(Reuters) - New claims for unemployment benefits slipped last week, but stayed at a stubbornly high level that underscored the labor market recovery was having trouble gaining traction.
Initial claims for state unemployment aid dropped 11,000 to 457,000, the Labor Department said on Thursday, a touch more than the fall to 459,000 that financial markets had forecast.
Analysts say new applications for jobless benefits, which have trended sideways for much of this year, have to drop to a 400,000-450,000 range to signal sustainable jobs growth.
"The labor market is steadying but at a relatively high level of unemployment. It offers a hint of improvement in labor market conditions," said John Lonski, chief economist, Moody's Investors Service, New York. "Nevertheless, jobless claims remain quite elevated, and suggest labor slack persists."
Stocks on Wall Street briefly edged higher after the data as investors drew some comfort from the report and strong corporate earnings from Exxon Mobil Corp. But share prices were lower by midday as technology shares fell.
Prices for safe-haven U.S. government bonds rose.
Sluggish jobs growth, marked by a 9.5 percent unemployment rate, is the biggest obstacle to the economy's recovery from the most brutal recession since the 1930s -- a recovery that has shown signs of wilting in the last couple of months.
President Barack Obama, struggling in polls as Americans worry about the weak recovery, is pressing for approval of a $30 billion plan to help small businesses and create jobs. The plan was blocked in the Senate by Republicans on Thursday.
While growth in the United States appears to be taking a breather, recovery in some parts of Europe is back on track after being shaken by a sovereign debt crisis.
Euro zone economic sentiment rose strongly this month to a 28-month high and unemployment in Germany fell to its lowest level since November 2008.
The upbeat European data lifted the euro to a 12-week high against the U.S. dollar.
SLOWING GROWTH
A U.S. government report on Friday is expected to show growth slowed to a 2.5 percent annual rate in the second quarter from a 2.7 percent pace in the first three months of the year. The moderation will likely reflect a step back in consumer spending and factory output, and a wider trade gap.
The slowdown in manufacturing, which has led the recovery that started in the second half of 2009, likely persisted this month as most regional surveys have shown a pullback in activity.
However, a survey of manufacturing activity in the nation's Central Plains and eastern Rocky Mountain region released on Thursday showed a strong rise for July.
The slowdown in economic activity bodes poorly for the jobs market.
"With claims (for jobless aid) at these levels the 200,000-plus increases in private payrolls that we need to see in order to bring unemployment down quickly just aren't going to happen any time soon," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.
With unemployment high, consumer spending has been tepid and home foreclosures have remained elevated.
Foreclosures rose in three of every four large U.S. metropolitan areas in the first half of this year, likely ruling out sustained home price gains until 2013, real estate data company RealtyTrac said on Thursday.
Unemployment was the main culprit driving foreclosure actions on more than 1.6 million properties, the company said.
In the week ended July 17, 4.57 million people were still receiving jobless benefits after an initial week of aid, up 81,000 from the prior week. The continuing claims data covered the survey period for the government's July household survey, from which the national unemployment rate is derived.
"We expect the July household survey to show a rise in the jobless rate to 9.6 percent," said Mike Englund, chief economist at Action Economics in Boulder, Colorado. The rate stood at 9.5 percent in June.
(Additional reporting by Lynn Adler and Richard Leong in New York; editing by Todd Eastham)
UK Mortgage Approvals are expected to fall for the second consecutive month in June while Net Consumer Credit growth slows from the previous month over the same period.
UK Mortgage Approvals are expected to fall for the second consecutive month in June while Net Consumer Credit growth slows from the previous month over the same period. The figures will reinforce dovish comments from BOE policymakers delivered in testimony to the Parliament’s Treasury Committee, where governor Mervyn King downplayed the stronger-than-expected second quarter GDP result to stress lingering uncertainty about the recovery in general and inflation in particular, signaling monetary policy is firmly stuck in accommodative territory for the time being.
Trading Tactics
A clear uptrend could be an opportunity to Buy GBP/USD.
The buying point is at 1.5627; Pivot point highest level is the take profit at 1.5695; Pivot point is the stop loss at 1.5590
The selling point is at 1.5570; Fibonacci 38.2% is the take profit at 1.5450; Pivot point is the stop loss at 1.5650
Technical: Sterling forms a new high and may continue the minor uptrend. A move back higher could set up a test of 1.5695
To strengthen our analysis; we use many other indicators, starting with MACD (Moving Averages convergence divergence); we notice MACD crosses the signal line upwards; Momentum and RSI (Relative Strength Index) are in an uptrend; stochastic oscillator gives a neutral signal.
*Analysis is for information purposes only and does not constitute advice in any form. Past performance is not an indicator of future performance. Trading in financial products carries a high degree of risk to your capital and it is possible to lose more than your initial investment.
€ The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2965 level and was capped around the $1.3040 level. The big news in the market today was a weaker-than-expected result for U.S. June durable goods orders. Defying expectations of a positive print, the headline number came in at -1.0%, down from the revised May tally of -0.8%, while the ex-transportation component fell to -0.6% from the May result of 1.2%. Sub-components such as capital goods orders non-defense ex-air were also considerably weaker and these data suggest the U.S. economy sputtered lower at the end of the first half of the year. Other data saw MBA mortgage applications off 4.4% from the prior +7.6% result. Weekly initial jobless claims and continuing jobless claims data will be released tomrorow followed by GDP, PCE, and final July University of Michigan consumer sentiment data on Friday. The Federal Reserve released its July Beige Book today and its noted that economic growth decelerated in some areas over the past two months. The expiration of a homebuyers’ tax credit and a decline in commercial real estate both had a negative impact on the U.S. economy. The Fed continues to anticipate “continued moderate growth.” New Fed nominees Yellen, Diamons, and Raskin won their Senate votes today and will soon join the Board of Governors. In eurozone news, provisional German states’ July consumer price inflation data released today came in on the elevated side. The preliminary national July CPI came in at 0.2% m/m and 1.1% y/y with the harmonized measure at +0.3% m/m and +1.2% y/y. French June CPI data will be released tomorrow. The European Central Bank introduced more stringent rules today on bank collateral including new haircuts on certain bonds. Euro offers are cited around the US$ 1.3265 level.
¥/ CNY The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥87.25 level and was capped around the ¥88.10 level. Bank of Japan Policy Board member Kamezaki reported the central bank “wants to make utmost efforts proactively to escape from deflation and return to a sustainable growth path under price stability,” noting a stronger yen will hurt exporters. In contrast, other BoJ officials including Governor Shirakawa have been hesitant about commenting on the strong yen. There is speculation that industrial production growth in Japan is decelerating and this may increase pressure on the BoJ to ease further. Yen gains were also prompted by weaker-than-expected Australian consumer price inflation data, suggesting global growth continues to decelerate. Reserve Bank of Australia will likely not hike rates next week and the yen could stay bid as a result of this evolving monetary and economic landscape. While Kamezaki’s remarks may not increase the changes of yen-selling intervention by the government, traders remain fixated on the ¥85 level. Economic growth in Japan may also slow in the fourth quarter. The spread between three-month U.S. Dollar Libor and three-month yen Libor narrowed to 23.937 basis points today, the smallest difference since 20 May. Data released in Japan overnight saw July small business confidence improve to 48.1 from the prior reading of 47.4. June retail trade data will be released tonight. The Nikkei 225 stock index climbed 2.70% to close at ¥9,573.27. U.S. dollar bids are cited around the ¥86.29 level. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥113.20 level and was capped around the ¥114.70 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥135.85 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥82.50 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.7778 in the over-the-counter market, down from CNY 6.7784. The Federal Reserve Bank of Cleveland warned that the anticipated appreciation of the Chinese yuan will not lead to a “substantial” reduction in the U.S. trade deficit. People’s Bank of China is expected to keep monetary policy relatively stable and continue to promote domestic final private demand.
£ The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5635 level and was supported around the US$ 1.5545 level. Data to be released in the U.K. tomorrow include July Nationwide house prices, June net consumer credit, June net lending secured on dwellings, June mortgage approvals, and the July GfK consumer confidence survey. Bank of England Governor King today expressed concerns that proposed reforms to the Basel capital accord will not be strong enough. Monetary Policy Committee member Miles said now is not the proper time to change policy while MPC member Bean said sterling’s decline will likely have a larger-than-expected impact on consumer prices. Cable bids are cited around the US$ 1.5270 level. The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.8310 level and was capped around the £0.8365 level.
Plenty of important macro data from the U.S. was published yesterday. Investors were disappointed by the figures and responded mainly by moving away from riskier assets. At first U.S. Durable Goods came negative at -1%, at 12:30GMT later at 18:00GMT Beige book revealed a gloomy outlook for U.S. economy. Although company earnings are still high, yesterday fears about recovery came back to dominate the markets.
Economic News
USD - Traders Shift from EU Debts Concern to U.S. Economic Outlook U.S. macro data came far less than expected. Investors responded by moving away from riskier assets back to buying the Yen and U.S. Dollar. The EUR/USD was slightly down after U.S Durable Goods was published, The USD/JPY traded lower, currently trading at $87.22 as investors feel safer holding the Yen over the USD. The British Pound continued to rally against the U.S. Dollar, despite the move to safer assets.
U.S. demand for Durable Goods, which is usually a sign for economic strength, came negative at -1.0%. Forecasts which already expected a form of decline from last month were more moderate than the actual figure. Traders were surprised by the final figure and reacted by sending markets lower. Later the Beige Book was released by the Fed during mid U.S. day trading. It provided a mixed economic picture but eventually supported the markets from declining further. The report said that the U.S. economy was growing but there were also signs of a slowdown in some regions over the past two months.
Looking ahead to today, traders should follow the release of the Unemployment Claims at 12:30 GMT. A worse than expected result might intensify the current trend and strengthen the greenback further.
EUR - EUR's Recent Rally Losing Steam EUR's rally against its major counterparts stumbled yesterday as new economic data raised fears about the strength of global economic recovery, with the common currency ending lower against its major counterparts.
EUR/USD ended slightly lower yesterday, reaching a low of 1.2968; however, it managed to recover some of its loses to currently trade at 1.3010. The pair seemed to trade without a clear trend and moved mostly sideways. The EUR/JPY, however sent more clear signs of a correction building up. The pair's five days rally ended yesterday after it breached an 11 week high. Signals show that pair should further decline in coming days.
Looking ahead to today, traders are advised to follow the British HPI data at 6:00 GMT as well as the German Employment change at 7:55 GMT. Positive data might bring back some market optimism, pushing the Pound and EUR higher against their counterparts.
JPY - Strengthens on Safe Heaven appeal The JPY strengthened against the U.S. Dollar yesterday as investors expressed their concerns about the U.S. economy by selling the U.S. Dollar and buying the Japanese Yen. The Yen traded higher against most of its major counterparts; however, a strong currency may ultimately weigh on the Japanese economy as it is heavily dependent on exports.
A strong Yen would have bad influence on profits of Japanese companies. Consequently the Japanese government might be forced to weaken their local currency. So far no comments were published regarding Government intervention. As long as the Japanese Bank avoids market intervention the Yen is expected to keep its strengthening momentum.
Looking ahead to today traders should pay attention to the $86.88 support line, crossing down might take the USD/JPY pair even lower. Some analysts estimate that that the Yen could even reach as high as $85 in the coming months.
