(Reuters) - The Federal Reserve should consider buying more Treasury securities, instead of promising an extended period of low rates to support recovery, should inflation drift lower, a top Fed official said.
St. Louis Federal Reserve Bank President James Bullard said on Thursday he is worried about the risks the United States could fall into a Japan-style quagmire of falling prices and investment that is hard to get out of.
"The FOMC's extended period language may be increasing the probability of a Japanese-style outcome for the U.S., and on balance, the U.S. quantitative easing program offers the best tool to avoid such an outcome," he wrote in a research paper, referring to the central bank's policy setting group, the Federal Open Market Committee (FOMC).
"With a little bit weaker numbers on the economy and inflation a little bit low, people are starting to talk about the possibility of a Japanese-style outcome for the U.S.," he told reporters at a press conference on the research.
The Fed's long-running promise to hold benchmark rates exceptionally low for an extended period -- which is aimed at spurring growth -- could lead businesses and consumers to anticipate slight deflation ahead, the St. Louis Fed chief said.
"Of course, that isn't what we're trying to do with the extended period language, what we're trying to do is encourage output growth and production, and through that channel, get inflation to move higher," he said.
Bullard said he continues to views the most likely course for the U.S. economy as a gradual recovery and that more easing of financial conditions will not be necessary. But he said the Fed should be prepared for further actions if unexpected shocks materialize.
The St. Louis Fed leader, a voter this year on the Fed's policy-setting panel, said he does not plan to join Kansas City Fed President Thomas Hoenig in dissenting against the extended period language, even though research Bullard released on Thursday found the language to be problematic.
Bullard said he took the unusual step of publishing his research and holding a press conference about the topic to stimulate debate about the effectiveness of the extended period language in achieving the Fed's goal of restoring stronger economic growth.
The Fed lowered borrowing costs to near zero in December of 2008 and has already flooded the economy with more than $1 trillion of credit to boost growth after a painful recession.
The recovery has stumbled in recent weeks, and Fed Chairman Ben Bernanke said this week the economy faces unusually uncertain prospects. The Fed could take further steps to bolster growth if needed, he said.
(Reporting by Mark Felsenthal; Editing by Andrew Hay)
(Reuters) - A string of Europe's largest firms issued surprisingly upbeat profit reports on Thursday, bolstering an abrupt renewal of investor confidence in the region after months of debt turmoil and fears for the euro.
Broader economic data added to the theme, following some startlingly strong numbers last week -- euro zone economic sentiment rose strongly in July and German unemployment fell to its lowest level since November 2008.
Economists said the underlying performance in the region as a whole was never quite as bad as suggested by incessant news of debt default dangers in Greece and other southern European economies badly bruised by the recession of 2008-2009.
But they also cautioned that the abrupt swing toward a more positive mood did not change the fact that the region's economy is likely to heal only slowly with harsh government austerity measures poised to bite in the months ahead.
On the day, the upbeat news from some of Europe's biggest companies was nonetheless impressive and came on the heels of surveys last week which showed an unexpectedly high level of growth in both the manufacturing and services sectors in the region.
Publicis (PUBP.PA), the world's third-largest advertising group in terms of revenues, posted better-than-expected profit figures for the first half, declared its outlook better than previously envisaged, and the company's boss went as far as to declare the bad times over.
"We really have the feeling of being at the end of economic crisis, or even having put it completely behind us," Publicis CEO Maurice Levy told reporters.
His remarks were not isolated.
Dutch staffing firm Randstad (RAND.AS), second largest in the world in its field, said it was not seeing signs of a double dip in the economy, with companies continuing to hire more staff, notably in Germany and France.
"We are seeing growth everywhere. Even in Greece we are seeing the usual pattern. We are not seeing signs of a second dip," Randstad Chief Financial Officer Robert-Jan van de Kraats told Reuters.
Europe's debt market crisis spilled out of Greece late last year when markets took fright at the size of the country's deficit and ballooning debt, knocking the euro and European assets as investors started to fret about the risk of debt default in the region despite a Greek bailout.
