Forex Investment and Currency Trading

A surprise widening to $57.2 billion in the U.S. trade deficit in October, first since July, implies an even steeper GDP decline for 4Q 2008. Exports continued to soften in response to foreign economic weakness, while sharply declining crude oil prices led to a surge in petroleum imports. Exports declined 2.2%, following a 6.4% drop in September. The widening real trade gap in October and likely for the quarter as a whole is a significant additional source of drag on GDP. GDP is now estimated falling at a more than 5% annualized pace this quarter.

Retail sales fell for a 5th consecutive month in November, declining 1.8% as the collapse in motor vehicle sales and gasoline prices continued.

A swift pace of economic decline this quarter is also consistent with the continued evidence of labor market deterioration. After two consecutive weekly declines, initial claims soared 58,000 in the latest (December 6th) week to reach 573,000. The 4-week moving average hit 540,500, highest since December 1982. While there were some special factors cited by the Labor Department, continued labor market deterioration was evident in early-December. Nor are laid-off employees locating work quickly. Continuing jobless claims jumped 338,000 to 4.429 million for the November 29th week, the largest gain since 1974. The unemployment rate is expected to continue to soar. November’s 533,000 decline in nonfarm payrolls was no fluke.

Market expects the Fed to cut its formal target funds rate by 50 basis points to 0.5% at this week’s
meeting. The size of the move is in large part ‘psychological’, as the Fed is now engaged in quantitative easing. But amid extreme economic weakness, a significant target rate cut is expected despite perceived risks to the money market fund industry. The FOMC statement will likely include a sentence or more on quantitative easing, stating that its monetary policy goals now include both achieving its funds rate target and explicit growth in its balance sheet. The Fed statement may add that it plans to purchase securities in markets that particularly need liquidity.