NEWS / Foreign Exchange

FOMC clearly biased to hold rates steady at 5.25%

FOMC Minutes (March 21st meeting)

FOMC clearly biased to hold rates steady at 5.25%.
As we anticipated, minutes confirm that FOMC increased uncertainty was led from greater concerns on the downside risks to growth and upside risks to core inflation. Worries arose from the possibility of persistently sluggish investment spending and the risk that labor costs might increase more rapidly. Minutes are consistent with our perspective of an extended pause at 5.25% throughout 2007 given mixed data and increased uncertainty, and signal that neither rate cuts nor hikes are likely considering that core inflation remains high and sticky to the upside, while downside risks to growth have risen. For further details see Fedwatch, April 11th 2007.

Treasury Budget (March)

Actual: -$96.3B Consensus: -$90.0B Prior: -$85.3B
The Budget Deficit widened to $96.3 billion, 12.9% higher than the level of a year earlier. Deficit??™s expansion was driven by refunds of withheld individual income taxes as well as the reschedule of some outlays. Total expenses increased by 5.2% year-over-year to $262.8B. Net interest payments rose 8.8% to $21.1B following a 10.6% surge in February; March??™s payments were $3.8B more than the average of the past ten years. During the first half of the current fiscal year, net interest payments eased considerably growing 2.5% from 25% in the same period of a year earlier. Total receipts rose 1.2% boosted by an 11.8% surge of revenues from corporate income taxes. By contrast, receipts from individual income taxes fell 9.8%. We expect a reduction of the fiscal deficit in FY2007 supported by a robust expansion of income from individual and corporate taxes together with some spending restrains in non-defense areas.

Import Prices Inflation (March)

Actual: 1.7%, Consensus: 0.8% Prior: 0.1%
Imports prices surged by the most since May 2006. The import prices index jumped 1.67% in March following a 0.1% increase in February. Higher petroleum and natural gas prices accounted for the most of March??™s inflation. Excluding fuels, import prices climbed 0.2% in the month. Prices of imported autos and parts rose 0.1% from 0.2% in February while prices of consumer goods jumped 0.2% following no change in February. On the contrary, the cost of imported capital goods declined for the second straight month. A weakening dollar has made imported goods other than energy more expensive. This could add some pressures on broader measures of inflation in the coming months.

Headline Producer Prices Inflation & Core (March)

Actual: 1.0, 0.0% Consensus: 0.7, 0.2% Prior: 1.3, 0.4%
Prices of finished goods rose 1% in March, led by a 3.6% increase in prices of energy goods and a 1.4% surge in the cost of food. Excluding these items, core prices were unaltered, favored by a drop in light trucks??™ and electronic computers??™ prices. Core figures are positive; however, they are largely the result of light trucks??™ volatility. Thus, core inflation could return to 0.2% in April. Inflation of intermediate goods rose 1% in March with the twelve month change at 3.4% from 2.7% in February. Excluding food and energy, prices of intermediate goods were contained with inflation steady at 0.2% and the twelve-month change easing to 3.5% from 3.7% in the previous month. This was not the case however of core inflation of crude materials, which rose 24.6% from a year earlier, the biggest since August 2006. Prices pressures at the early stages of production remain latent, which will make Fed??™s officials to remain on edge.