Markets are trading in a lethargic manner as participants continue to nervously take on risk-correlated trades. The move toward risk is logical because without the massive sovereign crisis fear hovering over the market like the Sword of Damocles, one needs to consider the fundamentals - particularly monetary policy, as the core driver. Overall, the rate at which central banks are mopping up excess liquidity has been slower-than-expected with the BoE and Fed still discussing the potential for further QE.
In this era of ultra-low policy rates, risk taking will be encouraged. In the past few days, we’ve seen Eurozone sovereign spreads narrow considerably, the VIX index is trending lower along with decreased FX volatilities and global equity markets have demonstrated a resilience to bearish news. If corporate earnings come out strong, this could be the start of a summer rally, however we’re not so sure. Our view is that the fears surrounding sovereign risk may have subsided for the time being, but will most likely return this fall.
Even with the recent stint of positive news, foreboding signs are on the horizon. The Fed’s Beige book released yesterday reported that the US recovery remained on track but has begun to actively slow. The notion of a US slowdown was reinforced by recent US data, including yesterday’s durable goods figures.
In New Zealand, the RBNZ raised its policy rate 25 bps to 3.00% as we had predicted and the accompanying statement asserted that future growth prospects had deteriorated considerably. Traders rapidly paired down their interest rate expectations which in turn weighed on the NZD.
Governor King’s comment seemed to slam into the sterling market, which was curious because his remarks were really nothing new or original. He recommended caution over reading too much into the strong Q2 GDP figures and reaffirmed that inflation remained finely in check. Paul Fisher stated that the global outlook had weakened and David Miles resonated with the most dovish view of all – that inflation would taper off and the current ultra-loose policy was correct.
The combination of all these comments hit the GBP value like a sledge hammer. It wasn’t until Sentance’s hawkish comments that the “current policy setting was extreme” that some sanity was regained in the FX market.
We are convinced that the market is now underestimating the strength of the UK recovery and that the current downtrend in inflation will flat line and then begin to move higher. The BoE interest rate path should give GBP a boost in the mid-term.
Otherwise, there’s a frenzy of data to be released during the European session today and after that it’s onto corporate earnings. We will continue to use equity market activity as a compass for FX directions. Correlation remains particularly high between the EURUSD and S&P and should thus be traded accordingly.
Today's Key Issues (time in GMT): 07:30 SEK Jun retail sales, +0.6% m/m EXP; prior +1.6% m/m, +2.7% y/y. 08:00 EUR GER Jul unemployment rate, 7.6% sa EXP; prior 7.7%. 08:00 EUR GER Jul unemployment, nsa and sa; prior 3.153 mln, 3.23 mln. 08:00 EUR GER Jul unemployment - change, -10k sa EXP; prior -21.0k. 08:00 EUR ITA Jun wages, +2.6% y/y EXP; prior +0.1% m/m, +2.5% y/y. 08:30 GBP Jun consumer credit, GBP300 mln EXP; prior GBP331 mln. 08:30 GBP Jun mortgage appl/loans, 49k/GBP1 bln EXP; prior 49.81k/GBP1.184 bln. 08:30 GBP Jun money supply; prior unch. 09:00 EUR Jul business climate index, 0.39 EXP; prior 0.37. 09:00 EUR Jul consumer sentiment index, -14.0 EXP; prior -17.0. 09:00 EUR Jul economic sentiment index, 99.1 EXP; prior 98.7. 09:00 EUR Jul industrial sentiment index, -5.0 EXP; prior -6.0. 09:00 EUR Jul services sentiment index; prior 4.0. 12:30 USD Initial jobless claims, thous (4wma) 24-Jul 23:01 GBP GfK consumer confidence survey, bal Jul
EurUsd We’ve had another day of tight range trading in EURUSD, and for the time being there is a ceiling of resistance at 1.3046 that is blocking the path higher. We are still playing the bullish break out of a symmetrical triangle pattern on the hourly chart, and based on the projected path of that triangle we are expecting a move to 1.3290 in the coming days. Once we clear 1.3046, the next resistance level is expected at 1.3093 (10 May high) with weak resistance also anticipated at 1.3213 and 1.3254 (14 and 13 May highs respectively). Support at 1.2950 is still valid, with trendline support just below at 1.2940 –should the pair drop below there we would have to concede the failure of the bullish triangle breakout, and would then eye technical levels below at 1.2793 (23 Jul low), 1.2733 (21 Jul low), 1.2683 (14 Jul low) and 1.2522 (13 Jul low).
GbpUsd There were a few hairy moments yesterday for GBPUSD as BoE’s King hit the newswires to downplay the significance of the latest GDP reading, but tellingly the temporary sell-off was met with eager buyers clambering to get in on this impressive GBPUSD recovery, and the pair has since pushed to fresh highs of 1.5655. As previously discussed, we feel that the UK GDP figures last Friday were a game changer, and from here we would relish any dips towards the lower edge of the current uptrend channel now seen at 1.5385 to get long. The way things have gone so far, we may not even get a correction that deep as decent support is also anticipated around the 200-day moving average at 1.5545, 1.5525 pivot, then again at 1.5443 (yesterday’s low). Really there is not much standing in the way of an assault on the 17 Feb high 1.5816 in the coming days, and beyond there we open up the possibility of re-testing the top of the 8-week uptrend channel (currently at 1.5950) before the psychologically significant 1.6000.
UsdJpy USDJPY may have slumped in a rather ungainly fashion back below 87.50 in the past few sessions, but the pair is at the very least continued carve out successively higher highs and higher lows since the double bottom around 86.25 levels. The last rally (which topped out at 88.11) was thwarted by a pretty formidable confluence of resistance levels (8-week downtrend resistance, top of 1-week uptrend channel and 88.00 pivot), but we still believe the bulls can overcome these barriers on a subsequent re-test now they are more comfortably spaced out. The 8-week downtrend has now crept down to 87.90 while the top of the current uptrend channel has climbed to 88.25; however thereafter few levels are discernible ahead of our triangle target 88.85. Should the rally have the momentum to continue beyond there, look for sellers at 89.15 (12 Jul high) and 89.50 (28-29 Jun high). The most convincing support level to try getting in on the long trade appears to be the lower edge of the 1-week uptrend which is now seen at 87.10-15 (already had one test of that area this morning), then further supports anticipated at 86.82 (Tuesday’s low) and 86.25 (recent range floor).
UsdChf Despite the bullish engulfing candlestick on Monday/Tuesday of this week AND the important break of the 1-month downtrend channel, the bulls have looked lacklustre in the past 24 hours and have sloppily allowed the 1-week uptrend to break down around 1.0560. This conclusively negates the bullish flag pattern we had proposed yesterday, and seems compelling argument to move to the sidelines for the time being on this one and wait for more favourable risk-reward trades to present themselves. Buyers should be able to catch the fall if it extends to 1.0450, and an extremely important support still remains at 1.0400 so we would look to resume buying down at those levels. Strong selling interest may once again cap rallies at 1.0640-47 (13 Jul & 27 Jul highs and 200-day moving average), and given the propensity of July/August markets to be directionless and range bound, we would actually look to sell at those levels rather than look for a continuation higher. IF the bulls manage to pull their fingers out and effect that break higher, a powerful resistance level around 1.0700 is backed up but the top of the 1-week uptrend at 1.0710.