Crude Oil - High U.S. Inventories Send Crude Oil Price Lower Crude Oil prices ended lower yesterday after U.S Oil Inventories rose by 7.3M barrels. Lately this figure made little impact over Crude Oil prices but yesterday it came quite high compared with expectations of a 1.4M drop.
Demand for durables goods which also came surprisingly lower added to worries that demand for Oil would decrease in the near future as manufacturing declines. Crude Oil price might decline further in the short term if economic figures continue to deteriorate. Investors are worried about a possible double dip, meaning a renewed recession.
Gold price rebounded slightly during yesterday trading session. During the day it reached as low as $1156.25, but thereafter recovered and is currently trading at $1165 Gold price dropped after inflation worries began to fade and analysts begin to worry about another recession or economic slow down.
Technical News
EUR/USD The pair was relatively unchanged yesterday and as such has formed a 2nd consecutive doji candlestick which reflects the bulls and bears inability to move the price significantly. The RSI (14) has crossed below the overbought line, triggering a sell signal. But traders may want to be patient and wait for the RSI line to break its trend line before going short. A rising trend line can be drawn from the low of the RSI line that begins on June 4th.
GBP/USD The pound was stronger yesterday and has risen versus the dollar for the past 6 consecutive bars. This has pushed most oscillators into oversold territory as the Slow Stochastic is showing a bearish cross and the RSI (14) is floating in the oversold territory. However, before going short, traders may want to wait for a breach of a short term trend line that can begins at the bar on June 22nd.
USD/JPY A bearish flag pattern has formed on the 4-hour chart. The base of the flag pole begins at the high on June 14th and runs to the low for the pair at 86.25. The flag pattern is sloping upward with a previous downward trend. Therefore, a breakout may be expected to the downside in the direction of the long term trend. Traders may want to wait for a confirmation of the breakout at a price of 86.80 and enter short.
USD/CHF For the past 15 days the pair has traded in a defined range between the prices of 1.0650 and 1.0400. In this trading range a double bottom reversal pattern may be forming. A confirmation of the reversal pattern will be a close above the 1.0650 resistance line.
The Wild Card Gold The drop in the price of gold shows a potential reversal in the trend. The price has closed below the long term upward sloping trend line for the past two days, confirming a significant breach of the trend line and a breach below the support level of $1169. However, yesterday's trading closed and formed a hanging man candlestick. This may signal an upturn in the price. CFD traders may find a good opportunity to go long on a breach above the $1169 resistance level.
(Reuters) - There has been just an inkling in recent weeks that financial markets might start to take their lead from the 'real' economy again after three years of being tossed about by their own panics and periodic exuberance.
Since the finance industry flailed into its crisis of confidence, doubting its own practitioners and the governments who became over-dependent on them, it has been almost impossible for households and companies to work out what markets are trying to predict about production, employment and consumption.
The net result has been the tail wagging the dog.
Guess the ephemeral mood of global markets six months hence -- voracious risk appetite or bunker-seeking safety -- and you might just stand a chance of predicting where businesses, consumers and policymakers would be forced to follow.
And while PIMCO asset managers predict a post-crisis 'new normal' of years of sluggish growth and policy angst, many yearn for an 'old normal' where finance reflects, rather th7an dictates, what is happening in the real economy where people produce and consume goods and services.
A VERY FINANCIAL COUP
For some, the credit crisis and aftermath had been fomented for decades by a more than a doubling of financial services to some 7.5 percent of the U.S. economy in the 40 years to 2007.
"The 3 percent of GDP (gross domestic product) that was made up of financial services in 1965 was clearly sufficient to the task, the proof being that the decade was a strong candidate for the greatest economic decade of the 20th century," Jeremy Grantham, Chairman of Boston-based asset manager GMO, told clients this month.
Lauding this month's U.S. financial regulation bill, he added: "The extra 4.5 percent would seem to be without material value except to the recipients. Yet it is a form of tax on the remaining real economy and should reduce by 4.5 percent a year its ability to save and invest, both of which did slow down."
Former International Monetary Fund chief economist Simon Johnson's 2009 Atlantic magazine essay, "The Quiet Coup", took a more conspiratorial view of the same phenomenon in sketching the lobbying power of the financial industry over that period.
Johnson estimated U.S. financial sector profits, which had never topped 16 percent of overall corporate profits in the decade to 1985, soared to 41 percent by the noughties. Average financial sector compensation as a share of the average in other industries almost doubled to 181 percent.
There was a similar development in Britain, where financial services had reached 8.5 percent of total output just before the crisis.
Deregulation, privatization, trade globalization and demographic trends were all catalysts for this growth in finance and the current regulatory backlash against the banks is unlikely to return the sector to its 1960s size.
But if knocking the froth off finance allows a more even relationship between real economic trends and financial markets, there may be a chance of tempering the endless boom and busts.
CHANGE AFOOT?
Is there any sign of that happening right now? Well, just an inkling.
In the past three years, financial and investment flows have been violently herded in and out of "safe-haven" cash and liquid assets, correlations zoomed between all asset classes and geographic regions, and risk gauges -- largely volatility measures -- careened from historic lows to highs and back again.
This mass behavior had been building for 20 years. Computer trading strategies supercharged the effect over time.
Yet as this year's euro zone sovereign debt crisis ebbs into the second half of the year, the herd seems for now to have stopped stampeding from its own rifle shots and may be listening more carefully to the underlying economy again.
Mindful of near-zero interest rates in cash, an expected dash back to safe-haven money market funds never really materialized during the worst of the euro crisis in April and May and 2010 outflows from these funds are still close to half a trillion dollars.
Partly as a result, stresses evident in lock-step asset correlations have ebbed and investors seem easier with idiosyncratic trends in selected stocks and credits.
Equity volatility has halved from April/May peaks and quartered from post-Lehman Brothers highs in 2008 and is holding closer to 20-year averages just above 20 percent rather than returning to unrealistic pre-2007 levels in single digits.
Even the world's main exchange rates between the U.S. dollar and euro -- long captive to "risk on/risk off" swings -- are starting to reflect interest rate gaps more than stress.
For active and diversified investors, this is how it is supposed to be and allows them to do what it says on the tin.
To be sure, we've been here before. But there are rays of hope for some return to old normals.
(Graphic by Scott Barber; Editing by Ruth Pitchford)
The U.S. dollar fell today against the Japanese yen after the report today showed that the orders for the U.S. durable goods fell unexpectedly in June, fueling the concern for the economic recovery and spurring the investors to turn to the safety of Japan’s currency. The EUR/USD moves up and down today after it closed yesterday near its opening level.
Durable goods orders declined for the second consecutive month, falling by 1.0 percent in June after dropping 0.8 percent in May. The impact of this report was even more significant as the market participants anticipated the growth, not another month of decline. The unfavorable economic data outweighed the better than expected corporate earning, causing the Standard & Poor’s 500 Index drop by 0.5 percent. The Stoxx Europe 600 Index was down 0.4 percent.
Ben Bernanke, the Chairman of the United States Federal Reserve, said on July 21st that “the economic outlook remains unusually uncertain”. The data from the U.S. definitely added to the risk aversion sentiment on the markets, increasing the appeal of the yen.
USD/JPY traded near 87.67 as of 16:27 GMT today after opening at 87.90. EUR/USD near 1.2995 close to the opening level of 1.2996.
The U.S. Dollar advanced on Wednesday, gaining 1% against the Japanese Yen and pushing the EUR back under $1.30, after a report showed U.S. consumer confidence fell more than expected, pressuring equities lower and reducing investors' appetite for risky assets. Economic News
USD - Dollar Rises on Demand for Greenback's Safety The U.S Dollar advanced against most of its major counterparts as a decline in U.S. consumer sentiment to a 5 month low revived demand for the relative safety of the world's main reserve currency. The U.S. consumer confidence for July fell to its lowest level since February with all eyes on consumer durable goods numbers for June later in the session for more evidence about the world's largest economy. The greenback advanced as much as 1.3% to 87.97 Yen in the biggest intraday gain since June 2. Treasury two-year note yields increased as much as 0.06 percentage point to 0.64% in the biggest intraday climb since June 10. The USD/JPY recent weakness has been related to the very low level of U.S. yields, analysts said. And the fact that the yields are rebounding at this stage is likely to lend some support to the pair.
EUR - EUR Erases Gains; Slips Below $1.30 level The European currency hovered below a key level on Wednesday, running into profit taking after it hit a 11-week high against the U.S. Dollar, with attention turning toward the Australian Dollar ahead of crucial inflation data. The EUR slipped below the psychological, and technically crucial, level of $1.30, having hit a high of $1.3045 on Tuesday.
The 16-nation currency held some impressive gains against the Japanese yen, trading above 114 yen after having jumped over 1% on Tuesday to a 2-month high. Traders said the EUR/JPY looked increasingly bullish on charts, especially after it rose above 113.50 yen where it had met lots of offers from Japanese exporters.
Moreover, despite the EUR/USD easing from highs, sentiment toward the single currency remains bullish in the short term with a number of commentators surprised by the resilience of the Euro-Zone economy. On the other hand, doubts remain over the ability of the U.S. economy to avoid a slowdown. Market players say that a sustained break above the $1.30 level could place the single currency against the greenback in a new $1.30-$1.35 trading range in the coming weeks.
JPY - Yen Rises on Safety Demand Japan's currency gained versus all 16 major counterparts ahead of U.S. reports in two days which are forecasted to show economic and business activity grew at a slower pace. The Yen rose from near a two-month low against the EUR on speculation signs of a slowing U.S. recovery will spur demand for safer assets.
The Yen typically strengthens in times of financial turmoil as Japan's trade surplus makes the currency attractive as it means the nation does not have to rely on overseas lenders. The Yen traded at 87.77 per Dollar from 87.90. The currency gained to 113.95 per EUR from 114.24 yesterday, when it reached 114.42, the weakest level since May 18.
Crude Oil - Oil Falls a 2nd Day after Consumer Confidence Drops Crude Oil declined for another day after an industry report showed U.S. crude inventories rose and the Conference Board said confidence among the nation's consumers fell, signaling growth and energy demand may falter. Rising oil production capacity in the Gulf of Mexico after Tropical Storm Bonnie fizzled over the weekend without damaging infrastructure also weighed on Oil prices, analysts said. Oil prices dropped the most in more than 3 weeks Tuesday as the U.S confidence index declined to the lowest level in 5 months. Traders mentioned that there was a sell-off in the crude market because of a fall in U.S. consumer confidence and the sentiment is still weak.
Technical News
EUR/USD Yesterday the pair pushed to its highest level in the past 3 months before falling backwards to finish almost unchanged, forming a spinning top candlestick formation. This may signal indecision on the part of traders and a lack of buyers in the current uptrend.
GBP/USD The pound was a big gainer in yesterday's trading as the cable breached and closed above the resistance level of 1.5520. The pair has been a strong performer as of recent, recording gains over the past 5 trading sessions. However, technical resistance is forming on the daily chart. The RSI (14) is dropping below the overbought zone while the Slow Stochastic oscillator is forming a bearish cross, indicating the next move may be to the downside. Traders may want to tighten their stops on any long positions.
USD/JPY The yen suffered during yesterday's trading, rising as high as 87.96 while closing above the 20-day simple moving average and the downward sloping trend line that began on June 14th. However, traders may be able to fade the trend as a bearish cross has formed on the 4-hour Slow Stochastic oscillator, indicating that the pair's next move may be lower. Traders can target the resistance level of 87.40 with an extended target at the year to date low of 86.25.