Drugs and engineering giants gave good readouts too.
France's Sanofi-Aventis (SASY.PA) beat second-quarter earnings expectations, AstraZeneca (AZN.L) posted strong results and German chemicals maker BASF (BASF.DE) surpassed analysts' earnings expectations for the sixth straight quarter, bolstered by a rebound in the car and electronics industries.
German engineering conglomerate Siemens (SIEGn.DE) posted a better-than-expected 40 percent rise in fiscal third-quarter operating profit, helped by cost cuts and the export fillip from a weaker euro -- an exchange rate advantage ironically spawned by the debt crisis and investor fears that at some stages fueled questions about the common currency's very survival.
That debt market crisis propelled debt refinancing costs to record highs for governments in places such as Portugal, Ireland and Spain in May-June, but they have fallen back sharply in many cases in the last 10 days or so, suggesting investors sense the worst of the danger has passed.
The premium investors demand to hold the 10-year bonds of Ireland and Portugal instead of the equivalent debt of safe-bet Germany has fallen about 18 percent in less than two weeks and markedly too in Spain.
MOOD SWING
All that reflects a suddenly more positive take on Europe as the region additionally gains attractiveness in relative terms for global investors after a string of somewhat disappointing news on the U.S. front in recent weeks.
Investment bank UBS, where economists have long argued that investors were perhaps overly negative about the fiscal woes of the region, published a note that captured the shift in mood as far as they see it.
"Today our Global Strategy team upgraded Europe to Neutral (from Underweight) as they position their portfolio for a more positive tone," said the note.
"We continue to promote Europe on compelling valuations, economic data and relief for the banks to boot," UBS said, noting that Germany's Ifo index of business sentiment registered its biggest leap in 20 years in July, British second-quarter GDP was much stronger than expected and the fact that "stress tests" on banks across the region had proven mostly reassuring.
Other signals that the crisis was petering out include sharp drops in the price of credit default swaps (CDS), which provide protection against debt default and which soared in May.
The Markit iTraxx SovX index of Western European CDS prices is now at 114 bps, 54 basis points below its highest closing level of 168 basis points, seen on May 7.
In addition to a renewed focus on economic activity, signs are that investors are also encouraged by the existence of the 750-billion-euro standby lending facility euro zone governments have put in place to stem debt crisis contagion.
Despite some skepticism, investors also appear reassured by the fact that all but seven banks passed so-called stress tests of their financial resilience [ID:nLDE6661JE]. Bank shares in Europe, as measured by the STOXX Europe 600 bank index .SX7P, are up 7.4 percent since the stress test results emerged on July 23. and 25 percent up from the trough they hit in early June.
NOT SO FAST
At Deutsche Bank, however, economist Gilles Moec warned against getting carried away about the economy's recovery.
"There's no big change in terms of the underlying macro picture: we're in for slow growth," said Moec.
After poor first-quarter GDP figures in much of Europe, the second-quarter is expected to be stronger by definition more than as a result of any major upswing, and government stimulus deployed to combat the recession is still in place, with much of the post-recession austerity yet to come.
Economic growth is expected to be a modest 1.1 this year and 1.3 percent in 2011, according to a Reuters poll of 40 economists that was published in mid-July [ID:nLAG006340]. That follows a GDP drop of 4.1 percent in 2009.
"What is really impressive is the speed at which investors' focus has shifted away from hammering Europe to having a more sober look at the U.S.," said Moec.
A Reuters poll of 15 Europe-based asset managers showed on Thursday that European investors boosted fixed-income allocation to a 2010 high in July, although, as Mauro Ratto, head of Europe and Asia management at Pioneer Investments, put it:
"Concerns about the euro government debt crisis seem to be receding. However, most warning signs are still flashing red ... the prospect of budget tightening is unlikely to improve European growth rates."