€ 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.
(Reuters) - Gold bounced higher on Thursday as the U.S. dollar weakened and physical buying picked up, but gains are seen limited after holdings in the world's largest gold-backed ETF fell to the lowest since early June.
Premiums for gold bars edged up in Asia, but although jewelers were happy to buy at lower levels, uncertainties in the outlook for the U.S. economy and poor technicals weighed on sentiment. Other precious metals tracked bullion higher.
Spot gold added $4.10 an ounce to $1,166.65 an ounce by 0602 GMT after falling as low as $1,156.90 on Wednesday, its weakest since late April. Bullion hovered below the 50-day and 100-day moving averages.
For a 24-hour gold technical outlook, see:
here
"There's a lot of safe-haven positioning being unwound right now in the gold market. Potentially, it could unwind down $1,130-$1,120 pretty quickly," said Mark Pervan, senior commodities analyst at ANZ in Melbourne.
"A lot of the gold gains in the last six months were driven by euro weakness, and that was really safe haven buying. The trend doesn't look good. Potentially, it could move down toward the low $1,100s," said Pervan, referring to levels last seen in April.
The world's largest gold-backed exchange-traded fund, SPDR Gold Trust (GLD.P), said its holdings fell to 1,282.279 tonnes by July 28 from 1,300.829 on July 27 -- their lowest since early June. The holdings hit a record at 1,320.436 tonnes on June 29.
Cash gold was nearly 8 percent below a lifetime high around $1,264 struck in June, when investors poured money into bullion on worries the euro zone debt crisis would spread. U.S. gold futures for August delivery rose $5.8 $1,166.2 an ounce.
Gold bars were offered at a $1.50 premium to the spot London prices in Hong Kong, up from $1.20 on Monday. In Singapore, premiums rose to $1.50 from between 80 cents and $1.20 earlier this week, while dealers in Tokyo pushed up the differentials to $1 from 50 cents.
"The premiums have gone up after prices dipped to the $1,160 mark. There are strong inquiries in the physical market, that's why we feel that we should push up the premiums," said a dealer in Tokyo.
The U.S. dollar slipped toward three-month lows against a basket of currencies on Thursday as investors cut their positions due to fresh evidence of a patchy recovery in the U.S.
"We're seeing a bit of short covering, so that's why the market has stabilized at current levels. A drop in the SPDR ETF may suggests investors think the euro zone is getting better," said a dealer in Hong Kong.
"Gold looks slightly bearish, although we see a mixture of buying from jewelers and other physical buyers."
The European Central Bank will likely wait until late 2011 before hiking interest rates, according to a Reuters poll of over 70 economists who stayed cautious in July despite some encouraging economic data.
The Nikkei ended down on Thursday as U.S. stocks slipped after weak durable goods figures and a downbeat assessment of the economy from the Fed's Beige Book kept the benchmark S&P 500 trapped below its 200-day moving average. .T .N
(Reuters) - The economy kept growing overall in recent weeks, but unevenly and it actually slowed in a few regions as housing markets softened after the end of a popular tax break, the Federal Reserve said on Wednesday.
The U.S. central bank's latest Beige Book summary of national conditions, based on information before July 19, said activity "continued to increase, on balance" though Cleveland and Kansas City said business held steady.
"Among those districts reporting improvements in economic activity, a number of them noted that the increases were modest, and two districts, Atlanta and Chicago, said the pace of economic activity had slowed recently," the Fed said.
The Beige Book reports on conditions in all 12 districts that are part of the Federal Reserve system and carries a high degree of credibility because it is based on interviews and anecdotal information from coast to coast.
The latest report, compiled by the St. Louis Fed Bank, covers seven weeks from the previous Beige Book in early June and painted a picture of less-than-robust recovery.
While manufacturing continued to expand in most districts, activity had slowed or leveled off in New York, Cleveland, Kansas City, Chicago, Atlanta and Richmond.
That fit with a report issued earlier on Wednesday by the government showing that new orders for costly manufactured goods unexpectedly dropped in June -- a second straight monthly fall that pointed to waning momentum in the factory sector.
Retail sales -- a gauge of consumers' economic participation -- were generally higher but modestly so.
"Several districts cited apparel, food and other necessities as recent strong sellers, while big-ticket items were weak sellers," the Fed said.
Most districts said new-car sales were declining and housing markets were sagging.
"Activity in residential real estate markets was sluggish in most districts after the expiration of the April 30 deadline for the homebuyer tax credit," the Fed said, referring to a now-expired $8,000 credit offered as an encouragement for first-time home buyers.
There was a modest improvement in labor markets, with several reports of temporary hiring. Consumer prices held steady in most parts of the country while wage pressures were described as "contained."
(Reporting by Glenn Somerville; editing by Andrew Hay and Jan Paschal)
(Reuters) - World stocks rose for the fifth day running on Wednesday as solid corporate earnings combined with easing fears about financial stability to boost investors appetite for riskier assets.
The dollar, following recent risk patterns, was lower against a basket of major currencies.
MSCI's all-country world index .MIWD00000PUS was up 0.4 percent against the previous close and the Thomson Reuters global stock index .TRXFLDGLPU gained half a percent. The MSCI index had touched a 2-1/2 month high during Tuesday's session.
Earnings reports in Europe and Japan were behind much of the improved mood.
"Earnings are coming through better than expected," said Bernard McAlinden, investment strategist at NCB Stockbrokers in Dublin. "Banks are better ... having underperformed for some time."
Among European companies reporting forecast-beating results were Spanish bank BBVA (BBVA.MC), British American Tobacco (BATS.L), German chipmaker Infineon (IFXGn.DE) and the world's leading luxury goods group LVMH (LVMH.PA).
The FTSEurofirst 300 .FTEU3 was up half a percent for a 1.3 percent year-to-date gain. Banks were leading the way. BBVA was up nearly 1 percent.
Earlier, Japan's Nikkei .N225 climbed 2.7 percent for its highest close and biggest one-day gain in two weeks. Canon (7751.T) jumped 5.7 percent after the world's No. 1 camera maker reported its strongest profit in seven quarters.
The positive earnings sentiment trumped concerns about a slowing U.S. economy, epitomized by mixed economic data on Tuesday. Home prices rose in May, but labor-market worries took July consumer confidence to its lowest since February.
U.S. financial services firm State Street suggested on Tuesday, however, that confidence among institutional investors was rising across the board and that good valuations were attracting them back into equities.
EURO REBOUND
The euro hit a two-month high against the yen and was up against the dollar as recent signs of resilience in the euro zone economy and solid bank earnings released brought out buyers.
Against the dollar, the euro was up a quarter of a percent at $1.3025, hovering near an 11-week high of $1.3047 struck on Tuesday.
"Clearly there's a risk-on situation as the market is starting to believe there's a (European) recovery in place, but there is thin liquidity behind it," said Neil Mellor, currency strategist at Bank of New York Mellon.
Euro zone government bond yields fell, with the focus on a Portuguese auction later in the day.
(Additional reporting by Brian Gorman and Neal Armstrong; editing by Patrick Graham)
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)
Just as the stress test advocates were getting ready to declare Friday’s results a success due to a selloff in USD and rally in equity markets, we then ran right into a summer whipsaw.