USD/CHF The pair may see a continuation of its recent downtrend in today's trading as the RSI for the pair floats in the overbought territory on the 2 hour and 8 hour charts with most other indicators floating in neutral territory. Traders may be advised to go short for the day.
The Wild Card GBP/NZD The pair may see some downward correction today as the RSI for the pair is floating in the overbought territory on the hourly and 2 hour charts while a bearish cross is evident on the 2 hour and 4 hour charts Slow Stochastic, indicating an imminent downward movement. Furthermore, a breach of the upper Bollinger Band is evident on the 2 hour chart. Forex traders may be advised to go short for the day.
(Reuters) - Job worries drove July U.S. consumer confidence to its lowest since February, with one in six people expecting lower income in the next six months, underscoring the precarious state of economic recovery.
Home prices rose in May but display no signs of a sustained rebound as long as unemployment flirts with 10 percent and a record stockpile of foreclosed houses looms over the market, a separate report showed on Tuesday.
Single-family house prices remain 29.1 percent below peaks four years ago, according to a Standard & Poor's/Case-Shiller index.
The deepest housing crash since the Great Depression dragged the U.S. economy into recession, and is doing little to stimulate broader growth as many economists fret about a possible double-dip recession.
The Conference Board, a New York-based business and economics research group, reported that consumer attitudes worsened this month as did expectations about jobs being hard to get.
"Concerns about business conditions and the labor market are casting a dark cloud over consumers that is not likely to lift until the job market improves," said Lynn Franco, Director of The Conference Board Consumer Research Center.
The group's index of consumer attitudes fell to 50.4 in July from an upwardly revised 54.3 in June, below the median forecast of 51 in a Reuters poll.
The "jobs hard to get" reading, meanwhile, rose to 45.8 percent from 43.5 percent.
The tepid consumer data tempered stock market gains. U.S. Treasuries fell in the face of new supply.
"There have been quite a few headwinds -- the fiscal stimulus is fading, the European situation certainly did have an impact on consumer confidence and inventories are being brought more into line," said David Sloan, economist at 4Cast Ltd in New York. "But clearly the big problem for consumers is jobs."
U.S. unemployment stood at 9.5 percent in June, the lowest in nearly a year, but reflected people leaving the workforce rather than a trend toward greater hiring.
New jobless benefits claims, to be reported by the Labor Department on Thursday, are seen are seen dipping to 459,000 in the week ended July 24 from a surprisingly high 464,000 the prior week
"Without consumers on board, the economic recovery is looking dangerously vulnerable," Paul Dales, U.S. economist at Capital Economics in Toronto, wrote in a report. "Falling consumer confidence and the growing likelihood of a double-dip in house prices have put a further dent in the already deteriorating outlook for consumption growth."
Consumer sentiment fell to a nearly one-year low in July on renewed fears about economic stability, according to the Thomson Reuters/University of Michigan's Surveys of Consumers earlier this month. The final data will be reported on Friday.[nN16126985]
U.S. single-family home prices rose more than expected in May, but still reflected robust spring sales spurred by now-expired homebuyer tax credits, the S&P/Case-Shiller home price indexes showed.
May is a strong seasonal period for home sales, and buyers who rushed to sign contracts by the April 30 deadline for up to $8,000 in tax credits have until September 30 to close loans.
Seven of the 20 largest metro areas still reported lower prices than a year ago and most economists predict further single-digit declines before any sustained upturn. A record inventory of foreclosed properties further threatens prices.
"For me, a double-dip is another recession before we've healed from this recession ... The probability of that kind of double-dip is more than 50 percent," Robert Shiller, professor of economics at Yale University and co-developer of the price index told Reuters Insider.
The 20-city composite price index in May rose 0.5 percent, seasonally adjusted, after an upwardly revised 0.6 percent April gain, topping the 0.2 percent rise seen in a Reuters poll. The index was 4.6 percent above last May, S&P said.
Prices jumped 1.3 percent on an unadjusted basis after a 0.9 percent April gain and falls in the six prior months.
"While May's report on its own looks somewhat positive, a broader look at home price levels over the past year still does not indicate that the housing market is in any form of sustained recovery," David M. Blitzer, chairman of the Index Committee at Standard & Poor's, said in a statement.
Sales of new homes in June, reported on Monday, surged 23.6 percent but remained at the second-lowest level since the Commerce Department started keeping records in 1963.
The government is expected to report on Friday that gross domestic product growth slowed to a 2.5 percent annual rate in the second quarter from a 2.7 percent pace in the first.
(Additional reporting by John Parry, Chris Reese, Jennifer Rogers and Julie Haviv; Editing by Andrew Hay)
The Euro hit a one-week high against the US Dollar as risk appetite held up overnight.
The Euro hit a one-week high against the US Dollar as risk appetite held up overnight. A tame European calendar puts the onus on US consumer confidence data and another round of second-quarter earnings reports. The Euro inched higher in overnight trade, adding nearly 0.2 percent and reaching a high of 1.3017 to the US Dollar, the strongest in a week. The British Pound was little changed, tracking sideways in a narrow range below the 1.55 figure.
Trading Tactics
A clear uptrend could be an opportunity to buy EUR/USD.
A buying point is at 1.2988; Pivot point is the take profit at 1.3075; Fibonacci 23.6% is the stop loss at 1.2900
A selling point is at 1.2880; Fibonacci 50% is the take profit at 1.2775; Pivot point is the stop loss at 1.2960
Technical: Euro breaks standard error channel middle line upwards and may continue the major uptrend. A move back higher could set up a test of 1.3075
To strengthen our analysis; we use many other indicators, starting with MACD (Moving Averages convergence divergence); we notice MACD is in a bullish direction; RSI (Relative Strength Index) and Momentum are pointing upwards; stochastic oscillator crosses %D line downwards.
*Analysis is for information purposes only and does not constitute advice in any form. Past performance is not an indicator of future performance. Trading in financial products carries a high degree of risk to your capital and it is possible to lose more than your initial investment.
The EUR once again reached above $1.30 on Monday after better than expected economic data from the US, and an advance in global equities, boosted demand for riskier assets. Gold continues to decline as market concerns ease and people turn away from safe-haven assets.
Economic News
USD - Dollar Declines on Renewed Risk Appetite The US dollar declined against all of its major counterparts Monday following the release of better than expected US New Home Sales data. Combined with a boost in FedEx Corp.'s earnings, these two reports together have helped to raise demand for riskier assets. New US home purchases increased 24% from May to an annual pace of 330,000.
The Dollar depreciated 0.7% to $1.008 per EUR during today's early Asian trading, from $1.2909 at the end of last week. The dollar fell to 86.86 Yen, from 87.46.
Looking ahead to today, traders are advised to follow the release of the CB Consumer Confidence at 14:00 GMT. Better than expected results on this report may intensify the greenback's recent downtrend, especially since risk appetite will rise with a positive reading.
EUR - EUR and GBP Advance after Banks Pass Stress Tests The EUR remained within its trading range as results from the stress tests continued to reassure investors. The common currency traded within a cent of the 10-week high of $1.3029 reached July 20; however, it has since returned to trade around $1.3015.
The EUR rose to ¥112.97, up from ¥112.11, after reaching ¥113.48, the highest level since June 3rd. The British pound also rose to $1.5490 from $1.5425 after briefly reaching above $1.55, the highest levels since late April.
The Pound advanced after a July 23rd announcement that HSBC Holdings Plc, Barclays Plc, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc passed the European bank stress tests.
JPY - Yen Drops as Demand for Safe-Haven Currencies Diminishes The Japanese yen fell versus all 16 major counterparts after the release of better than expected US New Home Sales data. The yen's safe-haven appeal also diminished as global equities gained and boosted demand for riskier currencies.
The JPY is currently trading at 113.07 per EUR as of today's early Asian trading, from 112.89 in New York yesterday, when it touched 113.48, the lowest since June 3. The yen is at 86.95 per USD, up slightly from 86.88.
Traders should follow the release of today's economic data from the US and Europe as positive news will likely dampen demand for the yen further.
Crude Oil - Crude Remains around $79 a Barrel Better than expected economic data from the US and advancing global equities helped support oil prices around $79 a barrel. Crude oil for September delivery traded at $78.85 a barrel, down 13 cents in electronic trading on the New York Mercantile Exchange
Oil seems to remain between $70 and $80 as future demand remains unknown and above average stockpiles are keeping Crude from breaching higher. For the time being, oil futures continue to trade on economic data as well as movements in equities. Traders should follow the release of today's US CB Consumer Confidence report at 14:00 GMT as better than expected results might help push oil prices closer to the $80 resistance level. Technical News
EUR/USD The price has broken out from the rising channel pattern on the daily chart for the second time; making a solid close above the upper line of the channel. A pullback into the channel pattern would signal a false breakout, as was the case last in last week's trading. A rise to the 38.2% Fibonacci retracement level at 1.3110 would signal a confirmation of the breakout pattern.
GBP/USD The pair rose as high as the resistance line of 1.5520, found the May high before falling back to close up at 1.5494. Momentum appears to be behind the price move as the 14-day Momentum indicator is sloping higher at 103, indicating further appreciation may be in store for the pair. The next significant resistance level comes in at 1.5820.
USD/JPY The bullish correction the pair experienced in the later half of last week came to an end yesterday. The price rose as high as the 20-day simple moving average before heading sharply lower. The inability for the pair to breach this resistance level indicates a sharp downtrend in the pair. Traders should be short with a first target at the support level of 86.25.
USD/CHF Shorter-time frame charts on this pair don't seem to be hinting too strongly at an impending direction. The hourly and 4-hour Stochastic (slow) and RSIs show upward mobility, but have not yet entered signal territory. We can see, however, that the weekly chart's Stochastic (slow) is giving off what appears to be a recent bullish cross. It seems upward pressure is mounting on this pair and we may see traders taking long positions as a result.
The Wild Card USD/SEK After a few days of trading sideways, this pair now seems to be giving off some clear buy signals. The 4-hour Stochastic (slow) appears to be approaching the beginning of a bullish cross, indicating future upward movement. The daily and weekly Stochastic (slow) also seem to indicate an impending bullish cross. The daily RSI also appears to be floating in the over-sold territory, indicating further upward pressure. Forex traders may want to take advantage of this information and enter a short-term long position on this pair for quick daily profits.
* New home sales (Jun): slight rebound from depressed levels * Consumer confidence (Jul): moderately lower * Durable goods orders (Jun): noticeable increase mainly due to nondefense aircraft orders * GDP (Q2): up by about 2.5% qoq in annualised terms
After the expiry of the home buyer tax credit on 30 April, new home sales in May plunged by a third to a record low of only 300,000 units. Sales are likely to have remained depressed in June. In view of the sales level, however, we expect new home sales to have rebounded by about 20,000 to 320,000 in June. This would be about in line with the total decline in housing starts in May and June.
According to the preliminary University of Michigan (UMI) consumer sentiment index, consumer sentiment deteriorated significantly in July. The overall index declined to 66.5 from 76.0, the assessment of economic conditions and outlook falling by about the same amount. We expect the final UMI Index, due on Friday, to remain unchanged for the most part; stock markets might indicate a slightly more upbeat mood, whereas the weekly ABC consumer comfort poll has declined somewhat. The Conference Board's consumer confidence index, due to be published on Tuesday, had plunged from 62.7 to 52.9 in June, foreshadowing the shift in the July UMI index. However, as the Conference Board's survey is more sensitive to labour market developments, the disappointing employment news might have dented confidence to some extent. We expect consumer confidence to have declined to 52.0 in July.
