Weekly Commodity Update: Uncertainty surrounding the pace of tapering process

March 05, 2014 - 12:00:00 am

By Ole S Hansen  (Senior Client Advisor)

Last week, the Dollar Index posted its worst monthly performance since five months, reaching a low of 79.68 amid uncertainty surrounding the pace of the tapering process especially after US government revised lower the fourth quarter GDP data. The Dollar index fell to a two-month low against the Euro currency after data showed steady eurozone inflation data, a sign of stability that cooled expectation that the European Central Bank might loosen its monetary policy further as its monthly meeting next week.

The Euro currency endured a volatile week. Euro opened the week at 1.3734, only to drop slightly to 1.3640 where it found good support. The Euro later gained steam reaching a two-month high of 1.3824 after the European Union statistics office Eurostat estimated that consumer prices in the 18 countries sharing the euro rose an annual 0.8 percent this month. 

US consumer confidence dropped slightly last week, on concern over the short-term outlook for business conditions and jobs. The Conference Board, said its Index of consumer attitudes fell to 78.1 below market expectation of 80.0. The Director of Economic Indicators said, “While expectations have fluctuated over recent months, current conditions have continued to trend upward and the Present Situation Index is now at its highest level in almost six years, this suggests that consumers believe the economy has improved, but they do not foresee it gaining considerable momentum in the months ahead.”

US New Home Sales jumped to a five and half year high in January, showing underlying strength in the industry and easing concerns of a sharp slowdown in the housing market. The Commerce Department said that home sales jumped 9.6 percent to a seasonally adjusted annual rate of 468,000 units, marking the highest level since mid-2008. The Commerce Department also indicated that  home  sales have increased in three of four regions, sales in the Northeast rallied 73.7 percent,sales in the South improved by 10.4 percent, sales in the West rose 11 percent while sales in the  Midwest dropped sharply by 17.2 percent.

The number of Americans filing new claims for unemployment benefits rose slightly last week. 

Federal Reserve Chair Janet Yellen testified on the Semiannual Monetary Policy Report before the Senate Banking Committee, in Washington DC. Yellen said the Federal Reserve is likely to keep on the tapering process, even as policy makers monitor data to determine if recent weakness in the economy is temporary.  Speaking on the monetary policy, Yellen emphasised that she expects a great deal of continuity in the FOMC’s approach to monetary policy and she strongly support that strategy designed to fulfil the Federal Reserve’s mandate of maximum employment and price stability. Yellen reiterated the Federal Open Market Committee forward guidance of maintaining a  low target federal fund rates at least as long as the unemployment remains above 6.5 percent and the inflation rate 0.5 percent above the 2 percent long-run goal, Crossing one of these threshold will not automatically prompt and increase in the federal fund rate.

The United States government reduced its 4th quarter growth estimate as consumer spending and exports were weaker than initially thought. The US GDP expanded at a 2.4 percent annual rate, down sharply from the 3.2 percent reported last month. Consumer spending accounted for a large part of the revision after retail sales in months of November and December came in weaker than expected. Consumer spending, which accounts for more than two-thirds of the US economic activity, contributed 1.73 percent percentage points to GDP growth, down from the previously reported 2.26 percent points. 

German business confidence rallied to its highest level in two and a half years in a sign that growth in Europe’s largest economy may accelerate. The Ifo institute’s business climate index, based on a survey of 7,000 executives, rose to 111.3 in February, beating market expectation of a rise to 110.60.    

The Europe Consumer Price Index grew an annual 0.8 percent, the same pace as in the previous two months. The European Central Bank President Mario Draghi has warned of the risk of inflation trapped in a danger zone below 1  percent, but said again last that there was clearly no deflation. Price pressures in the euro zone economy are low because unemployment remains stuck close to record highs. Eurostat said on Friday that 12  percent of the bloc’s workforce was unemployed in January, unchanged from a month before.

UK Gross Domestic Product rose by 0.7 percent in the fourth quarter in line with market expectations. Business activities and household spending played an integral part in the improvement of the GDP, business investment activities rose 8.5 percent in the fourth quarter, alongside an improvement in household spending that rose 0.4  percent on the quarter. Monetary Policy Committee member David Miles said last week that rates will not rise, despite what appears to be the brightest economic outlook in five years.

Canada’s economy grew at an  annualised rate of 2.9 percent in the fourth quarter of 2013 after expanding by 2.7 percent in the third quarter, beating market expectation of a rise of 2.5 percent. Because of this expansion, Statistics Canada revised up its growth figures for the first two quarters to reflect that exports of crude oil and crops were greater than it had initially estimated.

Japans  core consumer prices rose 1.3 percent  in January from a year earlier, marking an eighth straight month of gains, government data showed last week, in a sign  the Japanese economy is shaking off 15 years of stagnant deflation. The latest improvement in the CPI is a result of the ongoing quantitative easing programme implemented   by the bank of Japan.  THE PENINSULA