(Additional reporting by William James and Jeremy Gaunt in London, Lionel Laurent in Paris and Reuters company news reporters across Europe; Editing by Mike Peacock and Stephen Nisbet)
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 parity found support on its bullish slant, after a lowest on the support at 0.89. Indicators are mixed. We maintain to trade only long positions as far as the price is above 0.89. The breakout of 0.9050 will give a new buy signal. However, if 0.89 is broken, a sell signal will be given. We will then advise to trade only short positions as far as 0.8950 will be resistance.
The price didn't succeed to break the resistance at 1.38 and is currently making a pullback on 1.37 or towards its bearish slant in extension. Indicators stay globaly bullish. We maintain to trade only long positions as far as 1.37 is support. The breakout of 1.38 will give a new buy signal.
The parity found resistance on the lower band of its former bullish channel. The price made a pullback on the highest of July and is testing a rebound. We maintain to trade only long positions as far as the price is above 113.50. A return above 114 will comfirm the take up of the bullish movement. The breakout of 114.75 will give a new buy signal.
We maintain our last analysis : 'The parity continues to test the resistance at 1.30. In extension, the price don't succeed to break 1.3050. The parity is still moving into its bullish channel. All indicators are bullish. We maintain to trade only long positions as far as the price is above 1.2890. The breakout of 1.30 will give a new buy signal.'
The parity made a correction and 136.50 has been broken. So, we are now neutral between 136.50 and 135.66. We will wait the breakout of one of these two bands to take position: - Long if 136.50 is broken - Short if 135.66 is broken
The parity continues its bullish movement and is currently testing the breakout of the resistance at 1.56. If validated, a new buy signal will be given. We could then target the next resistance at 1.57. We maintain to trade only long positions as far as the lower band of the former bullish channel is support. In case of breakout, we will stay neutral. Only the breakout of 1.5466 will allow us to trade short positions.
The parity broke its bullish slant and 0.72 acted as support. So, we are now neutral on the parity between 0.72 and 0.73. We advise to wait a breakout of one of these two bands to take position: - Long if 0.73 is broken - Short if 0.72 is broken
The parity made a pullback on 1.0382 and then got back into its bearish channel. So, we maintain to trade only short positions as far as this level is resistance. The breakout of 1.0225 will give a new sell signal. However, if 1.0382 is broken, we could trade long positions.
The parity is currently making a correction and is testing the support at 1.0550. We maintain to trade only long positions as far as this level is support. A new breakout of 1.0580 will comfirm the take up of the bullish movement. However, if 1.0550 is broken, we will stay neutral on the parity between this level and 1.0494. We will then wait the breakout of one of these two bands to take position.
88 finaly acted as resistance and a correction occured, pushing back the price below 87.67. So, we are neutral on the parity between this level and 86.86. We will wait the breakout of one of these two bands to take position: - Long if 87.67 is broken - Short if 86.86 is broken
Plenty of important macro data from the U.S. was published yesterday. Investors were disappointed by the figures and responded mainly by moving away from riskier assets. At first U.S. Durable Goods came negative at -1%, at 12:30GMT later at 18:00GMT Beige book revealed a gloomy outlook for U.S. economy. Although company earnings are still high, yesterday fears about recovery came back to dominate the markets.
Economic News
USD - Traders Shift from EU Debts Concern to U.S. Economic Outlook U.S. macro data came far less than expected. Investors responded by moving away from riskier assets back to buying the Yen and U.S. Dollar. The EUR/USD was slightly down after U.S Durable Goods was published, The USD/JPY traded lower, currently trading at $87.22 as investors feel safer holding the Yen over the USD. The British Pound continued to rally against the U.S. Dollar, despite the move to safer assets.
U.S. demand for Durable Goods, which is usually a sign for economic strength, came negative at -1.0%. Forecasts which already expected a form of decline from last month were more moderate than the actual figure. Traders were surprised by the final figure and reacted by sending markets lower. Later the Beige Book was released by the Fed during mid U.S. day trading. It provided a mixed economic picture but eventually supported the markets from declining further. The report said that the U.S. economy was growing but there were also signs of a slowdown in some regions over the past two months.