Durable goods orders fell by 0.6% mom in May, mainly due to declining aircraft orders. Ex transportation, orders rose 1.6%. Volatile transportation goods, especially aircraft, made a positive contribution again in June. The ISM new orders component declined significantly, but remained elevated at 58.5, indicating expansion; durable goods production was flat in June. Based on available data, we expect total durable goods orders to have risen by 1.0% mom. Ex transportation, the increase is likely to be more modest at about 0.5% mom.
Initial jobless claims rose by 37k to 464k in the week ending 16 July, which is near the average of the last few months. Against this backdrop, the dip to 427k in the week ending 9 July appears to have been a oneoff, probably because retooling activities started somewhat later than usual. We expect initial jobless claims to have fallen to about 455k in the week ending 19 June, more or less in line with the 4 week moving average. This level still indicates - at least by historical standards - an ongoing decline in employment.
GDP had slowed to 2.7% qoq in annualised terms in Q1. Consumer spending, business investment and inventories had expanded moderately, whereas spending on housing and external trade had made a negative contribution to growth. The pattern in Q2 will probably have been similar. According to personal spending and retail sales data, consumer spending is likely to have grown by about 2.5%; moreover, capital goods shipments (ex defense & aircraft) have strengthened somewhat further in Q2, indicating robust business spending on equipment. However, residential construction slumped when the tax credit for home buyers expired at the end of April. Therefore, it will probably only have made a very small contribution to growth. Non-residential construction will have continued to decline. Mainly due to higher imports, the real trade deficit has widened. Against this backdrop, we expect a significant negative contribution from net exports. Government consumption could have picked up slightly, but it is still being hampered by falling revenues in the states which are obliged to balance their budgets. Inventories could have a slightly positive impact. All in all, we expect GDP to have risen by about 2.5% qoq in annualised terms in Q2. The annual rate could increase from 2.5 to 3.2%.
The substance and meaning of Friday’s Stress test results are still be hotly debated. Financial pundits are putting enormous emphasis on the European open as the barometer of the market’s sudden confidence in the results. We are still unconvinced about the stress tests and doubt that a single market open/trading day will create the directional rush some participants are looking for. FX markets initially took on risk in Asia but the gains were quickly eroded.
Seven of the EU banks, out of a total of 91, failed the stress test. The test did not find any troubled institutions in countries such as Italy and Portugal and just one in Greece. Of the banks that did fail, they only needed to 3 million Euros to meet their Tier-1 capital ratio of 6%, quite a low figure for major banks. The EU’s widespread denial of the possibility of a sovereign default is vexing to analysts, but it’s understandable from a political and market stability standpoint.
Overall, if the purpose of this test was to gauge the probability of a sudden bank collapse in the EU, than it misses the mark. We maintain the view that Europe’s problems are largely structural and thus no test will address these problems. The macroeconomic assumptions used in the adverse scenarios were not very difficult nor believable. Ireland’s GDP growing 1% is not an emergency scenario.
Markets will continue to watch LIBOR and credit-default swap spreads carefully as well as the equity markets’ reactions – especially to see which banks come under heavy selling pressure.
The Euro’s strength is limited as domestic growth prospects will diminish as the austerity measures kick in. Global growth is still decelerating and the credibility of the single currency has been damaged in recent years. In addition, we have our eye on the Swiss Franc to outperform across the board. The Swiss version of the stress test, released Friday prior to the EU test, was more rigorous and comprehensive. With the added scrutiny, market participants can be confident in Switzerland’s banking sector. We suspect capital will continue to flow from Europe, into Switzerland, as investors seek out a safe haven for their assets.
We are still very impressed with the UK growth figures released last Friday. Q2 GDP figures came in well ahead of expectations at 1.1% q/q and 1.6% y/y, ahead of the 0.6% q/q & 1.1% y/y expectations. While PMC member Posen has raised the question of further QE to prevent the UK’s economy from taking another dip, we are leaning more to the views of Sentence that inflationary pressure needs to be tackled now. We will be watching for the opportunity to go Long sterling, especially in the EURGBP.
Today’s final thought is on the Yen. There has been a noticeable lack of rhetoric surrounding its recent strength. The current government coalition believes that markets themselves should set prices, even though there has been no noticeable erosion in exports (June exports increased a whopping 27.7% y/y). This week’s June CPI will be in negative territory and we believe it’s only a matter of time until Japanese rhetoric begins and we see the Yen lose ground.
Today's Key Issues (time in GMT): 07:30 SEK Jun trade balance; last SEK2.7 bln surplus. 07:30 GBP Details of UK financial supervision reform. 14:00 USD Jun new home sales, 335k AR eyed; last 300k. 00:00 PLN Interest rate announcement, % 3.50 exp/prior
EurUsd Well, the European stress tests were just as underwhelming as expected, so for now EURUSD’s short-term uptrend remains intact and the markets look pretty directionless this Monday morning. Our gut instinct is that the medium-term direction for this pair will be lower, but in the short-term we would be willing to play this one either way depending on the outcome of a potential symmetrical triangle pattern now visible on the hourly chart. The lower edge of the triangle coincides with the short-term uptrend line, so a break below that support (currently 1.2825) would be the signal to go short with a target below around 1.2480. Given that target is some distance away, supports on the downside are a potential hazard at 1.2793 (Friday’s low),1.2733 (21 Jul low), 1.2683 (14 Jul low) and 1.2522 (13 Jul low). Should the bullish triangle scenario play out instead then we need a break above 1.2950 to trigger long entry, and eye a target above at 1.3300. Next resistance is expected at the 100-day moving average 1.2874, 1.3028 (20 Jul high) and 1.3093 (10 May high).
GbpUsd After the false break of the 6-week uptrend last week GBPUSD has bounced emphatically higher, and impressive UK GDP figures on Friday has catalysed the rally further to highs of 1.5501. In doing so, the pair has now surpassed the 15 Jul highs at 1.5472 and is now expected to make a move on the more significant 1.5525 (15 Apr high). Above there lies yet more technical resistance (namely the 200-day moving average 1.5558 and 23 Feb high 1.5575) which should stall the rally on the first visit, but beyond there the skies are clear for a run on 1.6000. Nearest support is back down around 1.5350 pivot level, with the lower edge of the 6-week uptrend now coming in below at 1.5280. Should the trend break lower once more then first stop on the downside will be 1.5125 (last Wednesday’s low), followed by 1.5080.
UsdJpy The bearish flag pattern we had been tracking last week has now decisively been dead and buried by the move back above 87.50, and if anything we look to be carving out a range between 86.25 –87.75. At current levels towards the upper end of the range, the most attractive strategy is to sell some and await a return to 86.50ish levels, but ensuring we keep a tight stop on the topside to keep the risk/reward ratio manageable. There is a possibility that from here, a break above that range ceiling (87.75) could indicate a double bottom chart pattern has been activated, and if so, we should be getting long there and aiming for a target above of 88.85.Sellers are expected to step in around 88.00 (former pivot), 89.15 (12 Jul high) and 89.50 (28-29 Jun high).
UsdChf Finally, someone told the bulls about the break of the 3-week downtrend channel and we managed to get a bullish engulfing candlestick pattern on the daily chart to finish the week; it only took about 3 days... The decisive burst higher on Friday afternoon hit a peak of 1.0564 but progress has been halted by resistance coinciding with the 19 Jul highs, so for now the pair is now consolidating above 1.0500. We see a potential bullish flag pattern on the hourly chart that suggests a break above 1.0560 should be taken as the signal to go long, with a target on the topside around 1.0715; however we think buying on a dip to 1.0500 (the lower edge of the flag) also represents decent value with 1.0450 likely to offer some protection below. Only resistance levels above to be wary of are the 14 Jul highs at 1.0618 and the 200-day moving average at 1.0640.
The Pound remains trading higher, supported by improved market confidence, and moving at 3-month highs above 1.5470, with room for further appreciation, according to technical analyst at Commerzbank.
The Pound remains trading higher, supported by improved market confidence, and moving at 3-month highs above 1.5470, with room for further appreciation, according to technical analyst at Commerzbank. The Sterling is biased to the upside, trading on an uptrend channel from May lows, targeting 1.5525/60 area, says Jones: "Short to medium term, the market has recently severed its 1.5310 down channel.
Trading Tactics
A clear uptrend could be an opportunity to Buy GBP/USD.
The buying point is at 1.5467; Pivot point is the take profit at 1.5565; Fibonacci 23.6% is the stop loss at 1.5400
The selling point is at 1.5380; Fibonacci 61.8% is the take profit at 1.5270; Pivot point is the stop loss at 1.5495
Technical: Sterling breaks the previous resistance level and forms a new support on moving averages line. A move back higher could set up a test of 1.5410
To strengthen our analysis; we use many other indicators, starting with MACD (Moving Averages convergence divergence); we notice MACD crosses the signal line with a higher histogram; Momentum and RSI (Relative Strength Index) are in an uptrend; stochastic oscillator crosses %D line in oversold area.
*Analysis is for information purposes only and does not constitute advice in any form. Trading in financial products carries a high degree of risk to your capital and it is possible to lose more than your initial investment.
The combination of growing confidence in Europe’s economy and mounting evidence of a slowdown in the U.S. is driving euro bears into hiding.
Fundamental The combination of growing confidence in Europe’s economy and mounting evidence of a slowdown in the U.S. is driving euro bears into hiding. After tracking the euro’s slide from about $1.45 at the beginning of 2010, the median forecast of currency strategists has stayed within two cents of $1.20 since the start of June, according to data compiled by Bloomberg. Goldman Sachs Group Inc. and Wells Fargo & Co. raised their estimates in the past two weeks, joining HSBC Holdings Plc and Deutsche Bank AG in predicting a stronger euro. Technical Technical analysis shows the euro may continue the bullish movement as MACD crosses the signal line upwards and RSI bounces on 30% line. Bollinger gives us a bullish signal by closing the candle above the middle band.
EUR/USD (Daily Chart) The primary tendency breaks downtrend line upwards.
EUR/USD (4 Hour Chart) The pair is in a clear uptrend.
EUR/USD (Hourly Chart) The Minor trend trying to break Fibonacci fan.
After a long time waiting, the Euro-Zone's famous Bank Stress Tests results were finally published on Friday evening. The results failed to reassure investors regarding the stability of the European banking system as analysts claimed that the test weren't strict enough. As this week begins, the reliability of the tests will remain the main topic. Will it eventually boost the Euro?
Economic News
USD - The Dollar Ends A Volatile Trading Week Following Mixed Data from the U.S. The Dollar saw mixed results against the major currencies during last week's trading session. The Dollar had ups and downs vs. the Euro, and eventually the EUR/USD level closed at the 1.29 level. The Dollar also slightly strengthened against the Yen, while falling against the Pound.
The Dollar's volatile session came as a result of the mixed data from the U.S. economy. On one hand, the housing sector provided positive data last week. The U.S. Building Permits report showed that 0.59M new residential buildings permits were issued during June. The meaning of the data is that the quantity of future construction will rise; obtaining a permit is among the first steps in constructing a new building.