The broad majority of G10 currencies sharply reversed their brief trends with today’s European open. Yesterday’s wave of risky asset investing lacked any solid drivers, so the momentum was bound to falter. Commodities continue to trade well (the exception being Gold) as Crude Oil continues to test the top part of its ranged resistance at 79.50. Commodity currencies should continue to be supported and could even receive a decent push in the near-term. AUDUSD traded about its 200 day moving average for the first time since May, while EURUSD traded about 1.3000. However given the frivolous nature of the current low-liquidity trading environment, we suspect the tide will change again.
The markets did view the stress tests as a minor positive, as slightly increased transparency is always good, sovereign bond spreads only tightened slightly. The tests failed to truly address the concerns of the market, especially because some EU banks refused to disclose their sovereign debt holdings. Due to several German banks refusing disclosure, German yields were pushed higher.
On a side note, Basel III announced yesterday that the members had come to a historic agreement to tighten capital requirements and start worldwide liquidity & leverage rules. Most likely, they’ll reduce some of their proposals while postponing others.
FX markets should settle into a period of consolidation this week as a lack of economic data will hinder any large decision making processes.
EurUsd The symmetrical triangle pattern we highlighted in yesterday’s report now appears to have become activated by the break above 1.2950, so we have gone long and now set our sights on a target above at 1.3290. The market is being somewhat choppy and directionless this morning, so should we pare back some gains and get a re-test of the 1.2950 break-out area we feel it would be a great opportunity to add to longs (or for those who missed the initial break-out to jump onboard). Next resistance is expected to exert its effect at 1.3028 (20 Jul high) and 1.3093 (10 May high) with weak resistance also anticipated at 1.3213 and 1.3254 (14 and 13 May highs respectively). With the 1-month uptrend very much still in play we expect buyers to step in ahead of trendline support at 1.2965 with more technical levels seen at 1.2793 (Friday’s low), 1.2733 (21 Jul low), 1.2683 (14 Jul low) and 1.2522 (13 Jul low).
GbpUsd GBPUSD’s revival has continued in the past 24 hours, with the 15 Jul high of 1.5473 becoming the latest technical landmark to be conquered by the bulls as the pair has marched on to the heady heights of 1.5530 not seen since February. For now, the quick peek above 1.5525 (15 Apr high) has only been brief, and indeed the pair has tumbled rather ungracefully back down to 1.5470 levels this morning. But we feel that the UK GDP figures last Friday were a game changer, and from here we would relish any dips towards the lower edge of the current uptrend channel (now seen at 1.5315) to get long. The 1.5350 pivot does come in just ahead of the trendline today so we set a limit order around 1.5360 with a stop through 1.5300 (the back side of last week’s downtrend). For now we feel the cluttered net of technical resistance above will cap this leg of the rally between 1.5525-75; this zone contains not only the 15 April high as previously discussed, but also the 200-day moving average at 1.5554 and 23 Feb high 1.5575. Should we be wrong and the pair instead capitulate through uptrend support, next levels eyed below are at 1.5125 (last Wednesday’s low), followed by 1.5080. 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 Although USDJPY and JPY-crosses have been broadly supported since the release of the bank stress tests and the much better than expected US housing data yesterday, we remain locked in the same range between 86.25 –87.75. Our bias is certainly for USDJPY to go higher in the medium term so focus on the price action approaching the range ceiling at 87.75, and for now there is still a possibility that a break above there could signal a double bottom pattern on the hourly chart. Should this be the case, we would be looking at a target above at 88.85. Before that destination, sellers are expected to step in around 88.00 (former pivot), 89.15 (12 Jul high) and 89.50 (28-29 Jun high). Obviously, until the break-out higher materializes we should still respect the range-trading environment that prevails, where 82.80 currently provides an intra range support and the range floor around 86.25 still looks robust having caught two previous sell-offs on 16 & 22 Jul.
UsdChf The bias on USDCHF in the short-term is bullish, but barely! The potential bullish flag pattern we noted on the hourly chart yesterday did not even activate (due to the failure to break above 1.0560) and now the slump back towards 1.0460 seems to have written off the possibility of this pattern being valid later on. Support should be readily forthcoming around 1.0450, with added buying interest below at 1.0425 (where the back side of the former downtrend now comes in). For now, 1.0565 is growing into a major ceiling of resistance limiting the upside, but should we manage to break above there, next levels expected at the 14 Jul highs 1.0618 and the 200-day moving average at 1.0641.
* 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%.
(Reuters) - Sales of new U.S. single-family homes rebounded strongly in June from the prior month's record low, driving the number of houses on the market to its lowest level in nearly 42 years.
The Commerce Department said on Monday sales jumped 23.6 percent to a 330,000 unit annual rate from a downwardly revised 267,000 units in May. The sales pace last month was still the second lowest since records started in 1963. The percentage increase was the largest increase since May 1980, and partially unwound the prior month's historic 36.7 percent decline.
Analysts polled by Reuters had forecast new home sales rising to a 320,000 unit pace last month from May's previously reported 300,000 units.
"Right now we're running about 60 percent below the average annualized rate for the last decade, so there's a lot of potential out there for improvement," said Michael O'Rourke, chief market strategist at BTIG LLC in New York.
"It seems like sales are bottoming, so its just a matter of that foreclosure inventory clearing up. After that, then we can start seeing some upside. I expect that to happen later this year, maybe next year."
U.S. government debt prices dipped on the home sales data, while U.S. stocks added to gains. The U.S. dollar pared losses against the yen.
Recent data have suggested the economy's recovery from its longest and deepest recession since the 1930s moderated somewhat in the second quarter. Economists expect weak housing activity to act as a drag on growth for much of the year.
The government is expected to report on Friday that gross domestic product growth slowed to a 2.5 percent annual rate in the April-June period from a 2.7 percent pace in the first three months of the year.
The Commerce report suggested the housing market may be close to working through the distortions following the end of a popular home-buyer tax credit in April, an incentive that brought forward sales. Data last week showed home construction fell to an eight-month low in June, while sales of existing home sales were the lowest in three months.
Analysts, however, believe a drop in home building is unlikely to ignite a new recession since housing is a much smaller share of the economy now than it was at the top of the housing boom.
The impact of a 10 percent drop in home construction has about one-third the impact now as it did in 2006, according to economists at Bank of America-Merrill Lynch.
Last month's surge in sales saw the supply of new homes available for sale dropping to 7.6 months' worth from 9.6 months' worth in May.
The number of new homes on the market dropped 1.4 percent to 210,000 units, the lowest level since September 1968. The median sale price for a new home fell 1.4 percent last month to $213,400. In the 12 months to June, prices dipped 0.6 percent.
Underscoring the pullback in growth, a measure of national economic activity fell in June for the first time since February. The Chicago Federal Reserve Bank said its national activity index fell to minus 0.63 from a positive 0.31 in May.
A reading above zero indicates the economy is growing above trend. However, the three-month moving average indicates growth has returned very close to its historical trend, and suggests subdued inflationary pressure for the coming year, the Chicago Fed said.
(Reporting by Lucia Mutikani; Editing by Neil Stempleman)
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.