Looking ahead to today, traders should follow the release of the Unemployment Claims at 12:30 GMT. A worse than expected result might intensify the current trend and strengthen the greenback further.
EUR - EUR's Recent Rally Losing Steam EUR's rally against its major counterparts stumbled yesterday as new economic data raised fears about the strength of global economic recovery, with the common currency ending lower against its major counterparts.
EUR/USD ended slightly lower yesterday, reaching a low of 1.2968; however, it managed to recover some of its loses to currently trade at 1.3010. The pair seemed to trade without a clear trend and moved mostly sideways. The EUR/JPY, however sent more clear signs of a correction building up. The pair's five days rally ended yesterday after it breached an 11 week high. Signals show that pair should further decline in coming days.
Looking ahead to today, traders are advised to follow the British HPI data at 6:00 GMT as well as the German Employment change at 7:55 GMT. Positive data might bring back some market optimism, pushing the Pound and EUR higher against their counterparts.
JPY - Strengthens on Safe Heaven appeal The JPY strengthened against the U.S. Dollar yesterday as investors expressed their concerns about the U.S. economy by selling the U.S. Dollar and buying the Japanese Yen. The Yen traded higher against most of its major counterparts; however, a strong currency may ultimately weigh on the Japanese economy as it is heavily dependent on exports.
A strong Yen would have bad influence on profits of Japanese companies. Consequently the Japanese government might be forced to weaken their local currency. So far no comments were published regarding Government intervention. As long as the Japanese Bank avoids market intervention the Yen is expected to keep its strengthening momentum.
Looking ahead to today traders should pay attention to the $86.88 support line, crossing down might take the USD/JPY pair even lower. Some analysts estimate that that the Yen could even reach as high as $85 in the coming months.
Crude Oil - High U.S. Inventories Send Crude Oil Price Lower Crude Oil prices ended lower yesterday after U.S Oil Inventories rose by 7.3M barrels. Lately this figure made little impact over Crude Oil prices but yesterday it came quite high compared with expectations of a 1.4M drop.
Demand for durables goods which also came surprisingly lower added to worries that demand for Oil would decrease in the near future as manufacturing declines. Crude Oil price might decline further in the short term if economic figures continue to deteriorate. Investors are worried about a possible double dip, meaning a renewed recession.
Gold price rebounded slightly during yesterday trading session. During the day it reached as low as $1156.25, but thereafter recovered and is currently trading at $1165 Gold price dropped after inflation worries began to fade and analysts begin to worry about another recession or economic slow down.
Technical News
EUR/USD The pair was relatively unchanged yesterday and as such has formed a 2nd consecutive doji candlestick which reflects the bulls and bears inability to move the price significantly. The RSI (14) has crossed below the overbought line, triggering a sell signal. But traders may want to be patient and wait for the RSI line to break its trend line before going short. A rising trend line can be drawn from the low of the RSI line that begins on June 4th.
GBP/USD The pound was stronger yesterday and has risen versus the dollar for the past 6 consecutive bars. This has pushed most oscillators into oversold territory as the Slow Stochastic is showing a bearish cross and the RSI (14) is floating in the oversold territory. However, before going short, traders may want to wait for a breach of a short term trend line that can begins at the bar on June 22nd.
USD/JPY A bearish flag pattern has formed on the 4-hour chart. The base of the flag pole begins at the high on June 14th and runs to the low for the pair at 86.25. The flag pattern is sloping upward with a previous downward trend. Therefore, a breakout may be expected to the downside in the direction of the long term trend. Traders may want to wait for a confirmation of the breakout at a price of 86.80 and enter short.
USD/CHF For the past 15 days the pair has traded in a defined range between the prices of 1.0650 and 1.0400. In this trading range a double bottom reversal pattern may be forming. A confirmation of the reversal pattern will be a close above the 1.0650 resistance line.
