The Federal Reserve to Act Aggressively Again? ~ Money Making Lounge

The economy in the United States is fighting to stay above water and the Federal Reserve might again cut rates aggressively during next week meeting. For the first time in more than five years, the February Beige book reports that economic growth has slowed overall and the decline is well distributed among labor market, construction, consumer spending and manufacturing.

Worst not over yet in the U.S.

Much time is required to bring the economy back on track. Equity markets are still looking for a point of equilibrium and mortgage rates have risen, despite the aggressive rate cut of 225 basis points since last year. The Federal Reserve might cut rates by at least 50 basis points to 2.50% during March 18th meeting and another rate cut is expected before mid year. Housing remains the weakest spot of the U.S economy. Last week, the monthly S&P/Case-Shiller Home Price data showed that seventeen out of twenty cities fell year over year. In addition, both the ISM manufacturing and the non-manufacturing index, which covers almost 90% of the economy, stayed below the benchmark of 50 in February signaling that the slowdown is accentuating.

The Institute for Supply Managers' manufacturing activity survey printed 48.3 after increasing to 50.7 in January. Employment and new orders were among the weakest components. The non-manufacturing index increased instead to 49.3 in February from January's 44.6, but was below the important level of 50 for the second straight month. Growth is expected to moderate further in the coming months. In fact, payrolls declined 63,000 units (+23,000 expected) in February on the top of January's fall of 22,000. Job contraction covered most of the sectors from manufacturing (-52,000) to the construction business (-39,000). With less people active in the labor force, the unemployment rate eased slightly to 4.8% from January's 4.9%.

Euro's strength not a priority for ECB yet

As expected, the European Central Bank left rates unchanged at 4.00% during last week meeting. President Trichet confirmed inflation as the main target, although he acknowledged that growth might moderate further in the coming months. The strong euro was not even mentioned, as it helps to calm down inflation, which is now above 3%. In reality, the long wave of the financial crisis has not yet fully reached the European mainland. In February, the German Purchasing Manager's Index (PMI ) for the manufacturing sector printed 54.3, practically unchanged from January, while the PMI services increased to 52.2 from 49.2. Euro zone results remained above the benchmark as well. The manufacturing PMI eased slightly to 52.3 from 52.8 and the PMI measuring business activity increased to 52.3 in February from January's 50.6.

German industrial production rose 1.8% (0.3% expected) in January from December's gain of 1.5%. Construction business moved up 12%, the largest move of the past two years, supported by the mild winter, while production of investment goods jumped 6.2%. Economic growth is still dynamic in Europe with some exceptions. German manufacturing orders, as an example, fell 1.5% (-0.4% expected) month over month in January from December's -1.1%. In addition, in the fourth quarter, Euro zone growth was 0.4%, below the increase of 0.8% registered in the third quarter. Annually, the Gross Domestic Product (GDP) rose 2.2% in the fourth quarter from 2.7% in the previous period.

USD/JPY challenging support level

EUR/USD has reached the important resistance at 1.5450/1.55. The long/medium/short term trends are bullish, but a move above 1.5570 is necessary for 1.5640, eventually 1.5760.

GBP/USD has quickly reached the important resistance at 2.0150/2.02 where the 100 MA and the 200 MA meet. If this level hold, the next target could be 2.03.

USD/JPY is dancing on the important support line at 102.50/103.00. A rebound from this level could take the market to 104.50, 106.0. A follow though could target 101, 100.