* Sales of new homes are seen rising by about 6.7 percent to a 320,000 unit annual rate in June from 300,000 in May. Sales plummeted 32.7 percent in May to the lowest since record-keeping started in 1963. Forecasts from 57 economists polled by Reuters range from 290,000 to 350,000 units.
* Standard & Poor's/Case-Shiller 20-city home price index is seen up 4.0 percent year-over-year in May, compared with a 3.8 percent rise in April. The 26 economists in a Reuters poll estimate a rises ranging from 2 percent to 5.1 percent.
* The 20-city index likely rose 0.2 percent in May from April, seasonally adjusted, with forecasts from 13 economists spanning between a 0.6 percent drop and a 0.5 percent gain. Unadjusted, prices likely rose 0.3 percent, with nine forecasts between a 0.4 percent drop and 0.8 percent rise.
FACTORS TO WATCH
New home sales likely rose about 6.7 percent in June, but the advance would come from record lows set in the wake of the homebuyer tax credit expiration on April 30.
Tax credits of up to $8,000 pulled sales forward into the spring at the expense of summer sales.
Applications to buy homes hover just above 13-year lows, according to the Mortgage Bankers Association, even though mortgage rates are at record lows and prices remain about 30 percent below peaks set four years ago.
The National Association of Home Builders sentiment index in July sank to a 15-month low in the tax credit hangover. The sales retreat has turned out to be longer than expected because of the sluggish recovery in the broader economy, particularly in employment, the NAHB and other economists said.
NAHB, however, predicted that sales of new homes in 2010 would rise 10 percent from 2009, and most economists look for a very gradual trend higher to take hold starting in the autumn.
The Commerce Department on July 20 said home construction fell 5 percent to an 8-month low in June, but a surprise 2.1 percent rise in permits suggested building could rise in July.
"We see the recent data flow as indicative of the housing market finding a bottom and expect new home sales to rise gradually toward the end of the third quarter and beyond," Barclays Capital economist Michael Gapen wrote in a report. "One factor that should provide support is that starts built for sale have consistently been below sales."
As for home prices, the S&P/Case-Shiller 20-city index is seen up 4.0 percent in May from a year earlier, compared with a 3.8 percent annual increase reported for April, a Reuters survey found.
Prices in May likely climbed but at a slower pace than in April. The 20-city index is seen up 0.2 percent, seasonally adjusted, and up 0.3 percent unadjusted, compared with April gains of 0.4 percent and 0.8 percent, respectively.
The overhang of unsold homes, exacerbated by foreclosures, will keep prices moving sideways at least through the rest of the year, most economists agree.
MARKET IMPACT
The biggest surprise for the markets would be data showing that the U.S. housing market can avert a double dip.
Granted, this leg down in housing is likely to be tame, with single-digit price declines widely expected after a period of stability induced by the tax incentives.
Evidence of a small rise from a deep floor in new home sales and a sideways pattern in prices would reinforce the widespread view that housing will bounce around the bottom until employment improves and foreclosures subside.
(Reporting by Lynn Adler; polling by Bangalore Polling Unit)
Risk appetite was pared down during the Asian session as investors chose to focus on Fed Chairman Bernanke’s dovish comments. Bernanke's semiannual report to Congress basically reiterated the position reported in the FOMC minutes and policy speeches. However, the markets seemed to have latched on the words “we recognize that the economic outlook remains unusually uncertain. We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed." That statement sent a rush of capital back to recent safe havens in the US dollar, Swiss Franc and Japanese Yen. Just as USD, CHF and JPY all received their boost, US yields & equities dropped like a stone with 10y yields falling 10bp as the chairman spoke.
As Europeans sat down at their collective desks this morning, the merits of the stress test are now being hotly debated. The chasm emerging between proponents and opponents is considerable. On one side are EU officials who believe everything will be repaired by this magical report and on the other side is the real market, which remains overall skeptical and unconvinced. For those that have been reading our reports for the last two weeks, we firmly remain in the skeptical camp. One of the CNBC anchors summed up our opinion best when speaking to a Greek finance official declaring that “if Greek banks pass, the stress test fails.” The increased dialog surrounding this issue is obviously due to the proximity of the data release, further amplified by the Wall Street Journal’s report that EU officials are looking to publish the results before tomorrow’s European open rather than at its close.
This begs the question, if the regulators haven’t even cemented questions regarding the distribution of their report, how confident can we feel in their thoroughness in analyzing complex balance sheets? The uncertainty and debate still surrounding this report is caustically eroding confidence. We still hold that the stress test will not provide the transparency needed, will not build nor shore up confidence in the EU and will leave us with more questions than answers.
In the UK, BoE MPC minutes revealed a 7-1 vote in favor of an unchanged policy rate with Andrew Sentance being the lone dissenter…again. The committee further voted unanimously to hold the QE program unchanged at £200 bn. There was a discussion of increasing QE easing, however no member actually voted for the move. BoE Governor Mervyn King still believes that inflation will continue to ease as growth is expected to deteriorate a bit further. Given these developments, we suspect the sterling will continue to come under selling pressure as the risk is now skewed towards policymakers opting to hold rates steady longer than the market currently expects.
Over the past few days, CAD remains the relative outperformer in the FX market. Canadian retail sales and their Monetary Policy Report are due out today and we believe that growth expectations will continue to be adjusted to the upside - giving the CAD even further support.
Today's Key Issues (time in GMT): 08:30 GBP Jun retail sales, +0.5% m/m, +1.0% exp; last +0.6%, +2.2%. 09:00 EUR May ind new orders, unch m/m, +20.2% y/y exp; last +0.9%, +22.1%. 13:30 USD FOMC Chair Bernanke semi-annual House testimony 14:00 EUR Jul consumer confidence index; last -17. 14:00 USD Existing home sales, mn saar 5.20 exp 14:00 USD Leading indicators index, % m/m Jun -0.3 exp 15:00 ZAR South Africa: Interest rate announcement, % Jul 6.50% 14:30 CAD BoC Monetary Policy Report.
EurUsd As the credibility of the European bank stress tests is put up to increasing scrutiny, the bears continue to pile the pressure on EURUSD; and in the last 24 hours we have seen the 3-week uptrend channel break down, leading to a low of 1.2733. From here the risk-reward profile strongly favours short positions, so we would look to use the back side of that 3-week uptrend as a good entry level for shorts; that trendline resistance is seen at 1.2790 currently, so we’d be happy getting in around there and setting a stop just above 1.2830 (yesterday’s US session high). First destination on the downside will be the 14 Jul low 1.2683, although it’s worth noting that today that level coincides with a very short-term downtrend support so the pair will likely bounce off there on the first attempt. Ultimately we see this bearish trend eventually taking another look at 1.2522 (13 Jul low) and 1.2483 (2 & 6 Jul lows), and very possibly a further extension back towards 1.2000. Should the bears relent enough for the pair to break back within the uptrend channel at 1.2790, expect further selling interest to lie around 1.2840 (support-turned-resistance from earlier this week), the 100-day moving average 1.2887, and 1.2925.
