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EUR/USD: US Consumer Confidence May Suggest That the Worst is Yet to Come for Retailers
Tuesday, February 26, 2008

What Are The Markets Facing?

On Tuesday, the release of US economic data will likely highlight some of the reasons why traders are ramping up speculation that the country is in midst of a recession. Indeed, the S&P/Case-Schiller index of home prices is likely to fall sharply for the fourth consecutive period in the fourth quarter to the lowest level in nearly three years. Later in the morning, the Conference Board’s consumer confidence index is forecasted to fall to a more than four year low of 82.0 from 87.9, which won’t be entirely surprising as rocketing food and energy prices combined with the collapse of the US housing sector and tightening credit conditions have sparked widespread pessimism throughout the financial markets. Furthermore, the labor markets have started to deteriorate, as the unemployment rate has slowly ticked higher in recent months and things are only expected to get worse. As a result, retail sales contracted for the second month in a row in January, which does not bode well for consumption trends for the first half of 2008 but does suggest that looser monetary policy is on the way. However, the vote for the most recent reduction in the fed funds rate had one dissenter, Richard Fisher, who “felt that monetary policy was already quite stimulative” given the emergency 75bp rate cut on January 22 which brought the funds rate down 175 basis points since September. Nevertheless, fed fund futures are still fully pricing in a 50bp cut to 2.50 percent, and as a result, worse-than-expected house price readings consumer confidence could exacerbate market speculation about the bank’s next move as signs continue to suggest that the US economy is in or nearing a recession.
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