However on the other hand, the unemployment reports delivered negative signals. The weekly Unemployment Claims report showed that jobless claims in the U.S. increased more than forecasted to 464,000. The number of individuals who filed for unemployment insurance for the first time during the past week rose from 427,000, and failed to reach expectations for 449,000.
As for the week ahead, many interesting economic reports are expected from the U.S. The most significant publications look to be the New Home Sales, the Consumer Confidence, Durable Goods Orders indices, the Unemployment Claims, and the Gross Domestic Product (GDP). All these reports have potential to impact global trading and the Dollar in particular, and traders are suggested to follow the end results.
EUR - Stress Tests Fail to Ease Investors' Concerns from a Possible Debt Crisis The Euro saw a volatile session during last week's trading. The Euro began last week's trading with a bullish trend vs. the Dollar and the Yen. However the Euro then saw sharp drops and by the end of the week, resumed to its previous levels.
The Euro had a rising trend with the beginning of the week as positive data from the Euro-Zone supported the 16-nations currency. The German Producer Price Index (PPI) rose by 0.6% in June, beating expectations for a 0.2% rise. The report suggested that inflation in Germany rose for the 4th consecutive time, reassuring investors that the German economy is recovering. The European Industrial New Orders report also provided an unexpected positive data. The report showed that industrial orders in the Euro-Zone rose by 2.8% in May, well above expectations for a 0.1% drop.
However, by the end of the trading week, the Euro erased its profits, as the European Bank Stress Tests failed to reassure investors concerns from a possible sovereign crisis. The tests showed that merely 7 banks have flunked the stress test, out of 91 major banks that were tested. The supposedly positive data failed to create an impact in the market as investors felt that the tests may not have been strict enough. However, traders should take under consideration that European governments are putting a lot of efforts in the attempt to convince investors regarding the reliability of the tests results.
As for the week ahead, a batch of data is expected from the Euro-Zone. Traders are advised to focus on the German Preliminary Consumer Price Index (CPI), which will prove if the German inflation is indeed rising as last week's PPI data showed. Traders should also keep in mind the affects of the bank stress tests, as these results will continue to impact the market this week.
JPY - Yen Weakens Against the Majors The Yen fell against most of the major currencies during last week's trading session. The Yen dropped about 100 pips vs. the Dollar and about 300 pips against the Pound, and the GBP/JPY pair is now trading near the 135.50 level.
The Yen dropped last week due to speculations that Asia's economic recovery is advancing. These speculations have increased risk-appetite in the market, and have turned investors to look for riskier assets. The Yen is considered to be a safe-haven currency, and tends to fall as risk aversion weakens. The speculations came following several reports which showed that South Korea's economy grew faster than analysts forecasted, and Japanese exports rose more than expected.
As for this week, many interesting publications are expected from the Japanese economy. The main news events that traders are advised to follow are the Retail Sales on Monday and the Tokyo Core Consumer Price Index (CPI) on Thursday. If the reports will continue to provide positive signals, the Yen might weaken further as investors will continue to look for higher-yielding assets.
OIL - Crude Oil Prices Consolidates Around $79 a Barrel Crude oil prices continued to climb during last week's trading session. A barrel of crude oil was traded around $76 a barrel at the beginning of last week and as the week progressed, crude oil prices soared, and a barrel of crude oil is now trading around $79 a barrel.
Crude oil strengthened last week due to several positive economic reports from the U.S. and the Euro-Zone. The positive reports have created speculations that global energy demand will increase, and as a result, crude oil prices consistently rose. The bullish trend halted close to the weekend as concerns regarding tropical storm Bonnie have eased due to reports claiming that the storm has weakened.
As for this week, traders are advised to follow the main publications from the U.S. and the Euro-Zone, as they have significant affect on oil prices. Trades should also follow the U.S. Crude Oil Inventories report on Wednesday as this tends to have an instant impact on spot crude oil prices.
Technical News
EUR/USD Last week's trading has led to a doji candlestick formation on the weekly chart indicating a potential reversal lower for the pair. Traders will want to combine this signal with other technical indicators for confirmation before entering short. The next significant resistance level rests at the 38.2% Fibonacci retracement level at 1.3110. The next support level is found at last Wednesday's low of 1.2730.
GBP/USD The 2-month bullish correction has pushed the price above significant technical resistance levels, signaling a shift in the long term trend of the pair. The weekly chart shows the price broke the long term downward sloping trend line that began in July of 2008. The price has also moved above the 200-day simple moving average line. Traders will want to be long on the pair with the next resistance level coming in at 1.5520, April's high. USD/JPY Last week the pair failed to break below the support level of 86.25. Momentum for the pair has reversed as the Momentum (10) is trending higher. The price is looking to break above the resistance at the 20-day simple moving average line. A breach above this line could take the pair to the resistance level at 89.15, close to the long term downward sloping trend line. The potential correction could lead to a good setup to enter short in the direction of the trend.
USD/CHF The Relative Strength Index on the 4-hour chart shows the pair in overbought territory, indicating a downward correction could take place. That being said, according to most other technical indicators, the pair is trading in neutral territory with no clear direction. Traders may want to take a take a wait and see approach today, as a clearer picture may present itself later.
The Wild Card AUD/USD The Stochastic Slow on the 8-hour chart indicates that a bullish cross has formed, meaning a downward correction may occur today. This theory is supported by the Relative Strength Index on the 4-hour chart. Forex traders may want to go short in their positions for this pair today, as bearish movement will likely occur.
* Stress test results are in--Yawn * Sterling bolstered as some of the economic gloom lifts * German recovery becoming difficult to ignore * JPY-strength becoming an issue in Tokyo * Key data and events to watch next week
Stress test results are in--Yawn
The long-awaited results of the Eurozone banking sector stress tests were delivered on Friday and markets greeted them with a collective yawn. Earlier leaks led markets to conclude the adverse scenarios would not be especially stringent, causing most to discount the results. To re-cap, only 7 of the 91 banks tested failed, requiring a total of only EUR 3.5 bio to be raised in new capital. To put that number in perspective, some analysts reckon Spanish banks alone need to raise EUR 40 bio to be adequately capitalized. The stress tests also excluded the potential for a sovereign debt default and focused only on securities held in banks' short-term trading books, and not the 90% of banks' government bond holdings that are classified 'hold to maturity.' But the basis of the European debt crisis was exactly that--banks holding large amounts of Euro-area government debt were vulnerable in the event of a sovereign default. The lack of credibility of the stress tests raises the risk that market concerns over Euro-area financial sector stability will resurface, leading to another round of speculation that the EUR is a doomed currency.
The one potential bright spot to emerge from the stress tests are disclosures of individual bank's holdings of government debt of Greece, Spain and Portugal, but those numbers were not available on Friday. They are expected to be divulged over the next two weeks. Revealing which institutions hold what amounts of troubled government debt will allow banks to more accurately determine which of their counterparties are most risky, and potentially improve credit market functioning and overall stability. Another possibility is that revealing government debt will lead to a two-tiered lending environment, with those holding significant exposures being forced to pay up or rely further on the ECB. We will be watching closely to see how European inter-bank lending rates move to start next week as the decisive measure of the market's acceptance of the stress test results. Going into the stress test results on Friday, with all that was known about the tests beforehand, 3-month Euribor rates were at the highest levels for the year, suggesting that credit markets remain on edge.
Against this backdrop, risk assets performed reasonably well in the past week, with stocks rebounding and making new gains, JPY-crosses at their highs (but still below recent highs), and the USD nearer to its lows against most others. Continued positive corporate earnings reports appear to be holding sway, but the overall environment remains extremely fragile and of low conviction. At the close of the week, risk looks like it may test higher next week, just as it looked set to extend losses at the end of last week. The passing of the stress test 'event risk' may propel risk higher in the near-term, but with more questions raised than answered, we think gains in risky assets are likely to prove unsustainable. As well, recent positive data surprises obscure the risks from a pending US slowdown into year-end, which is likely to echo around to other major economies. In this environment, we would suggest maintaining an extremely short-term trading bias and remaining alert for sharp intra-day reversals. Sterling bolstered as some of the economic gloom lifts
There is a broad consensus that the second half of this year will be difficult for the UK economy as it struggles in the face of budget reform. The news that Q2 GDP was far stronger than expected (+1.1% q/q) doesn't change this impression but it significantly reduces the chance that the UK economy will fall back into double dip recession on the back of austerity measures. The additional growth should soften the government's budget projections and should help heal the deficit a little faster than previously expected. Since UK growth in Q2 was quicker than expected it follows that inflation potential may also be a little firmer. Recent economic data does not support this view with headline CPI slipping back and average earnings moderating. That said there is sufficient fodder in price data for the UK inflation hawks to remain on edge. The impact of the GDP report was thus to send sterling sharply higher. EUR/GBP pushed below the 0.8390 technical support following the data release. A fall below 0.8310/20 could suggest another leg lower. Cable has broken above the USD1.5330 level which has strengthened the technical outlook. A break above USD1.5450 may see towards 1.5525.
German recovery becoming difficult to ignore
The German July IFO survey surged to 106.2 in July, outpacing both the market consensus and the June data by a generous margin. The release comes on the heels of stronger than expected German PMI data and provides more evidence that Germany's economic recovery continues to gather pace despite the loss of momentum in the US economy. Both the current and expectations components of the IFO surprised on the upside. Recent German surveys have shown some hesitancy in the expectations components, so the IFO's result suggests that the impact of the sovereign debt fears may have peaked. The current disparity between US and German economic data provides an interesting backdrop for the continued move higher in Euribor; though the ECB have attributed this to market forces. While there is little risk that the ECB will hike the refi rate at least before the middle of next year, the firmer Euribor is likely to offer EUR/USD decent near-term support. Medium-term the EUR remains susceptible to difficulties that some European banks may have in recapitalising themselves. Near-term, the USD1.2700 support continues to hold solid and risk is for another run at the USD1.3000 level.
JPY-strength becoming an issue in Tokyo
Japanese officials have stepped up their verbal rhetoric against continuing JPY strength, with comments coming from senior leaders at the BOJ and the MOF. Most highlighted the risk of a stronger yen being a significant danger to future growth in the Japanese economy. This week's Q2 earnings reports, as well as the highly awaited announcement of the European stress tests were major sources of pessimism over the past few weeks. The fact that both came and went without much fanfare has calmed the markets and reassured investor sentiment. Thus, the Yen has weakened against every major currency in the G10 this week; of note: USD/JPY (86.50 to 87.40), EUR/JPY (111.60 to 112.90) and AUD/JPY (75.25 to 78.30) rose over 4% this week alone.
The BOJ will continue to monitor market activity closely as increased global risk aversion is still on the forefront and could lead to fresh JPY-strength. There have been rumors of semi-official interest to buy USD/JPY down around 86.20/30 in the short term and we're likely to see further verbal intervention if it reaches 85.00. However, it is rather unlikely the BOJ will take further measures on additional strength unless it rapidly appreciates towards the 80.00 level, then the odds of actual intervention would become highly probable.
Key data and events to watch next week
The calendar in the US is moderately busy in the week ahead. Housing numbers kick off the week with June New Home Sales on Monday and the May S&P/CaseSchiller Home Price Index to follow on Tuesday. Also on tap for Tuesday are the Richmond Fed Manufacturing Index and the Consumer Board's Confidence Index for July. The data slate for Wednesday sees Durable Goods Orders for June followed by the Fed's Beige Book in the NY afternoon. Weekly Jobless Claims are scheduled for its regular release on Thursday. Friday's data sees Q2 GDP, Q2 Personal Consumption, Q2 GDP Price Index, and Q2 Employment Cost Index. Data for the week wraps up with Chicago PMI and University of Michigan Survey of Consumer Confidence Sentiment for July.
