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RESEARCH NOTE: December 3rd Beige Book Outlook
Jacob Oubina, Currency Strategist
Summary Outlook:
(December 2, 2008) The Fed's Beige Book, which is due to be released tomorrow at 1400ET/1900GMT, will continue to highlight the deterioration witnessed in the US economy of late. While this was slightly pre-empted by Fed Chairman Bernanke's dovish comments earlier this week, the anecdotes that the Beige Book provides are likely to nudge markets nonetheless. The risk is that the highlighted weakness trumps anything that we have already seen in the overall horrid data releases for the month of November. This has the potential to send recovering equity markets into a tailspin and usher in a fresh dose of risk aversion.
The trading strategy should focus on expectations for the moves in the FX risk trades. This is likely to play out in size via the EUR/USD and JPY crosses. We would look to get short JPY crosses and EUR/USD heading into the release as the reaction to what will likely be terrible headlines should see risk trades come off sharply. We would then look to put on trailing stops on any initial knee-jerk move lower in order to protect profits from a reversal as bargain hunters enter the equity space and spur a rally in risk. The rationale behind putting on a short EUR/USD position is that USD/JPY could be caught in limbo on the back of USD strength (the safe haven bid) and JPY buying (unwinding carry trades). In terms of risk management, we would place stops upon putting on our shorts in order to limit losses on better than expected Beige Book headlines.
Research Analysis:
Here is how we expect the characterizations of consumer spending, employment and credit markets to have evolved:
Consumer spending probably continued to weaken as cash-strapped shoppers cut back further on discretionary spending in light of deteriorating economic prospects. The last Beige Book noted that spending was softer in nearly all districts, and we expect this trend would have continued. Weekly retail sales numbers show activity is down nearly -2% since the last Beige Book release. Gasoline stations are suffering as demand remains feeble despite plunging prices at the pump while auto sales remain in a depression. The one bright spot will likely be in the discount store space, as folks continue to trade-down and hunt for the best bargains.
Employment likely deteriorated further in the near two month period. Job losses as per the NFP report continued to accelerate and we are at risk of getting a -400K result this Friday. Continuing jobless claims, meanwhile, have worsened and are running about 6.5% above early October levels - and near a 4 million run rate to boot. We expect the weakness in labor markets to be widespread across districts with the sole positive in the skilled labor space, where demand is likely to have remained strong.
Credit markets look to have deteriorated further overall but there are some areas of improvement. Corporate lending still looks troublesome as Baa corporate spreads continued to widen to a new record high of 630 basis points, from 450 bps at the time of the last Beige Book. Consumer rates remain stagnant and we have seen little to no improvement in personal loan, credit card or mortgage rates since early October despite massive government measures to bring these down. The area most improved has been in interbank lending, where the narrowing TED spread to 217 bps from 380 bps suggests that market has eased up significantly.
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.
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