GbpUsd After a choppy and indecisive few days trading, we feel GBPUSD is gathering momentum for a move lower –a view based on yesterday’s break below the significant 6-week uptrend and reinforced by a bearish engulfing candlestick on the daily chart over the last 2 days of this week. We now look to sell around 1.5200 levels –the back side of the 6-week downtrend seen at 1.5210 –and await a return to 1.5125 (yesterday’s low). Further downside is highly possible but likely to become laboured below 1.5125 as trendline support is currently seen around 1.5110 and a significant former pivot level remains at 1.5080.Should we managed to conquer those supports, there is a much clearer path towards the next downside targets of 1.4992 (100-day moving average), then the 12 Jul low 1.4949. The risk-reward profile does look a little edgy should we break back above the uptrend at 1.5210, with next resistance not seen until 1.5350 (19 Jul high), 1.5472 (last Thursday’s high), and 1.5525 (15 Apr high).
UsdJpy Yesterday we outlined the two possible scenarios in play for USDJPY –the first being a potentially bullish symmetrical triangle pattern with a target at 88.15, and the second one a larger bearish flag pattern which had not yet been activated. That latter pattern now looks to have become activated by the sell-off through trendline support at 87.00-05, and with that we now feel that the smaller symmetrical triangle pattern is as good as dead in the water. The classically defined target on the downside for this new flag pattern is 84.30 with supports ahead of there eyed at 86.27 (16 Jul low) and Nov 2009 lows of 84.83; but as we have mentioned a couple of times recently, down at those levels we would be playing Russian roulette with possible BoJ intervention so anything below 85.50 seems an ambitious enough take profit level for our fear/greed ratio. Any rallies from here are likely to meet fresh sellers around 87.15-20 (back side of the flag) where those who missed the break-out first time around will want to jump in, then further resistance seen at 87.57 (this week’s high from 20 Jul), 88.00 (former pivot), 89.15 (12 Jul high) and 89.50 (28-29 Jun high).
UsdChf The 3-week downtrend channel has been violated a number of times in the past 24 hours, but as of yet the bulls have failed to capitalize on the upside break and the pair is continuing to stutter around the trendline resistance. We are still short at 1.0530 from yesterday’s trade recommendation (taking the view that a lack of directional impetus from either the bulls or the bears made it a prime range-trading environment) and are looking at a first target of 1.0450 (Monday’s low), with 1.0400 (double bottom seen last week) as a possible extended target. Some bulls may favour buying on the dips towards, 1.0400, but should they be wrong the landscape below 1.0400 is only dotted with stale support levels at 1.0365, 1.0315 (trendline support), then 1.0230 –could be a nasty plunge with few buyers to slow the descent.
Markets gained a temporary sense of optimism as FX risk-correlated trades recover from yesterday’s sell off and equity markets rally in Asia. Yesterday we saw a sharp reversal - especially in the EURUSD as leveraged players cut their long positions after the pair lost momentum and seemed to run into resistance. EU officials are on the wires talking up the bank stress test due to be released this Friday.
As we’ve already stated this week, we suspected that EU officials would throw a few sick banks under the bus in an effort to create the illusion of rigor. Greek, Spanish and now French officials have all been vocal affirming that the vast majority of their banks will pass the test. French Economic Minister Christine Lagarde stated she was "confident" about the results of the stress test for French banks, but failed to provide any details as to why.
The show boating is making us a bit concerned about the “stressfulness” of their methodology. Our best guess is that the test will measure the two major types of bond portfolios within banks. One bond type is used for trading which the ECB can apply a haircut to, the second is your traditional hold-to-maturity bonds which are going to be mark-to-market and potentially deemed immaterial. EU offical move in this direction since they are concerned with a "trading shock" more then a default. However, we hearing rumors that there’s been a fascinating migration of tradable bonds into the hold-to-maturity classification as of late.
The EU structured safe haven for these bonds and not looking at the full picture concerns us as it is a convenient place to hide bad assets and tell half the story. We don’t believe that this stress test will provide the confidence the market is searching for and certainly not be as successful as the US stress test. We suspect that the EUR will continue to come under selling pressure and we are watching for a test of the 1.2750 lvl.
In Japan, the BoJ minutes released this morning asserted the central bank’s commitment to "continues to aim at maintaining the extremely accommodative financial environment” and that the BoJ’s new scheme to encourage commercial lending to growth industries would be initiated in August. Perhaps the most intriguing aspect is that officials continue to make comments on the recent Yen strength while BoJ Deputy Governor Yamaguchi reiterated that they are watching forex moves very carefully.
While we don’t expect US yields to reverse their current direction, which would provide a great catalyst for a JPY sell-off, we do believe that Japanese comments and potential intervention around the 85 lvl will provide some ample USDJPY buying opportunities in the near-to-mid term.
Today’s focus will be on the BoE’s MPC minutes release & Chairman Bernanke’s testimony to Congress. MPC member Sentance voted for a rate hike at the June meeting and his recent public comments continue to be hawkish. However, dovish MPC member Posen maintained to Dow Jones that there was more than a 50% probability that the next BoE move would be a policy loosening, not tightening. Sterling has been very jumpy as of late as traders try to anticipate the BoE’s next move. Without any clear guidance, this is a currency we would avoid for the time being.
Today's Key Issues (time in GMT): 08:30 GBP retail sales, +0.5% m/m, +1.0% y/y eyed; last +0.6%, +2.2%. 08:30 GBP BoE MPC minutes, vote 7-1 prior 09:30 EUR German FinMin Schaeuble, French FinMin Lagarde meeting in Paris. 10:00 EUR Germany E4.0 bln 3.25% 2042 Bund auction. 00:00 EUR Portugal E1.25 bln 12-month Treasury bill auction. 10:15 EUR Schaeuble-Lagarde, Franco-German Econ-Fin"l Council press conference. 18:00 USD FOMC Chair Bernanke semi-annual Senate testimony
EurUsd Just as we suspected in yesterday’s report, the brief visit above 1.3000 (1.3028 the high) soon attracted the attention of bears who re-emerged in numbers and drove the pair all the way back down to lows of 1.2839. We feel that at these lofty levels, a short bias seems the most attractive in terms of risk-reward (recall that the rally to 1.3028 represented a 9.5% appreciation in the space of just 6 weeks), and significant resistance level appear to cap the upside to 1.3095-1.3125. That zone of anticipated selling interest includes the triple whammy of 10 May high (1.3095), the 4-week uptrend channel resistance at 1.3115, and also the 38.2% fibonacci retracement of the entire sell-off from 1.5145 to 1.1876 which comes in at 1.3125. The tricky part here is selecting favourable entry levels and a small enough position size to tolerate a wide stop; 1.2950 would be the ideal area for us to re-load shorts, with the view that the pair should at the very least re-visit the lower edge of this 4-week uptrend channel in the coming days (currently seen at 1.2745). We still expect some buyers to lie around 1.2780 (a former pivot) and 1.2683 (last Wednesday’s low).
GbpUsd The fickle short-term trends in GBPUSD are making trading conditions difficult, and indeed the 1-week downtrend channel we highlighted yesterday morning has already broken its originally defined ceiling –a development made all the more frustrating by the fact it came very shortly after the pair had broken through 1.5230 support (which would have suggested in our minds that the next significant leg of this move would be to the downside). Given this whipsaw action, we prefer to steer clear of fresh trade entry for the time being, and should the bulls clear the next significant resistance at 1.5350 (19 Jul high), we could be induced to consider longs once more. Above there the likely targets are 1.5472 (last Thursday’s high), and 1.5525 (15 Apr high). Should the pair opt to go lower instead, yesterday’s low was 1.5154, and next supports are seen at 1.5080 former neckline, 100-day moving average 1.4992, then the 12 Jul low 1.4949.
