It feels like I'm spending a good proportion of every report writing just about US politics and the latest bill going through congress, however such is the state of the financial system that the market's attention is riveted on the prospects for the TARP. The credit crisis has been rumbling on since July 2007, but the recent collapse of some major US banks has cranked up the tension, and interbank lending rates (1 month sterling libor is almost 1% above base rate), leaving banks so unwilling to lend to one another that the BoE has had to cut some of it's liquidity measures as the banks would prefer have the extra funds they've borrowed sat in a low interest bearing account with the BoE, rather than risk lending it to each other.
The rumours overnight were that congress were close to agreeing on the TARP plan, or at least a variation of it, and the Dollar has strengthened as a result. It is a sign of the importance of the plan that the Dollar did rise, as the actual economic news out of the US did not make good reading; durable goods orders plunged 4.5%mom, jobless claims jumped 40k, and new home sales dived 11.5%mom. In spite of the bad news the Dollar actually advanced against the Euro forcing the EUR/USD rate down to below 1.46.
Although there was no official data out for the UK yesterday there was news of department store sales down 5.6%yoy, to remind everyone that it is not just the financial sector that is having trouble. Sterling has fallen back against the Dollar below 1.8350, and has also fallen against the Euro down below 1.26.
There is little data out today, not that it matters much as the focus this afternoon will be on the progress of the TARP plan through congress. There was a white house meeting, with members of congress as well as the two presidential candidates, but it ended in acrimony, and with Bush predicting financial meltdown if the plan wasn't passed by Monday, which does raise the question why they left it so late to put a plan to congress.
Michael Corcoran | Treasury Solutions | nabCapital