demand as households repair balance sheets.


Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

http://www.forex.com/09-07-28-bb.html