UsdJpy A very interesting picture for USDJPY at the moment with the possibility of both a bullish triangle pattern and a bearish flag pattern currently on the table. Yesterday we highlighted an ascending triangle pattern on the hourly chart with a target at 88.15 which looks to have been activated by the move up through 87.22; but having assessed the subsequent price action, it looks more accurately like this was in fact a symmetrical triangle. The consequences of this shift in definition is a mere 5 pips (the target now 88.20), so our view of the topside prospects remain unaltered;resistance is seen around 88.00 (i.e. might use discretion on taking profit a little earlier than the pattern’s defined target), and further supply remains at 89.15 (12 Jul high) and 89.50 (28-29 Jun high). What is intriguing however about the current picture is that there is also the possibility of a bearish flag coming into play in the coming sessions, and which currently suggests a break below 86.95 (lower edge of the flag) would be a good trigger for short entry –implying a target of 84.20 below. This bearish scenario does tie in nicely with the recent break of 86.97 (1 Jul low) which opened up the possibility of another plunge towards Nov 2009 lows of 84.83; but once again we should remain cautious that such a bearish target would almost certainly catch the attention of the BoJ in which case intervention may be a very real and ruthless threat.
UsdChf The 3-week downtrend channel continues to direct price action in the short term, but trendline resistance has already been under threat this morning around 1.0515. Given that the bears looked unable to muster a decent assault on 1.0400 at the end of last week, they are likely to capitulate soon enough in defending this trendline too. Having said that, it doesn’t look like the bulls are all that feisty for a move higher either, so perhaps we will be confined to ranges for the time being. If that’s the case, we think that current levels (1.0530) actually look pretty attractive for short entry given the previous price action around 1.0550-60. We’d be satisfied using 1.0580 as our stop, and set a first target on the downside of 1.0450 (Monday’s low), with 1.0400 (double bottom seen last week) as a possible extended target. Some bulls may favour buying on the dips towards, 1.0400, but should they be wrong the landscape below 1.0400 is only dotted with stale support levels at 1.0365, 1.0315 (trendline support), then 1.0230 –could be a nasty plunge with few buyers to slow the descent.
(Reuters) - Housing starts hit their lowest level in eight months in June, further evidence the economy lost momentum in the second quarter, but a rise in permits offered hope of a pick up in homebuilding.
The Commerce Department said on Tuesday housing starts dropped 5.0 percent to a seasonally adjusted annual rate of 549,000 units, the lowest since October. It was the second straight month of declines in groundbreaking activity and was well below market expectations for a 580,000-unit rate.
The data was the latest in a series of indicators to imply the United States' recovery from its longest and deepest recession since the 1930s took a step back in the second quarter, much earlier than economists had initially anticipated.
"Housing is one of the areas of the economy that has helped deliver V-shaped recoveries in the past and with housing continuing to languish at very low levels, the V-shaped recovery is basically off the table," said Zach Pandl, an economist at Nomura Securities International in New York.
Analysts do not believe output is contracting, but acknowledge the risks of a double-dip recession have risen.
Stocks on Wall Street opened down as the report and below forecast earnings from corporate giants like Goldman Sachs soured investor sentiment.
Safe-haven U.S. government bonds rallied, with the yield on the two-year note dropping to a record low. The U.S. dollar rose against the euro, but hovered near seven month lows versus the yen.
BUILDING PERMITS RISE
Although housing starts fell last month, applications for building permits unexpectedly rose 2.1 percent to a 586,000-unit annual pace. That implied home construction activity could pick up in July, analysts said.
Building permits dropped 5.9 percent in May and markets had expected them to slip to a 570,000 rate in June.
The housing market was one of the key triggers of the economic downturn and its recovery has leant heavily on the government. Following the end of a tax credit for home buyers in April, home construction and sales have dropped sharply.
May's starts were revised down to show a 14.9 percent decline, previously reported as a 10.0 percent drop. Compared to June last year, starts were down 5.8 percent, the biggest decline since November.
Analysts said the housing starts were close to finding a bottom in the aftermath of the tax credit, citing a modest decline in single family starts last month.
Groundbreaking for single-family homes slipped 0.7 percent to an annual rate of 454,000 units, the lowest since May 2009. Starts for the volatile multifamily segment tumbled 21.5 percent to a 95,000-unit annual pace, erasing May's 4.3 percent rise.
"The report suggests that the housing market is trying to find a bottom after the expiration of the homebuyer tax credit," said Michael Gapen, an economist at Barclays Capital in New York. "We continue to expect housing starts to rebound in the second half of the year, albeit at a gradual pace."
Housing's share of economy has shrunk in recent years, with residential construction accounting for 2.4 percent of gross domestic product in the first quarter.
However, it has a had an out-sized impact on the economy through consumer spending and bank lending. When the housing market is healthy households feel wealthier and are inclined to spend, while banks profit on mortgage loans.
Last month, home completions surged a record 26.2 percent to an 886,000-unit pace, the highest level since December 2008. The inventory of houses under construction dropped 5.5 percent to a record low 450,000 units in June while units authorized but not yet started rose 3.6 percent to 91,500.
Analysts are concerned high unemployment and a flood of foreclosed properties will continue to hobble new home construction.
"With high unemployment and tight credit likely to keep demand subdued and more foreclosures set to add to the already high number of unsold homes, homebuilding activity is going to remain weak for a long time," said Paul Dales, a U.S. economist at Capital Economics in Toronto.
(Reuters) - Housing starts hit their lowest level in eight months in June, further evidence the economy lost momentum in the second quarter, but a rise in permits offered hope of a pick up in homebuilding.
The Commerce Department said on Tuesday housing starts dropped 5.0 percent to a seasonally adjusted annual rate of 549,000 units, the lowest since October. It was the second straight month of declines in groundbreaking activity and was well below market expectations for a 580,000-unit rate.
The data was the latest in a series of indicators to imply the United States' recovery from its longest and deepest recession since the 1930s took a step back in the second quarter, much earlier than economists had initially anticipated.
"Housing is one of the areas of the economy that has helped deliver V-shaped recoveries in the past and with housing continuing to languish at very low levels, the V-shaped recovery is basically off the table," said Zach Pandl, an economist at Nomura Securities International in New York.
Analysts do not believe output is contracting, but acknowledge the risks of a double-dip recession have risen.
Stocks on Wall Street opened down as the report and below forecast earnings from corporate giants like Goldman Sachs soured investor sentiment.
Safe-haven U.S. government bonds rallied, with the yield on the two-year note dropping to a record low. The U.S. dollar rose against the euro, but hovered near seven month lows versus the yen.
BUILDING PERMITS RISE
Although housing starts fell last month, applications for building permits unexpectedly rose 2.1 percent to a 586,000-unit annual pace. That implied home construction activity could pick up in July, analysts said.
Building permits dropped 5.9 percent in May and markets had expected them to slip to a 570,000 rate in June.
The housing market was one of the key triggers of the economic downturn and its recovery has leant heavily on the government. Following the end of a tax credit for home buyers in April, home construction and sales have dropped sharply.