The Wild Card Gold The drop in the price of gold shows a potential reversal in the trend. The price has closed below the long term upward sloping trend line for the past two days, confirming a significant breach of the trend line and a breach below the support level of $1169. However, yesterday's trading closed and formed a hanging man candlestick. This may signal an upturn in the price. CFD traders may find a good opportunity to go long on a breach above the $1169 resistance level.
(Reuters) - Oil was steady around $77 on Thursday after falling in the past two sessions on weak durable goods data and the biggest weekly increase in crude inventories for nearly two years in the United States.
U.S. crude stocks surged 7.31 million barrels last week as imports jumped, government statistics showed on Wednesday, while the nation's gasoline and distillate stocks including diesel gained for the fifth and ninth consecutive weeks respectively.
Wall Street slipped on Wednesday and Asian shares slid on Thursday after new orders for long-lasting manufactured goods posted their largest decline since August, a fresh sign the U.S. economy slowed in the second quarter.
"The crude market has shown the economy is not absorbing the supply, nor is the motivation there for refiners to process those supplies," said Jonathan Barratt, managing director at Commodity Broking Services in Sydney. "The numbers in America are not that good."
U.S. crude for September advanced 13 cents to $77.12 a barrel at 12:57 a.m. ET, after dropping close to 0.7 percent on Wednesday, having touched $79.69 a day earlier, the highest price in almost 12 weeks. ICE Brent gained 5 cents to $76.11.
"We have tested $80 twice and failed. Now we are going to test lower into the range again," Barratt said, referring to the $70-$80 range within which oil has traded for nearly two months.
The Organization of the Petroleum Exporting Countries (OPEC) has for the past year and a half expressed a preference for oil to remain stable around $75 a barrel, saying that price encourages investment to sustain and increase production capacity and does not threaten the economic recovery.
"In a crisis situation you need stability," Barratt said. "Crude is very stable. This suggests to me that the forces of supply and demand are at ease with each other."
Oil analysts including Michael Wittner from Societe Generale pointed out that total U.S. product demand growth was robust at 3.4 percent over the past four weeks from a year earlier, according to EIA figures.
But supply accumulation is outpacing consumption at a time when the U.S. economy is recovering from the most severe recession of the post-war era.
The U.S. 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.
Last week's gain in U.S. crude stockpiles was the biggest since October 2008, according to statistics from the U.S. Energy Information Administration, which published Wednesday's inventory report. U.S. weekly crude imports reached 11.12 million barrels last week, the highest level since August 2006.
(Reuters) - New orders for long-lasting manufactured goods fell unexpectedly for a second straight month in June, posting the largest drop since August in a sign economic recovery cooled in the second quarter.
However, the Commerce Department report on Wednesday showed cash-flush businesses continued to invest in equipment. That implied underlying demand remained intact with firms exhibiting confidence in the moderate economic recovery.
"The bottom line is that the data show business investment had a very strong second quarter and, although the recovery in manufacturing may be losing a little momentum, it is hardly collapsing," said Paul Ashworth, senior U.S. economist at Capital Economics in Toronto.
Durable goods orders dropped 1.0 percent after falling 0.8 percent in May, surprising financial markets that had expected a 1.0 percent increase. Durable goods include big-ticket items such as cars and planes.
But orders for non-defense capital goods excluding aircraft, a proxy for business spending, unexpectedly rose 0.6 percent after increasing by an upwardly revised 4.6 percent in May. Markets had expected a flat reading.
Stocks on Wall Street fell as investors focused on the overall decline in orders and a full-year earnings forecast from Boeing Co that was below market consensus.
The Standard & Poor's 500 Index fell for a second straight day, closing below its 200-day moving average, currently around 1,114.
Prices for safe-haven U.S. government debt rose and the dollar rallied against the euro but fell versus the yen.
Data from consumer spending to manufacturing have suggested the recovery from the longest and deepest recession since the 1930s took a step back in the past few months.
The government is expected to report on Friday that 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.
A separate report from the Federal Reserve showed U.S. economic activity was still rising but at a subdued rate.
