U.S. DOLLAR: RISK ADVERSE MENTALITY
Another day of trading brought many markets to their knees, with the dollar and yen emerging as the true victors. The risk adverse patterns have clearly been brought back in to play. The most glaring example of this would have to be the large declines in the commodity currencies like NZD/USD which lost 2.6%. However, the one unexpected component of today’s trading was that the pound managed to resist the downward pressure. Risk tolerance was obliterated on weak New Home Sales and a continued selloff in stocks. The S&P fell for the fourth consecutive day, a decline that has almost completely erased the gains made earlier this month.
Housing Trouble
The report on New Home Sales accelerated the pace of this week’s decline in currencies like the euro and Australian dollar. The number was so far below expectations that the shock single-handedly took all the life out of the markets. Sales of new homes, which account for only 10% of the housing market, slid by 3.6% compared with a consensus that the figure would actually rise by 2.6%. To top things off, median prices fell at an accelerating rate and inventories fell to the lowest levels in more than twenty-five years as construction has come to a grinding halt. The main fear factor that this report provides is that buyers have turned away knowing that first-time buyer rebates would soon come to an end. On that note, the theory that government efforts have been the only factors supporting housing are an unwelcomed thought in any investors mind. Government uncertainty on whether the program will be extended is only adding on to market stress. Nevertheless, this one report does not spell the end of the housing market or predicts another cataclysmic drop. Considering the fact that existing home sales, which represents a much larger portion of the housing market, was much better than expectations suggests that all is not lost in the troubled industry.
Signs of renewed housing distress completely overshadowed the slight improvement in Durable Goods Orders. The figure was in-line with expectations and increased to 1.0% from -2.4%, posting its fourth improvement in the last six months. However, durables were unable to excite markets because ex-defense capital goods, an important component in GDP calculations, actually shrunk by 0.2%.
Will GDP be as good as Expected?
The big event for tomorrow will be the advance report on third quarter Gross Domestic Product. The exceptional improvement in our economic conditions, largely led by significant stock rallies, has made a very probable case for the quarter marking the end of one of the most devastating recessions since the Great Depression. However, current expectations of a 3.2% growth rate seem a little too optimistic. Even though it is very likely the economy will show growth, there are too many loose ends like employment and today’s reports on housing and durable goods for the economy to expand at such a fast pace. Coming in short on the GDP front may be a big disappointment for the already depressed markets. We will also be met with Core Personal Consumption Expenditures, which is the Federal Reserve’s preferred inflationary gauge. As always, it will be important to keep an eye on jobless claims for any clues as to next week’s employment report.
EUR/USD: SELLOFF INTENSIFIES
A more significant correction in EUR/USD seems to be forming with today’s drop marking the fourth straight day of declines. The 1.50 level has proven its strength so far, but the pair still has room to fall before we can deem the uptrend invalidated. Once again, the euro’s retreat is coming on little economic news from the region. The only thing that we did receive today was German Consumer Prices which saw a marginal uptick thanks to higher energy prices. Annualized consumer prices came in unchanged in the month of October, versus a decline of 0.3% in September. Even though Germany’s report relaxes some of the fears surrounding the possibility of a more substantial dip into deflationary territory, it should not do much in terms of convincing the ECB that they may have to revise their current monetary course. It is really equity flows that are running the euro into the ground so far. Aside from the declines American stocks, European indices have been struggling as well. Both German and French markets are now looking at their fifth consecutive day of declines thanks to the widespread opinion that stocks have become unreasonably overvalued. Tomorrow will be much more important in terms of the economic schedule which is highlighted by German Unemployment and Euro-zone Consumer Confidence.
USD/JPY: BIG WINNER ON WAVE OF RISK AVERSION
USD/JPY plummets for the second day as the classic patterns of risk aversion are taking a strong hold on trading. Declines were even more substantial in pairs like AUD/JPY which suffered more than a 3.15% decline. On the economic front, reports from today indicate a broad based improvement in Japanese retailing. Retail Trade came in at -1.4%, the smallest decline in ten months. Furthermore, Large Retailers’ Sales increased to -5.6% from -6.8%. Although these numbers are not stunning, it does indicate that the economy may be able to rely on the consumer a bit more to boost growth. Since the yen seems uninterested in giving up gains, this added benefit will be crucial in keeping economic hopes alive. We will receive more insight into the health of the consumer with the Jobless Rate which is scheduled for tomorrow night. Vice Finance Minister Noda has added to the fervor of recent comments, indicating that “keeping easy monetary conditions are important in supporting Japan’s economy”. Noda believes that a change is currently not warranted, an opinion that may have an impact on the BoJ’s meeting later this week. For tonight, we are expecting Industrial Production along with Manufacturing PMI.
May The Force Be With You.
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