May's starts were revised down to show a 14.9 percent decline, previously reported as a 10.0 percent drop. Compared to June last year, starts were down 5.8 percent, the biggest decline since November.
Analysts said the housing starts were close to finding a bottom in the aftermath of the tax credit, citing a modest decline in single family starts last month.
Groundbreaking for single-family homes slipped 0.7 percent to an annual rate of 454,000 units, the lowest since May 2009. Starts for the volatile multifamily segment tumbled 21.5 percent to a 95,000-unit annual pace, erasing May's 4.3 percent rise.
"The report suggests that the housing market is trying to find a bottom after the expiration of the homebuyer tax credit," said Michael Gapen, an economist at Barclays Capital in New York. "We continue to expect housing starts to rebound in the second half of the year, albeit at a gradual pace."
Housing's share of economy has shrunk in recent years, with residential construction accounting for 2.4 percent of gross domestic product in the first quarter.
However, it has a had an out-sized impact on the economy through consumer spending and bank lending. When the housing market is healthy households feel wealthier and are inclined to spend, while banks profit on mortgage loans.
Last month, home completions surged a record 26.2 percent to an 886,000-unit pace, the highest level since December 2008. The inventory of houses under construction dropped 5.5 percent to a record low 450,000 units in June while units authorized but not yet started rose 3.6 percent to 91,500.
Analysts are concerned high unemployment and a flood of foreclosed properties will continue to hobble new home construction.
"With high unemployment and tight credit likely to keep demand subdued and more foreclosures set to add to the already high number of unsold homes, homebuilding activity is going to remain weak for a long time," said Paul Dales, a U.S. economist at Capital Economics in Toronto.
EURUSD was able to shake off yesterday’s Moody downgrade of Ireland and the speculation that a German Bank would fail the stress test to rally to 1.3028. The Hungarian decision to halt talks with the IMF/EU remains risk negative but was not able to weigh on the Euro. While none of the events are on-their-own monumental or unexpected for the Euro, we still believe that the there is a growing fundamental argument that the recent EUR run is losing momentum and should reverse in the near-term.
The key catalyst should be the inadequacy of the bank stress test due to be released Friday. We doubt that this report will provide the clarity investors need and participants will potentially find significant flaws in the methodology. Even with EU officials throwing a few well-publicized “sick” banks under-the-bus such as German lender Hypo Real Estate Holding AG, we suspect the market will remain nervous.
The path to the next resistance at 1.3093 looks heavily congested which should provide the barrier we are looking for.
In Australia the published RBA minutes were slightly less hawkish than the markets had anticipating prompting traders to cut their long AUDUSD spec positions. The language was broadly in line with the policy statement released two weeks ago but highlighted two core issues that is on the market’s mind.
The RBA stated that the "critical medium-term question was the extent to which economies in Asia could continue to grow strongly in the face of what could be an extended period of subdued conditions in the major North Atlantic economies" and discussing the EU stress test stated "it’s critical that the stress tests be regarded as credible and that plans be in place to deal with any capital shortfalls identified." Questions we too would like to see addressed and convincingly answered. Given the overall tone we suspect that the RBA will opt to pause in August but will raise rates another 25 basis points in September.
As for the AUD prospects, clearly there has been little decoupling from risk which will be the key determinate for the currency’s movement.
Today, markets are expecting that the Bank of Canada will continue to tighten monetary policy when they meet on Tuesday, with the median forecast for a hike of 25 bps to 0.75%. After holding interests rates at 0.25% for over a year, the central bank finally submitted to restarting monetary tightening at the last meeting and since then data from Canada has been rather encouraging, including a surprisingly strong June employment report (+93.2K) that has brought the unemployment rate back below 8% to 7.9%. There is still a small probability that the BoC might choose to wait on raising rates till after the EU banks stress tests, however we now believe this is a long shot. A lack of scheduled economic data and events will place the short term focus on GS and BONY earning releases.
Today's Key Issues (time in GMT): 06:00 EUR GER PPI 06:15 CHF Trade 08:00 EUR ITA Ind orders 08:00 EUR ITA Ind sales 08:30 GBP Money supply 08:30 GBP PS new brwing 08:30 GBP PSNCR 09:00 EUR ITA Trade non-EU 10:00 GBP CBI orders -23 exp 12:30 USD Housing starts, thous saar Jun 580 exp, 593 prior 12:30 USD Building permits, thous saar 570 exp, 574 prior 13:30 CAD Interest rate announcement, % .75 exp vs. 50 prior 14:00 USD Fed Governor Tarullo (FOMC voter) testifies on financial regulation
EurUsd The rally continues for EURUSD, with today’s surge clocking up a high of 1.3028. Over the last few sessions our focus has predominantly been on the hourly chart (and the 4-week uptrend channel that has guided up from 1.2150), but today it is worth taking a look at the bigger picture revealed by the daily chart as it appears we may be approaching a significant juncture where the bears may start to exert their force once more. Since touching the lows of 1.1876 back on 7 Jun, EURUSD has taken a mere 6 weeks to rally over 9.5% (!), but a formidable resistance zone is now on the horizon which would prompt us to start getting short and selling on any rallies towards 1.3050 (we may not even get to see that level though so our preference is to scale into the position gradually above 1.3000). For one thing, the 4-week uptrend channel resistance we’ve been monitoring on the hourly chart now comes in at 1.3080, and is backed up by a significant former high at 1.3095 (seen on 10 May). The added information the daily chart can give us is that at 1.3125 there is also the 38.2% fibonacci retracement of the entire sell-off from 1.5145 to 1.1876 which should present a major hurdle for this relief rally to overcome. We still expect some buyers to lie around 1.2905 (100-day moving average), 1.2871 (yesterday’s low), 1.2780 (a former pivot), and 1.2683 (last Wednesday’s low).
GbpUsd A 1-week downtrend channel appears to be the main driver of GBPUSD so far this week, but the pair still hasn’t posed a serious threat to the significant support down at 1.5230. Indeed, as mentioned yesterday, we have been using that 1.5230 level as a pivot to buy off and after picking up some cheap GBPUSD late yesterday afternoon we have managed to scalp 50-60 pips of upside this morning. With the 1-week downtrend now imposing its effect even lower down today (trendline resistance 1.5305) we won’t attempt to go long again just yet –at least until the price action is able negate that downtrend and make the risk-reward profile more attractive. Once the bulls can break above that downtrend we’d be more confident of a continued rally to targets around 1.5350 (yesterday’s high), 1.5472 (last Thursday’s high), and 1.5525 (15 Apr high). Should the downtrend actually outlast the support at 1.5230, we would be willing to flip to a shortbias andexpect next supports at the 1.5080 former neckline, 100-day moving average 1.4989, then the 12 Jul low 1.4949.
UsdJpy USDJPY has managed to consolidate for the last 24 hours despite the recent break of major support at 86.97 (1 Jul low) which has opened up the possibility of another plunge back towards the November 2009 low of 84.83. The potential bearish pennant we highlighted on the hourly chart yesterday failed to activate (so no position entered), and indeed the move back above 86.97 has negated the possibility of that pattern playing out later on. Instead, we now see the possibility of an ascending triangle in play which would become active on a break above 87.22 and which would look to target 88.15. We are slightly wary that resistance may come into play around 88.00 so will have to use discretion on perhaps taking profit a little earlier than the pattern’s defined target. Further supply remains at 89.15 (12 Jul high) and 89.50 (28-29 Jun high).