"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 in its Beige Book, which is based on conversations with business contacts across the nation.
BUSINESS INVESTMENT GROWING
Some analysts said there was a chance second-quarter growth could beat expectations given signs of strong business investment. With profits booming, companies have stepped up spending on equipment and software after aggressively cutting back during the recession.
"There has been a loss of momentum in the past two months. It's yet to be seen how much of the upward momentum from earlier this year has been reversed," said Jim O'Sullivan, chief economist at MF Global in New York. "(But) I think the trend toward improvement is still intact."
Durable goods orders are a leading indicator of manufacturing, which has benefited from businesses replenishing inventories drawn down to record lows during the recession. However, that effort appears to be running out of steam.
Economists had expected durable goods orders to rise last month because Boeing received 49 orders for civilian aircraft in June compared to only five in May.
But non-defense aircraft orders tumbled 25.6 percent after falling 30.2 percent in May. Analysts said most of Boeing's orders were too late in the month to be caught by the report.
The drag on orders also came from bookings for computers and electronic products, which saw their largest decline since October. Orders for machinery recorded their biggest decline in 14 months, while those for primary metals fell by the most since March 2009.
"We expect further moderation in durable goods orders as the inventory cycle fades over the second half of the year," said Yelena Shulyatyeva, an economist at BNP Paribas in New York.
Durable goods shipments, which go into the calculation of gross domestic product, fell 0.3 percent after sliding 0.7 percent in May.
The Mortgage Bankers Association said on Wednesday that demand for loans to buy homes rose for the second straight week last week to the highest level since the end of June, but hovered just above 13-year lows.
(Reuters) - There has been just an inkling in recent weeks that financial markets might start to take their lead from the 'real' economy again after three years of being tossed about by their own panics and periodic exuberance.
Since the finance industry flailed into its crisis of confidence, doubting its own practitioners and the governments who became over-dependent on them, it has been almost impossible for households and companies to work out what markets are trying to predict about production, employment and consumption.
The net result has been the tail wagging the dog.
Guess the ephemeral mood of global markets six months hence -- voracious risk appetite or bunker-seeking safety -- and you might just stand a chance of predicting where businesses, consumers and policymakers would be forced to follow.
And while PIMCO asset managers predict a post-crisis 'new normal' of years of sluggish growth and policy angst, many yearn for an 'old normal' where finance reflects, rather th7an dictates, what is happening in the real economy where people produce and consume goods and services.
A VERY FINANCIAL COUP
For some, the credit crisis and aftermath had been fomented for decades by a more than a doubling of financial services to some 7.5 percent of the U.S. economy in the 40 years to 2007.
"The 3 percent of GDP (gross domestic product) that was made up of financial services in 1965 was clearly sufficient to the task, the proof being that the decade was a strong candidate for the greatest economic decade of the 20th century," Jeremy Grantham, Chairman of Boston-based asset manager GMO, told clients this month.
Lauding this month's U.S. financial regulation bill, he added: "The extra 4.5 percent would seem to be without material value except to the recipients. Yet it is a form of tax on the remaining real economy and should reduce by 4.5 percent a year its ability to save and invest, both of which did slow down."
Former International Monetary Fund chief economist Simon Johnson's 2009 Atlantic magazine essay, "The Quiet Coup", took a more conspiratorial view of the same phenomenon in sketching the lobbying power of the financial industry over that period.
Johnson estimated U.S. financial sector profits, which had never topped 16 percent of overall corporate profits in the decade to 1985, soared to 41 percent by the noughties. Average financial sector compensation as a share of the average in other industries almost doubled to 181 percent.
There was a similar development in Britain, where financial services had reached 8.5 percent of total output just before the crisis.
Deregulation, privatization, trade globalization and demographic trends were all catalysts for this growth in finance and the current regulatory backlash against the banks is unlikely to return the sector to its 1960s size.
But if knocking the froth off finance allows a more even relationship between real economic trends and financial markets, there may be a chance of tempering the endless boom and busts.