In the Eurozone, Wednesday sees the release of the Business Climate Indicator, Consumer Confidence, and Industrial Confidence numbers for July. Friday closes out the week with June Euro-zone Unemployment Rate and July CPI Estimate. In Germany, Tuesday sees the August GfK Consumer Confidence Survey and June Import Price Index. The data session comes to a close on Thursday with July Consumer Price Index and July CPI - EU Harmonized. In addition to the upcoming data releases, there will be top tier Q2 and first half earnings releases, kicking off with Deutsche Bank on Tuesday.
A light week of data in the UK starts with July Nationwide House prices, June Net Consumer Credit, and June Mortgage Approvals on Tuesday. There is no significant data due out until Friday, however the BOE's King, Bean, Fisher, and Sentance will be testifying on the May Inflation Report at Parliament's Treasury Committee on Thursday. Friday closes out the week with the July GfK Consumer Confidence Survey.
Data out of Tokyo is moderate, starting with June Retail Trade and Large Retailers' Sales on Wednesday. Thursday sees June Unemployment Rate, July Tokyo CPI, June National CPI, and June Industrial Production. Friday wraps up the week with June Housing Starts.
Canada begins a light week of data with Industrial Product Prices and Raw Materials Price Index for June on Thursday. The data session comes to a close with May Gross Domestic Product MoM on Friday.
A light calendar down under begins with Q2 PPI and CPI due out on Sunday and Tuesday. The week wraps up with June Private Sector Credit on Thursday. New Zealand begins the week with July NBNZ Business Confidence on Tuesday. Wednesday will have the RBNZ rate decision with expectations for a 25 basis point hike to 3%. Data continues on Wednesday with June Trade Balance and wraps up on Friday with June Building Permits.
Weekly Economic and Financial Commentary U.S. Review
Home Is Where the Economy's Heart Is
* Housing starts and existing home sales declined in June, reflecting the winding down of homebuyer tax credits. * Building confidence fell to 14 in July, and June's numbers were revised down slightly. * The effect from the unwinding of various economic stimulus programs is evident in other data, with the leading indicators declining 0.2 percent and weekly firsttime unemployment claims bouncing back to 464,000. * Bernanke's midyear report to Congress outlined possible future steps the Fed may take to boost economic growth.
We Have Got to Get in Shape
If the state of the nation's housing market is at the center of the economy's near-term prospects, then we have got to get in shape. Nearly all of the major housing indicators reported this past week showed more weakness than was widely expected, suggesting that the payback from the homebuyer tax credit program will be a bit deeper and longer lasting than many had hoped. One of the most disconcerting pieces of news was housing starts, which fell 5 percent in June, following a downwardly revised 14.9 percent drop in May. A slight 2.1 percent rise in building permits initially took some of the sting out of the headline number, but all of that gain was in the volatile multi-family unit series. Permits for new single-family homes fell 3.4 percent, following 10.3 percent drops in both May and April
Single-family permits are now running at just a 421,000-unit pace, well below the recent trend in starts. When you couple this with July's decline in the Wells Fargo/NAHB homebuilders' index, there is no reason to expect housing starts to increase in July, and we may not see a gain in August either. With demand flat and credit for homebuilders still extremely tight, there is no incentive for builders to get out ahead of demand.
Existing home sales actually fell less that expected, but the trend remains unfavorable. Existing home sales have been harder to read because of the extension of the closing deadline for homebuyer tax credits from June 30 to September 30. The net effect of the deadline extension will be to moderate the slide in existing home sales over the new few months.
The latest data from the National Association of Realtors (NAR) shows that first-time homebuyers accounted for 43 percent of home sales, about the same as the prior month. Distressed transactions, which include foreclosures and short sales, accounted for 32 percent of existing home sales in June, and investor purchases accounted for 13 percent. One of the more worrisome aspects of the report is that the number of homes on the market increased in June and remains relatively high. There is currently a 10.6-month supply of condominiums on the market and 8.7-month supply of single-family homes.
There were also a couple of pieces of encouraging news. The median price of an existing home rose 1.0 percent from last June to $183,700. The NAR also noted that home prices rose in 10 of the 19 MSAs that report monthly, and sales increased in 12 of those 19 areas. In addition, mortgage applications for the purchase of a home rose 3.4 percent, as the lowest mortgage rates on record are beginning to pull some buyers back into the market.
Fed Chairman Bernanke delivered his midyear report to Congress this week and basically reiterated the forecast released in the minutes of the June FOMC meeting. The markets were initially bewildered that the Fed chairman did not focus more on the deterioration in economic activity and growth prospects that has occurred since that forecast was put together. He redeemed himself, however, by focusing on what steps the Fed could take to further stimulate economic activity.
U.S. Outlook
New Home Sales • Monday
Giving back two months of solid gains, new home sales plummeted 32.7 percent in May to a 300,000-unit pace, the lowest level on record. Demand for new homes was pulled forward due to the homebuyers' tax credit, which required buyers to sign a contract by April 30. With mortgage applications for purchase declining 14.8 percent in June, we expect at least one more month of payback. New home sales will likely fall 3.3 percent in June to a 290,000- unit pace, setting a new record low. Moreover, the downward trend in other indicators such as builder sentiment, permits, and starts continue to suggest weakness in the housing market. With new home sales at such depressed levels, a modest recovery in sales could be imminent following the tax credit payback, but any rebound in housing will likely be painfully slow.
Previous: 300K Wells Fargo: 290K Consensus: 320K
Durable Goods • Wednesday
Advance orders for durable goods fell 1.1 percent in May, driven largely by a 29.6 percent drop in nondefense aircraft orders. The decline in aircraft bookings was mostly payback from a 215.7 percent surge in April. The underlying components of the report were far more sanguine than the headline suggested, with machinery, primary metals and computers and electronics bookings all increasing on the month. New orders excluding the volatile transportation sector were up 0.9 percent in May and will likely continue to improve in coming months, but at a modest pace. Moderating its positive momentum, the ISM manufacturing index pulled back for the second consecutive month in June, likely suggesting slower manufacturing activity in the second half of the year. We expect headline durable goods to increase 1.2 percent in June, with orders excluding transportation rising 0.8 percent.
Previous: -1.1% Wells Fargo: 1.2% Consensus: 0.8%
GDP • Friday
The economic recovery that likely began a little more than a year ago is beginning to lose momentum. Much of the slowdown can be attributed to the fading of fiscal stimulus programs and the ending of the inventory cycle. Moreover, recently released economic data on retail sales and foreign trade also suggest the economic recovery is moderating. Core retail sales, which excludes auto dealers, gasoline stations and building material stores, rose only 0.2 percent in June and posted negative readings in April and May. This component of retail sales closely parallels personal consumption and suggests another quarter of weak consumer demand. International trade could also weigh down economic growth. The trade deficit widened in May and may shave 1.0 percentage point from second quarter GDP growth. Consequently, we expect real GDP likely grew at a 2.4 percent pace in the second quarter.
Previous: 2.7% Wells Fargo: 2.4% Consensus: 2.5%
Global Review
U.K. Economy Breaks into a Sprint, but Will It Last?
* The U.K. became the first major economy to report GDP growth for the second quarter. Expectations were blown away as growth expanded at the fastest clip in nearly a decade. But, given the fiscal deficit problems and upcoming cuts in government spending, does the U.K. economy really have the legs to keep up this pace? * Fiscal tightening is not the only concern in the United Kingdom. The overall rate of CPI inflation is well above the Bank of England's target of 2 percent, and the January increase in the value-added tax complicates the outlook for inflation.
Strong Growth Will Face Headwinds in the U.K.
During the global recession, the U.K. economy was among the hardest hit in terms of major developed economies, with real GDP falling more than 6 percent. Since then, a tepid recovery has taken hold and, until very recently, sequential economic growth has been weak even with the benefit of low base effects. But developments in the United Kingdom this week including a decent retail sales report and a stellar GDP print for the second quarter might seem to suggest something different. Is the U.K. economy finally catching the wind in its sails? Unfortunately, we suspect the sequential growth rate in the second quarter will likely be the high-water mark for the next several quarters and the expansion will slow somewhat as fiscal tightening and deficit reduction programs sap economic growth in coming quarters.
The Bank of England's (BoE) Monetary Policy Committee (MPC) on Wednesday released the minutes from its meeting earlier this month. As was widely expected, the MPC left rates at the very stimulative present level of 0.50 percent. There is clearly a divergence among the members of the MPC as to the timing of dialing back stimulus from the U.K. economy. Even as one member voted for a hike in the target benchmark rate, the minutes revealed that the "committee considered arguments in favour of a modest easing in the stance of monetary policy." While the recovery appears to be building up steam, the overall rate of CPI inflation is well above the Bank of England's target of 2 percent at present. Adding to inflation concerns, the MPC agreed that, in the near term, "inflation was likely to be higher." Our view is that fiscal tightening will exert headwinds on growth over the next few quarters, and there seems to be support for that position among the MPC members. That is why we are not forecasting a rate hike until the second half of 2011. The valueadded tax hike in January may keep the overall rate of CPI inflation elevated, but underlying inflationary pressures should remain benign.
Thursday's retail sales report for June showed that sales climbed 0.7 percent in the month and, excluding the volatile auto fuel component, sales climbed 1.0 percent. Month-to-month changes in retail sales are notoriously choppy, and it should be noted that retail sales have been tepid so far in this recovery; the jump in June may also reflect a temporary boost in spending related to England's participation in the World Cup.
Finally, at the end of the week, the United Kingdom became the first major developed economy to report second quarter GDP. U.K. GDP grew at a 4.5 percent pace in the second quarter after increasing at a mere 1.3 percent pace in the previous quarter. We do not yet have a breakdown of GDP into its various components, but preliminary details suggest a jump in construction sector spending. There was also an increase in government services output, an area where support will likely be absent in coming quarters as government spending is scaled back. Going forward, we do not expect the U.K. economy to match this pace of growth as it struggles to overcome headwinds from fiscal tightening.
Global Outlook
Japanese Retail Sales • Tuesday
The Japanese economy has expanded in each of the past four quarters, and total real GDP has retraced roughly half of the ground lost in the recession. Part of the recovery story in Japan has had to do with surprising strength in domestic demand. Indeed, retail sales climbed steadily in every month of the year through April before falling 2.0 percent in May. This moderation is consistent with our outlook for slower growth in the second half of the year. On Tuesday, retail sales data for June will become available. The June measure of consumer confidence surged to its highest level since 2007, which may suggest shoppers in Japan returned to the stores in June, but we do not expect strong consumer spending to last. Also out next week in Japan are data on housing starts and construction orders on Friday, which will shed light on the housing situation.
Previous: 2.8% Consensus: 3.2%
German CPI • Wednesday
As the largest economy in the Euro-zone, economic trends in Germany can influence decisions made by the European Central Bank (ECB). In ordinary times, the ECB targets an inflation rate of just under 2 percent. The year-over-year harmonized inflation rate for Germany slipped to 0.8 percent in June. A July CPI figure is expected on Wednesday of next week. A modest recovery in oil prices during the month could help lift the year-over-year rate somewhat, but inflation pressures will likely remain benign for the near future. This gives the ECB cover to keep its target rate at 1.00 percent, and to continue its other unconventional methods of stimulating the economy such as providing a nearly limitless supply of credit to banks. In addition to usual concerns like balancing growth and inflation, the ECB has the additional consideration of keeping the sovereign debt situation from spinning out of control.