UsdChf The 3-week downtrend channel continues to direct price action in the short term, but thus far the bears have not managed to muster a decent attempt at breaking below 1.0400 despite a couple of attempts late last week. We think that current levels (1.0530) actually look pretty attractive for short entry given the previous price action around 1.0550-60 is now bolstered by downtrend resistance at 1.0535. We’d be satisfied using 1.0580 as our stop, and set a first target on the downside of 1.0450 (yesterday’s low), with 1.0400 (double bottom seen last week) as a possible extended target. Some bulls may favour buying on the dips towards, 1.0400, but should they be wrong the landscape below 1.0400 is only dotted with stale support levels at 1.0365, 1.0315 (trendline support), then 1.0230 –could be a nasty plunge with few buyers to slow the descent.
(Reuters) - The dollar eased on Tuesday, inching closer to a two-month low versus the euro hit last week as investors continued to cut long positions on more disappointing U.S. economic data.
The greenback rose a little against the yen on bids from Japanese importers, but remained close to a seven-month low marked last week, leading many market players to look to what authorities in Japan could do about a firm yen.
The Australian dollar jumped more than 1 percent thanks to a rise in Chinese shares as well as buying against the yen amid wariness about Japanese yen-selling intervention.
The Wall Street Journal reported the Bank of Japan could consider taking additional steps to support the economy if the yen climbs to around 85 per U.S. dollar and stays there.
In Asian trade, the dollar rose about 0.4 percent to 87.01 yen, on buying by Japanese importers, off a seven-month low of 86.27 hit on trading platform EBS on Friday.
Traders suspect Japanese officials would not want to see the 85 level breached in a hurry, though many traders doubt Tokyo is ready to intervene at this point.
"I guess the authorities will be nervous. There will be verbal intervention or they might do rate checks as they did before. But I don't think they can do actual intervention," said a trader at a Japanese financial institution.
Indeed, traders say they saw marginal yen-selling by Japanese investors.
"Japanese investors' risk appetite hasn't come back. They are not ready to sell the yen yet. It's hard to expect upside for the dollar/yen," said a trader at a European bank.
Demand for the dollar waned further on Monday after the NAHB/Wells Fargo Housing Market index fell more than expected in July to its lowest level since April 2009, after a popular tax credit for homebuyers expired in April.
The report was the latest in a string of data that has flashed warnings about the state of the U.S. economy and quashed expectations of a Federal Reserve interest rate hike this year.
If Fed Chairman Ben Bernanke drops any hint of further easing at testimony on Wednesday it could push the dollar down further, some traders said.
"The overall bearish setup remains intact for dollar/yen," JPMorgan said in a morning report. "This follows last week's breakdown below the key 87.00/22 yen support zone while affirming the intermediate term bearish setup and a closer test of the 84.82 November 2009 cycle low."
The euro edged up 0.15 percent to $1.2963/64, not far from a two-month high of $1.3008 hit last Friday.
Traders expect the pair to trade in a $1.28-1.31 range in the coming days ahead of EU stress test results for banks and Fed chief Bernanke's testimony.
Support for the euro is seen around the previous day's low of $1.2870. Resistance comes in at Friday's high of $1.3008, while some traders say a break of that level could push it to around $1.3113, a Fibonacci retracement of its decline from last December to early June.
The results of stress tests on 91 European banks are due on Friday and there is a consensus building in the forex market that it could be positive for the euro.
Bankers and officials in Greece, Spain and Belgium joined a chorus of countries expecting their banks to pass the stress tests, but doubts linger over whether the checks are tough or transparent enough.
Some traders suspect the euro could be in for a "buy on the rumor sell on fact" retreat, after having risen nearly 10 percent from a four-year low, mostly shrugging off negative news on the euro zone.
It brushed aside news that Moody's had cut Ireland's debt rating and concerns that negotiations between Hungary and international lenders had broken down.
Meanwhile, the Aussie rose 1.1 percent to $0.8775 and 1.4 percent to 76.38 yen, helped by an upbeat mood in Chinese share markets and wariness about Japanese yen-selling intervention.
The Australian dollar quickly recovered the ground it had lost after minutes from the Reserve Bank of Australia's (RBA) July policy meeting that suggested it was unlikely to raise interest rates next month if coming inflation data showed the moderation it expected.
The currency has strong support around $0.8575-8590, where there is a 50 percent retracement of its rally this month as well as a cluster of previous lows.
(Additional reporting by Anirban Nag and FX analyst Krishna Kumar in Sydney; Editing by Michael Watson)
(Reuters) - Gold regained strength on Tuesday as jewelry makers resurfaced after the price dropped to its weakest in nearly two months, while investors looked to movements in other markets for further cues.
A drop in Japanese shares also spurred buying from speculators, who are keeping an eye on U.S. corporate earnings and Federal Reserve Chairman Ben Bernanke's comments on the economy on Wednesday. Silver and palladium firmed, but platinum tracked equities lower.
Spot gold added $3.15 to $1,183.50 an ounce by 0534 GMT (1:34 a.m. EDT) after falling as low as $1,177.15 on Monday, its lowest since late May.
"We've seen buying on the lower end, which helps push up the market a bit. There's a mixture of purchases from Jewelers and other physical buyers," said a dealer in Hong Kong.
"Technically, the market is still a bit bearish but I think we are looking for a rebound after prices dropped below $1,195. Investors are looking for fresh news because the euro zone has stabilized a bit," he added.
U.S. gold futures for August delivery added $1.5 to $1,183.4.
Cash gold and U.S. futures struck record highs in late June on worries the debt crisis in Europe would spread and the U.S. economy was slowing.
Japan's Nikkei average slipped on Tuesday as tech shares were hit by disappointment over U.S. corporate results. On Monday, Wall Street had gained as investors hoped results from key firms Texas Instruments (TXN.N) and IBM (IBM.N) would echo Intel's positive results last week.
However, shares of the two companies fell after the bell on disappointing revenue. .T .N
Ong Yi Ling, investment analyst at Phillip Futures in Singapore noted that most companies had been reporting earnings for the upside, which should continue to reduce the safe-haven demand for gold.
"And of course, we have the bank stress test at the end of this week, so I think that would also be something that people would definitely monitor," she added.
Europe is assessing how 91 banks across 20 countries would cope with another economic downturn in an effort to restore confidence after Greece's sovereign debt crisis hit markets and sparked fears the euro zone could unravel.
The Committee of European Banking Supervisors (CEBS), which is overseeing the stress tests, said results would be released on an aggregated and bank-by-bank basis from 1600 GMT on Friday.
The dollar eased on Tuesday, inching closer to a two-month low versus the euro hit last week as investors continued to cut long positions on more disappointing U.S. economic data.
U.S. home-builder sentiment fell more than expected in July to the lowest level in more than a year after a popular homebuyer tax credit expired in April, the National Association of Home Builders said on Monday.
The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust (GLD.P), said holdings were unchanged at 1,314.211 tonnes. The holdings hit a record 1,320.436 tonnes in late June.