CHANGE AFOOT?
Is there any sign of that happening right now? Well, just an inkling.
In the past three years, financial and investment flows have been violently herded in and out of "safe-haven" cash and liquid assets, correlations zoomed between all asset classes and geographic regions, and risk gauges -- largely volatility measures -- careened from historic lows to highs and back again.
This mass behavior had been building for 20 years. Computer trading strategies supercharged the effect over time.
Yet as this year's euro zone sovereign debt crisis ebbs into the second half of the year, the herd seems for now to have stopped stampeding from its own rifle shots and may be listening more carefully to the underlying economy again.
Mindful of near-zero interest rates in cash, an expected dash back to safe-haven money market funds never really materialized during the worst of the euro crisis in April and May and 2010 outflows from these funds are still close to half a trillion dollars.
Partly as a result, stresses evident in lock-step asset correlations have ebbed and investors seem easier with idiosyncratic trends in selected stocks and credits.
Equity volatility has halved from April/May peaks and quartered from post-Lehman Brothers highs in 2008 and is holding closer to 20-year averages just above 20 percent rather than returning to unrealistic pre-2007 levels in single digits.
Even the world's main exchange rates between the U.S. dollar and euro -- long captive to "risk on/risk off" swings -- are starting to reflect interest rate gaps more than stress.
For active and diversified investors, this is how it is supposed to be and allows them to do what it says on the tin.
To be sure, we've been here before. But there are rays of hope for some return to old normals.
(Graphic by Scott Barber; Editing by Ruth Pitchford)
Risk correlated trades had a strong showing yesterday as banking stocks rallied and concerns over the inadequacies of the Stress Test dissipated. The USD lost ground to both the GBP and EUR while longs in JPY and CHF were equally cut. Risky trades continued to benefit throughout the trading day in spite of US Consumer confidence data coming in negative. We especially like the appreciation we saw in sterling. We suspect there has been a fundamental shift in GBP prospects due to the sturdy GDP reading last Friday and we anticipate further upside to sterling in the near-to-mid term.
Asian equity markets are having a roaring day and the positive effects are spilling over into European indexes. We are seeing other encouraging signs as VIX dropped below its 200-day moving average and Gold continues to come under heavy selling pressure. There has been a noticeable lack of 1st tier economic data and we are cautious in accumulating too much risk just yet. These are the dog days of the trading summer – as such, low liquidly and inconsistent participants will continue to be as important as real data.
During the Asian session, the big news was the disappointing Australian Q2 CPI reading which came in well below markets expectations. The market was quick to shift rate hike expectations from August to later in the fall (ACM expects a November hike). The AUDUSD dropped like a rock to .8923 from .9020 in response to the release. With the inflation rate now within the RBA’s 2-3% target, markets now pricing in a late fall hike. The large AUD interest rate differential will further erode, which in turn will lend added support to currencies like CAD and NOK. Look for CAD & NOK to gain in the near term.
We are still highly constructive on the global economy and suspect commodities prices to trend higher which should give AUD a boost against the USD. With all the excitement around AUD, the CPI watchers will now be turning their gaze toward New Zealand.
In NZ, July business confidence and activity outlook surveys showed a significant deterioration from the June results. Analysts are in unanimous agreement that the RBNZ will raise the OCR 25 bps to 3.00% at its policy meeting tonight. Market and media interest will be focused on the accompanying statement released with the rate hike. Although recent NZ CPI readings have come in lower-than-expected, the markets are still pricing in roughly 75 bps worth of hikes between now and the year’s end.
We believe that the RBNZ statement will sound slightly more dovish, signaling a minor shift in interest rate trajectory as policy makers prepare for a global economic slowdown later this year. The sudden adjustment in rate path should translate into short-term NZD weakness, especially against the AUD.
As for today, US Durable Goods data is due to be released as investors continue to look for directional signals for the US recovery. The Fed’s Beige Book will likely reflect recent data softness.