Previous: 0.8% Consensus: 1.1%
Euro-zone Unemployment Rate • Friday
The unemployment rate in the Euro-zone held steady at 10 percent in May - the highest level of joblessness in more than 11 years. When the ECB recently dialed back its growth outlook for the second half of the year, ECB President Jean-Claude Trichet noted "weak labor market prospects" as one of the bank's primary worries.
The June unemployment number will hit the wire on Friday and will give financial markets a sense of whether hiring is picking up. We suspect employers across the Euro-zone will be sitting on their hands, holding back on big expansions or mass hiring until they become convinced that the sovereign debt situation is under control and until they get a better sense of how growth will be shaping up in the second half of the year.
Previous: 10.0% Consensus: 10.0%
Point of View
Interest Rate Watch
The Fed Still Has Some Bullets Left
Fed Chairman Ben Bernanke broke precious little new ground in his midyear report to Congress and essentially reiterated the forecast issued in the minutes of the June FOMC meeting. The problem with that is economic conditions have clearly deteriorated since the Fed last met, and many forecasts for second quarter growth have been scaled back by a full percentage point or more. With conditions widely thought to have deteriorated further, many of the questions the Fed chairman faced were whether the Fed had any bullets left if the recovery should falter.
Bernanke outlined the steps the Fed could take to provide more stimulus if conditions warranted. He stated the Fed could change its policy statement to indicate that shortterm interest rates would remain near zero for an even longer period. The Fed could also reduce the interest rate it pays on excess reserves. In addition, it could reinvest the proceeds of maturing mortgage backed securities or buy more securities.
While Bernanke's reasoning is perfectly sound, the first option already appears to have been played out. The financial markets have already pushed the first Fed tightening all the way out into late 2011. Announcing that the extended period had been extended further would seem anticlimactic at this point.
We believe the Fed is putting on a brave front. While he stood by the Fed's forecast, Bernanke also noted there are downside risks to the forecast and also spent considerable time lamenting the problems with persistently high unemployment. We expect the Fed to reduce its forecast later this year.
A second round of quantitative easing was always a long shot unless we saw severe deterioration in the economic outlook or some sort of exogenous shock. That said, the Fed would be wise to keep its powder dry. There are still huge unresolved issues with the sovereign debt crisis in Europe and municipal finances in the U.S.
Consumer Credit Insights
A New Credit Paradigm
Consumer spending as a share of real gross domestic product (GDP) has risen from 60 percent in the early 1950s to 70 percent today. These were the heydays of American consumer might. These were the days when if you wanted something, you bought it, with little thought to if you could afford it. This was fueled by a post-war economy that continued to innovate, expand and grow. More recently, this was accompanied by a severe lack of concern for the credit quality of borrowers, which led to a credit explosion. Even the Great Recession didn't stop this trend, as the peak of consumers' share of real GDP was reached in the third quarter of 2009. But the U.S. economy is going through a structural shift, characterized by a new credit paradigm.
With the passage of the Financial Regulation (FINREG) Bill, as the banks warned, credit is likely to be more scarce than it already is. The new rules will force banks to hold more capital, which could restrain loan growth. In addition, due to the reduction in interchange fees and other stipulations in the bill, banks will need to find new sources of revenue. All of this will likely lead to less reliance on credit, a more frugal consumer and a smaller consumer contribution to GDP. But maybe this isn't such a bad thing. After all, diversification is a good thing, right? Maybe it's time to focus more on trade. Increasing exports would support economic growth, likely create more jobs and would help to reduce the current account deficit. Topic of the Week
A Glimmer of Hope in the Construction Outlook
The Architectural Billings Index (ABI) is a monthly diffusion index that can serve as a leading economic indicator for nonresidential construction spending. The American Institute of Architects surveys around 300 architecture firms across the country where participants are asked whether their billings increased, decreased, or stayed the same. In June, the ABI posted a reading of 46.0, remaining below the breakeven of 50 for nearly two and a half years. The score continues to suggest further weakness ahead for nonresidential outlays.
All is not doom and gloom, however. The ABI, although still below the threshold of 50, has risen significantly since reaching its record low of 33.9 in January 2009. Despite May's subpar reading, a closer look at its components sheds some light on the future of the nonresidential construction industry. Billings for architecture firms with a commercial/industrial specialization posted a score of 50.6 in June, putting the sub-index in expansionary territory for a second consecutive month. Commercial and industrial construction spending can lag the commercial/industrial sub-index up to 11 months, which suggests better times could be less than a year away in this sector.
The ISM Manufacturing Index, which also closely parallels the commercial/industrial sub-index, has been in expansionary territory for nearly a year and could also portend future growth in the commercial and industrial sector.
It is still too early to predict what will come of the sector and nonresidential construction spending overall, however. Sure, the commercial/industrial sub-index surpassed the breakeven of 50, but two months in positive territory is not nearly enough evidence to prove a recovery. Moreover, while the index provides valuable insight, it is a diffusion index, which can only accurately portray the breadth and not the depth of the industry's strength. We expect nonresidential construction outlays will continue to fall well into 2010.
* Fed Chairman Bernanke delivers semi-annual testimony to Congress, in which he noted uncertainty in the economic outlook but stuck to his guns in continuing to prudently plan the ultimate withdrawal of the extraordinary monetary accommodation. * Chatter of U.S. double-dip recession remains in the headlines. High frequency and leading indicators do support a slowdown, but the indicators are nowhere near levels required to flash a re-entry into a recession. A mid-cycle slowdown remains the most likely outcome. * No sign that the housing market is breaking free from the doldrums. Starts slip more than market expectations, and while existing home sales beat market expectations, they still backtrack by 5.1% in June. * In Canada, markets were unscathed by the widely anticipated 25 basis point rate hike by the Bank of Canada (BoC). Reactions, however, followed the ensuing dovish BoC communiqué. * BoC affirmed that fiscal austerity measures relating to the European sovereign debt crisis appeased the risk of an adverse outcome and lifted the likelihood for sustainable long-term growth, but the global economy will recover at a more moderate pace than previously anticipated. The BoC observed that the Canadian economy has largely developed as anticipated, except for growth in business investment which seems to be constrained by uncertainties surrounding the global outlook. * We expect a protracted renormalization of the overnight rate, with gradual hikes of 25 basis points through the latter half of 2010 and 2011, albeit interrupted by occasional pauses. The overnight rate should reach 1.25% and 2.50% by the end of 2010 and 2011, respectively.
UNITED STATES - THE BATTLE OF WORDS
When Fed Chairman Bernanke delivered his semi-annual testimony to Congress on Wednesday, equity markets sold off on trepidation that the speech did not address or make a case for additional monetary stimulus. Rather, the central banker noted that "the Federal Reserve continues prudent planning for the ultimate withdrawal of extraordinary monetary policy accommodation." The market reaction was curious in many respects, because the US economy is already one year into an economic recovery and rates remain at record lows alongside a bloated Fed balance sheet. What more can be expected of the Fed? Shouldn't we be thinking of monetary withdrawal, the potential for persistent low rates to fuel bubbles in other areas, and unacceptable inflationary pressures taking hold one to two years out? The problem rests with the market perception that the recent slowdown in some economic indicators could be a harbinger that the US economy is headed for a double dip. Before addressing this possibility, there must first be an understanding on what a 'double dip' actually means. It is not a mid-cycle slowdown, such as real GDP growth downshifting from an average annualized pace of 3.5% over the past three quarters to a 1-2.5% range, which is what we believe is actually occurring. Rather, we take a double-dip to refer to broad-based weakness, marked by a contraction in domestic demand indicators, such as industrial production and private sector jobs. In other words, a return to a recessionary period, like that which occurred over the 1980-1982 period.
So, are the economic indicators pointing to a double dip recession? No. High frequency and leading indicators do support a slowdown, but they are nowhere near levels required to be flashing a re-entry into a recession. The manufacturing ISM index stands firmly in expansion territory at 56.2 - which is even above its long term historical average. An index in excess of 42 generally indicates an expansion of the overall economy and, at the very least, it would have to drop towards the 46 level to be consistent with historical signals of when the US economy was nearing (but not yet in) recession. Private sector hiring is proceeding at a snail's pace relative to any economist's preference, but it is proceeding nonetheless. Since the 1960s, a recession has always ensued when the 6-month annualized change of private sector employment was decelerating and went as low as 0.6%. Currently this is not the case, the trend is accelerating and is well outside this danger zone at 1.1% - but this is a great indicator to keep an eye on in upcoming payrolls data. As an aside, the nearly 400,000 temporary workers hired since the end of the recession certainly speaks to the ongoing cautiousness of corporations, but not their disdain to hire. Temporary workers are a leading payrolls indicator, which is still flashing a green light for the expansion.
I could go on through a list of other leading indicators, but since word space is at a premium, I would rather discuss one other possibility tied to the last point made. An alternative to the double-dip recession is what is referred to by the NBER as a 'growth recession'. This is when the economy is expanding but not at a pace that prevents the level of unemployment from continuing to rise. Although the post 2001 period was not officially marked as a 'growth recession', the job losses that ensued in the 19 months following that recession would have made that expansionary period still feel like a recession to many Americans. With firms having hired nearly 600,000 workers since the start of this year, the US economy currently does not satisfy this definition. However, among the various downside risks to the base case mid-cycle slowdown, it seems more probable that an over-cautious business mentality could bleed back into private sector job losses rather than we end up in a position of a double-dip recession. If the former were to occur, however, the Fed would likely be wary about adding in more stimulus in an economy that was still expanding and already had record amounts of monetary stimulus, as it could create problems elsewhere in the domestic or global economy... like investors taking inappropriate risk in search of yield... been there, done that.
CANADA - THE BANK OF CANADA TIPTOES THROUGH RATE HIKES
Attention centred this week around the Bank of Canada's (BoC) overnight rate announcement on Tuesday and the subsequent release of its quarterly Monetary Policy Report (MPR) on Thursday. While markets were unscathed by the widely anticipated 25 basis point rate hike, reactions followed the ensuing dovish BoC communiqué.
The BoC pointedly characterized the global economic recovery as one that is "not yet self-sustaining". It stressed that while the fiscal austerity measures relating to the European sovereign debt crisis appeased the risk of an adverse outcome and lifted the likelihood for sustainable long-term growth, the global economy will recover at a more moderate pace than previously anticipated. Moreover, it noted that growth in U.S. private demand, while picking up, remains uneven. The BoC affirmed that the Canadian economy has largely developed as anticipated, except for growth in business investment which seems to be constrained by uncertainties surrounding the global outlook. Going forward, business investment and net exports are now expected to contribute more significantly to growth.
All said, the BoC downgraded its real GDP forecast for 2010 and 2011 by 20 basis points relative to its April MPR (from 3.7 to 3.5 per cent in 2010 and from 3.1 to 2.9 per cent in 2011). Our forecast is slightly more pessimistic as we forecast a stronger Canadian dollar (and hence, weaker net exports) and a weaker contribution from consumer spending. While the BoC's downward revision in forecast growth may seem insignificant, it is projected to delay the closing of the output gap by two quarters, to Q4/2011.
