NEWS / Foreign Exchange

The FOMC minutes are likely to discuss the increased risks for the US economy

The FOMC minutes are likely to discuss the increased risks for the US economy but they will also emphasize that inflation remains policy makers??™ predominant concern. The trade deficit may have widened in February, partly due to higher petroleum prices. March inflation data will reflect the further rise in energy prices, which could also have a negative impact on the University of Michigan??™s preliminary consumer sentiment for April.

Initial jobless claims rose by 11k to 321k in the week ending 31 March, but the 4-week moving average fell slightly to 315.8k. But due to weakness in construction and manufacturing we expect jobless claims to reach a higher level in the weeks ahead, and our forecast for initial jobless claims in the week ending 7 April is 325k.

Despite sharply higher petroleum prices, import prices only increased moderately by 0.2% mom in February, and expetroleum they even fell by 0.1% mom. However, as oil and natural gas prices continued to rise throughout March, we expect import prices to have risen by about 1.0% mom. Producer prices (PPI) already went up sharply by 1.3% mom in February, but mainly due to the further significant rise in gasoline prices they could have increased strongly again by 0.8% mom (3.0% yoy) in March, although food prices may have stopped rising following three consecutive marked increases. After having risen by 0.4% mom in February, core PPI may have gone up by just 0.2% mom. Tobacco prices, for example, are likely to have leveled off after strong increases in the previous two months, and car prices have probably only been moderately higher due to high inventories. We thus expect the annual rate of core PPI may to have remained stable at 1.8% for the third month in a row.

The March budget deficit is expected to have narrowed by $35bn to $85.0bn compared to March 2006. The total deficit after the first six months of the current fiscal year would thus amount to $247bn, an improvement by $55bn from the same period in the previous year.

The trade deficit narrowed by $2.4bn to $59.1bn in January, as imports declined slightly and exports grew strongly. Given the favourable development of the ISM export orders component, we expect exports to have risen again by about 1.0% mom. Although domestic demand has slowed down, imports, too, are likely to have gone up by 1.0% mom: The reason for this is that energy imports have probably been higher, and, according to Chinese figures, the bilateral trade deficit with China might have widened further. We expect the overall trade deficit to have increased to about $60.0bn in February.

The University of Michigan??™s (UMI) final March consumer sentiment was revised down slightly from 88.8 to 88.4, despite the recovery in stock markets. Sentiment seems to be dampened mainly by the ongoing rise in gasoline prices: In the first week of April they reached $2.7 per gallon, which was a good 25% more than in the middle of January. In addition, falling home prices and a deterioration in mortgage financing conditions could also have a negative impact. Given that the weekly ABC consumer comfort poll declined from ??“2 to ??“5, we forecast UMI??™s preliminary April consumer sentiment to drop further to 87.0.