Today's Key Issues (time in GMT): 00:00 EUR GER Jul HICP - prelim, +0.2% m/m, +1.1% y/y exp; prior unch, +0.8%. 07:00 EUR ESP Jun retail sales; prior -1.9% y/y. 08:45 GBP BoE Gov King, other MPC member testimony before Parliament. 10:00 GBP Jun Land Registry house prices. 12:30 USD Jun durable goods orders, +2.9% m/m exp; prior -0.6%. 12:30 USD Jun - ex-transport, +1.0% m/m exp; prior +1.6%. 18:00 USD Fed Beige Book release. 18:30 USD Senate vote on Fed nominees 21:00 NZD RBNZ interest rate announcement, % 3.00% exp, 2.75% prior
EurUsd The symmetrical triangle pattern on the hourly chart is still very much in play, and thus far we have seen a couple of nudges through the 20 Jul high at 1.3028. We are long from the original break above 1.2950 (there was even the re-test of that level yesterday which we suggested as a chance to add to longs) and expect the triangle to yield a target in the region of 1.3290. At present the bulls are steadying themselves above 1.3000 so further progress has been somewhat laboured; 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 at 1.2905 –but should the pair drop below there we would have to concede the failure of the bullish triangle breakout, and would then expect technical levels below at 1.2793 (Friday’s low), 1.2733 (21 Jul low), 1.2683 (14 Jul low) and 1.2522 (13 Jul low).
GbpUsd GBPUSD continues to march unwaveringly higher, making easy work of the tangle of technical resistance levels between 1.5525-75 (15 April high, 200-day moving average and 23 Feb high) and going on to touch 1.5627 this morning. 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 1.5350 (coinciding with a recent pivot level) to get long, and set a stop through 1.5300. Really there is not much standing in the way of an assault on the 17 Feb high 1.5816 in the coming days, then only uptrend resistance (currently at 1.5905) before the psychological significant 1.6000. Supports now seen below at 1.5525, 1.5450 and 1.5350.
UsdJpy Finally, a breakout from the 86.25 –87.75 range; and as expected, this has occurred on the topside –in the process activating a double bottom pattern we proposed earlier in the week. Given the depth of the two troughs we should therefore anticipate a target around 88.85, and after this morning’s break above the significant 88.00 pivot level, that now seems an extremely attainable goal. Sellers may still hinder progress up through the remaining trendline resistance around 88.45 but then the next discernable levels are all beyond our target; 89.15 (12 Jul high) and 89.50 (28-29 Jun high). Adding conviction to our view is the bullish engulfing candlestick carved out on the daily chart which suggests the bears have become overwhelmed and further upside is likely. Dips back towards the 87.75 breakout level will likely meet good bids, with the supports below there at 86.82 (yesterday’s low) and 86.25 (recent range floor).
UsdChf The bulls finally got a better grip on USDCHF yesterday, and not only managed to take out the stubborn 1.0565 resistance level, but then to print a bullish engulfing candlestick on the daily chart. We now see a fresh bullish flag pattern possible on the hourly chart which would suggest that on a break above 1.0620 we should go long and aim for a target around 1.0770. Standing in our way before that would be yesterday’s high 1.0640 (roughly coinciding with the 200-day moving average at 1.0644), the top of the 1-week uptrend channel at 1.0685, then the major 1.0700 level. Bidders are very likely to lurk around 1.0565 where the old resistance level once stood, then 1.0450and 1.0400.
The parity broke the resistance at 0.90 but 0.9050 stopped the bullish movement. The price is still moving above its bullish slant. Indicators are now mixed. We stay neutral as far as the price is below 0.8950. A return above this level will allow us to trade again long positions as far as the price will be above 0.89. However, if 0.89 is broken, a sell signal will be given.
The parity broke the resistance at 1.37, offering a new buy signal. The parity is now testing the next resistance at 1.38. All indicators are bullish. We maintain to trade only long positions as far as the price is above 1.37. The breakout of 1.38 will give a new buy signal.