The BoC statement cautiously concludes that "any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments", thereby leaving the door open to an interest rate pause if conditions warrant. The marginal increase in the overnight rate can be expected to have limited economic consequences beyond raising the cost of borrowing on variable rate loans. Longer-term borrowing costs (for example, on a 5-year mortgage) have actually retreated since May, thereby reducing associated debt service costs.
We expect a protracted renormalization of the overnight rate, with gradual hikes of 25 basis points through the latter half of 2010 and 2011, albeit interrupted by occasional pauses. The overnight rate should reach 1.25% and 2.50% by the end of 2010 and 2011, respectively.
The release of the BoC communiqué brought about a temporary appreciation of the CAD vis-à-vis the USD. This was reversed in short order on Wednesday following U.S. Fed Chairman Bernanke's testimony before Congress stating that the "economic outlook remains unusually uncertain".
This week's data releases for Canadian retail sales and the Consumer Price Index (CPI) echoed the BoC's cautious tone regarding the economic outlook. In real terms, retail sales posted a M/M gain of 0.4% in May, largely supported by weaker prices. Meanwhile, the core measure of CPI decelerated to 1.7% in the twelve months leading to June from a gain of 1.8% in May. The upcoming release of the monthly GDP for May next Friday will be closely tracked to gauge activity in Q2 and the extent of the economy's deceleration from 5-6% growth of the previous two quarters.
U.S.: UPCOMING KEY ECONOMIC RELEASES
U.S. Real GDP - Q2/10
* Release Date: July 30/10 * Q1 Result: 2.7% Q/Q ann. * TD Forecast: 2.1% Q/Q ann. * Consensus: 2.5% Q/Q ann.
The slowdown in economic growth following the stimulus and inventory driven recovery came a quarter earlier than expected. After average growth of 3.5% over the last three quarters (all rates annualized), real GDP growth is expected to have slowed to 2.1% in the second quarter of 2010. Much of the slowdown is attributable to a deceleration in consumer spending growth from a rate of 3.0% in the first quarter to just over 2.0% in the second quarter. Retail sales at the outset of the quarter were given a boost by strong spending on building materials, but this wore off quickly and retail sales declined outright in both May and June. Similarly, the homebuyer's tax credit contributed to rising home sales at the outset of Q2, but this too reversed course as the quarter closed out. Business fixed investment, and especially spending on equipment and software, stands out as the one major bright spot for the quarter, increasing by close to 20%. The rebound in machinery investment comes after an unprecedented decline that has led the stock of capital goods to fall over the last three quarters. On the whole, final domestic demand likely had a fairly good quarter, increasing by close to 4.0%, mostly due to growth early on. Nonetheless, as the trade data revealed, much of this demand went to foreign producers. Import growth is expected to be more than double the pace of export growth, leading net-trade to subtract close to 2 percentage points from real GDP in the quarter. Peering into the second half of this year, expect much of the same - growth to continue but at a not quite satisfying pace.
The pace of economic activity in Canada has clearly decelerated from the blockbuster rate set during the first quarter of the year. This was to be expected, as one must go back to the heady days of the tech boom to find as rapid of a six month growth rate as we enjoyed through the end of 2009 and into 2010. Alas the release of April's GDP report, which showed economic activity screeched to a halt, was perhaps a bit too shocking of a deceleration. Looking over the recent spate of soft data, we approached our forecast for May real GDP with some trepidation. Although the nominal growth rate for manufacturing shipments and retail sales were on the weak side, we credit subdued price pressures for supporting their constant-price counterparts. So we anticipate that the service sector will help underpin a 0.1% increase in real GDP in May. When we build out our quarterly forecast, the impact of the slowdown through the first two months of Q2 will make it difficult for the annualized growth rate to exceed 3.0%. This is broadly in line with what the Bank of Canada expects and is consistent with our expectation for a gradual economic recovery over the balance of the year.
The Fed Chairman, Ben Bernanke dominated currency trading this week adding risk and trader's aversion back into the mix. When the Federal Reserve worries in public about the lack of job creation in the United States, and says that “properly executed' tax cuts can benefit an economy, a policy in direct opposition to the government's plans, markets begin to doubt the security in their own positive economic judgments. The Fed Chair has always been most circumspect in hi economic assessments, if he is willing to pass comment on current government policy, what fears does he hold if no changes are made in Us economic policy?
In the hour after his congressional testimony at 2:00 pm Easter Time the euro dropped almost a figure against the dollar. If the United States economy is then the rest of the world, including China and Asia is as well. Risk renters the currency market and the dollar is the risk slayer of choice.
After taking the cue from their American regulatory colleagues, the European bureaucrats conducting the bank capital adequacy ratings have relied, as they have said they would, on Europe accounting standards to measure their institutions. The 91 banks being assessed will have to take haircuts on sovereign debt that they own only if it is classified as belonging to their trading portfolios not their investment books. The probably result is that a majority of the outstanding debt of Greece, Ireland Spain Portugal and the rest of Europe, owned by European banks will not have any reductions in value and hence the banks will not incur additional capital requirements.
The stress tests assume losses of 23.1% on Greek debt, 14% on Portuguese bonds, 12.3% on Spanish securities, 5.9% on French and 4.7% on German issues, according to Bloomberg.
The different market reaction to potential further quantitative easing by the Federal Reserve between March 2009 and Wednesday is striking.
Last March 18th when the Fed announced its $300 billion Treasury purchase program in the context of new trillion dollar deficits and the dollar got hammered, losing almost five figures on the day again the euro. But that was then. Trillion dollar deficits have become routine. The administration has planned a decade of such and the market reaction is passé. But worry about the state of the US economy and by default the world recession recovery is the current topic. When the Chairman said that “significant time will be required to restore 8 ½ million jobs”, traders heard economic slowdown and potential quantitative easing, one of the few monetary tools remaining to the Fed. This time mortgage rates and the ten-year Treasury are at or close to historic lows; the markets do not fear the monetization jinn. The last two years have proved that the dollar is the world's risk destination. If the US economy is headed for a serious trough or recession risk will rise in every market and economy. When risk goes up so does the dollar. The US currency gained almost two figures against the euro in New York afternoon trading once Chairman Bernanke began speaking before Congress.
The EU bank stress tests will satisfy no one. These tests were primarily about sovereign debt. To exclude this debt form the capital adequacy measures, no matter how adverse the supposed ‘stress test' scenarios are, entirely begs the question. What security is there that Greece of any of the other impaired sovereign will be able to pay these debts at maturity? Holding them as investments is irrevelent. The only measure of the current value of these bonds and sovereign paper is the market judgment upon sale, essentially the haircut applied by the testers themselves. The euro cannot proper until the European banking system takes the full measure of its medicine.
A week spent speculating which banks might fail their 'stress tests', and whether these were worth doing at all, indices alternating between fairly large up and down days to end the week in positive territory. Jakarta, Mumbai and Thailand set new highs for 2010. The Japanese stock market closed near the lowest levels in two years, pressured by a strong yen (86.27) and dragged down by the banks index. The US dollar has lost ground against all major currencies this week, the Australian dollar leading at $0.8972 (a ten-week high) and the Swiss franc at 1.0400, best this year. The Hungarian forint weakened to 292.00 per Euro because of new PM Viktor Orban's refusal to implement IMF-suggested austerity measures. Top-quality Treasuries remain well bid, those of weaker Eurozone countries still all too close to their records over Bunds. US asset-backed securities the first casualty of new financial regulation, so the SEC has had to allow a 6-month grace period for implementation. [Rating agencies can now be sued for fraud and reckless behaviour so they are not allowing their ratings to be published in prospectuses]. ICE Sugar rallied to 18.66 cents per pound, its most expensive since March though a fraction of February's unsustainable 30.40 peak. Most Baltic Freight rates are at their lowest in a year or more. Political and Economic Developments
The Bank of Canada raised it key rate by 25 basis points to 0.75%; Brazil raised its Selic rate 50 basis points to 10.75%, slightly less than expected on negative inflation in June.
UK Q2 GDP came in a better than expected +1.1% Q/Q taking Y/Y growth to +1.6%, helped in part by June Retail Sales which rose by 1.0% M/M and +3.1% Y/Y excluding auto-fuel. No doubt the football World Cup had an effect, but this keeps it at the average of the last decade. With June Core CPI also running at +3.1% Y/Y (RPI +5.0% Y/Y and among the highest in two decades) yet Gilts maturing within 9 years yielding under 3.00%, real interest rates are decidedly negative. Pity then that National Savings and Investments was forced to withdraw its index-linked securities (RPI +1.00% per annum) to all new investors, the first time in their 35-year history, because of huge inflows. Hometrack has annual house prices rising by under 3.00% or shrinking since December 2007, Rightmove suggests +3.7% Y/Y, though the Halifax and Nationwide calculate 6.3% and 8.7% respectively. Gains on main homes tax free.
German and Eurozone Purchasing Managers' Indices, IFO and Consumer Confidence Surveys all upbeat versus June's.
Underlying Themes
For several weeks now politicians and central bankers have been suggesting we shouldn't be so gloomy, that in fact the economy was growing and banks were sound, many giving lengthy TV interviews on these subjects. Mercifully chairman Bernanke in his semi-annual testimony to the Senate Banking Committee spared us the usual drivel. Saying the number one concern for small businesses was a lack of demand not access to credit and that funding was not a constraint on large firms, that state and local governments were under fiscal stress, plus the worrisome structural problems of high unemployment, were all drags on economic recovery; above all the 'economic outlook remains unusually uncertain'. Perhaps they have at last grasped the enormity of the problem; perhaps they now know there are no more tools in the box; perhaps they now understand that deleveraging and rebuilding overstretched balance sheets takes a very long time. Perhaps the Bank of England's MPC is also adopting a more realistic approach. After predicting UK CPI would be back at target by the end of this year (their usual mañana mentality) chief economist Spencer Dale suggested this might now not happen until the end of 2011, and that the country would not get back to normal 'for an awfully long time'.
What to watch for next week
Monday Japan June Trade Balance, German Import Prices due from this day, US New Home Sales and UK July Hometrack Survey. Tuesday Japan June Corporate Service Prices, EZ16 M3 Money Supply, UK CBI July Distributive Trades, US Consumer Confidence, German August GfK Consumer Confidence and US May CaseShiller House Prices. Wednesday Japan July Small Business Confidence, ECB Bank Lending Survey, July CPI for the various German states due and US June Durable Goods Orders. Thursday Japan June Retail Trade, Large Retailers' Sales, UK Net Consumer Credit, Mortgage Approvals, German July Business Confidence, Unemployment, EZ16 Business Climate and Confidence and the Fed's Beige Book. Friday Japan June Unemployment, Household Spending, CPI, Industrial and Vehicle Production, Housing Starts, Construction Orders and Tokyo July CPI. Then EZ16 June Unemployment, CPI, US Q2 GDP, July Chicago Purchasing Managers and final University of Michigan Confidence Survey. Monday 2nd August holidays in Canada and Iceland.
Positioning and Technical Analysis
The last week of another thin summer month and many markets are tottering at fairly pivotal levels. August will probably see trends develop and more chaotic conditions predominate. Watch FX weekly closes for important breaks; another round of generalised US dollar selling is due, something which should prop up commodity prices. Top-notch Treasuries and Corporate bonds should remain well bid maintaining the pressure on credit spreads. Stock markets will probably be subject to increasingly violent intra-day swings.
