In This Issue…
* European concerns again
* Another disappointment for manufacturing
* US data reports kick into high gear
* Sweden posts higher growth
And, Now, Today's Pfennig For Your Thoughts!
On the clock…
Good day…and welcome to the last day of July. While August usually brings us the dog days of summer, the month of July will go down in the history books as one of the hottest on record here in the Midwest. Unless we see the mercury rise even higher than where it has, we might already be numb to the so called dog days of summer. Who knows, maybe we’ll even see things cool off a bit but that doesn’t look to be the case this week. I even got to use the windshield wipers on the way home last night, so that was a nice change of pace.
The action in the markets yesterday wasn’t anything new as concerns over global growth re-entered the picture and kept most currencies range bound throughout the US trading session. As I mentioned yesterday, the trading tone had already been set by the time I arrived to the office and most of the currencies ended the day right where they began. Since we really didn’t have any data to evaluate here in the US, concerns that the potential bond purchases by the ECB may not be enough to keep the wheels on the track was the dominating force.
The focus now rests squarely on Draghi’s shoulders to deliver on his promises to do whatever is necessary, so he has somewhat painted himself into a corner. Obviously a number of different actions will most likely be needed, but if the markets don’t feel that he is utilizing all of his resources to the fullest extent, the Italian and Spanish bond yields will snap right back to where they were early last week. Interest rate cuts from the ECB have not provided the desired results in the way of lower yields, so the nonconventional actions will end up taking center stage. The Italian 10 year yield fell to 5.96% and the Spanish yield fell to 6.61%, so hope is in control right now and needs to be followed by action soon or we could see a complete reversal.
While the ECB does meet later in the week, there is an increasing level of pessimistic sentiment entering the market as many are getting the feeling this meeting won’t bring a concrete plan. I think most investors feel the stepped up bond purchases are a foregone conclusion, but they want to see more since the previous efforts haven’t had a lasting impact. Spain’s second quarter GDP figure didn’t help matters as it came in at -0.4% and confirms the recession has gotten worse after first quarter growth fell 0.3%. The proposed tax increases and spending cuts designed to attack the deficit look to compound the problem. The IMF has already doubled previous forecasts as they are now calling for GDP to come in at -1.2% next year.
Switching gears for a moment, there wasn’t much to talk about with the US economy as the only report that we saw was the Dallas Fed manufacturing activity report. With that said, it measures factory activity in Texas and yielded a dismal -13.2 reading after it was expected to come in at 2.0. Any reading above zero indicates expansion so this report missed expectations by a large margin. The index of future business activity registered its first negative reading in ten months and represents just another regional report that has offered disappointment. We do get to see the national manufacturing gauge tomorrow as the July ISM figure will be released mid morning, but the recent string of slower activity isn’t doing any favors.
There will be plenty to look at this morning as we kick it off with personal income and spending, both of which are expected to come in higher than the previous report, and we also get to see the results of revisions made to past data. Like I said yesterday, some of these revisions are so old that it really doesn’t do much for us now. The corporate sales numbers and an employment picture that hasn’t seen any type of lasting improvement doesn’t provide much in the way of hope for a strong result. These figures are from June so its outdated info to begin with but I don’t recall anything that would point to any excitement.
We also see the results of the Fed’s preferred measure of inflation with the PCE reports. This index measures inflation based on changes in personal consumption and is considered to be more comprehensive than CPI. Nonetheless, the preliminary estimates are calling for a slight pickup while the annual core figure is expected to remain unchanged. There will also be a couple more regional manufacturing reports when the Chicago and Milwaukee areas are expected to show consistency in more slowness.
Talk about old data, the S&P/Case-Shiller index of home prices from May will also be on the docket today. The general consensus is to see more evidence that home prices are continuing to fall at a slower pace as the annual figure is expected to show a 1.4% loss. I saw a recent poll of mortgage bond investors that shows a majority still expect a further decline in prices, but less than 5%. The disappointing existing home sales figure in June would support this sentiment, but I don’t see any profound movement in either direction from the report this morning.
Lastly, we’ll see July consumer confidence released mid morning and is expected to show more rot on the vine. The last printing fell for a fourth consecutive month and represented the lowest figure in five months, so today’s expected slide to 61.5 looks to further highlight the strain consumers are dealing with on the employment front. Just to give some perspective, the measure averaged 53.7 during the recession through June 2009, so we’re still quite a ways from that territory but the slowdown in consumer spending justifies the lack of confidence.
Looking ahead to tomorrow, we’re going to see some heavy hitter reports with ISM manufacturing, construction spending, and vehicle sales. As I’ve mentioned, the markets will most likely be on the edge of their seats until early afternoon as the Fed will give us more insight into the economy and any thoughts of additional stimulus. Most economists point toward September if we do see any action taken, but any type of prelude will weigh heavily. The last bit of information will come in the way of the ADP employment numbers and is expected to show a decline, but we know this report can vary greatly from the government’s official report on Friday.
The currency market was fairly uneventful as the dollar did show another rise primarily against the euro, and associated currencies, along with the emerging markets. The euro just didn’t have any traction throughout the day and consistently traded in the low to mid 1.22 handle all day long. In addition to what I mentioned in the beginning, economic confidence in the euro area fell more than expected to nearly a three year low. Just about every facet of this report show deterioration that encompasses both manufacturers and consumers so the European leaders will have their hands full in trying to turn the tide.
The euro also took a hit with all of the balance sheet expansion talk in the form of additional bond purchases. If the Fed does announce or hint around to the fact they would pursue such action, I think that would trump an announcement from the ECB. In other words, action by the Fed would look to initiate dollar weakness even if the ECB does the same thing. If the ECB acts alone, it could be a different story. Another cause for the dollar strength has been the biggest repatriation of funds back into the US since the start of the financial crisis. In the period of time between December through May, US investors brought home $48.9 billion and inflows into US bond funds doubled to $157 billion in the first six months of the year.
The Swedish krona was, by far, the best performing currency of the day as it gained about 1.15%. Finally, I had some good news to report. Swedish second quarter GDP grew 1.4%, the fastest pace since the fourth quarter of 2010, as consumers increased spending and exports actually saw a pickup in activity. While the central bank kept rates on hold during their last meeting, they did indicate another rate cut by year end was possible so this pleasant surprise has removed some of that likelihood. The overall economy is well placed at the moment, but it won’t take much to send things in the other direction since 70% of their export market is with Europe.
While the Swedish krona is a thinly traded currency, the country does enjoy some positive attributes. They are one of the twelve countries that are currently rated AAA by all three ratings agencies and the domestic government is expected to run a balanced budget this year and a surplus next year in the neighborhood of 0.4% of GDP. Consumer confidence and employment have been moving in the right direction but this can be a volatile currency, especially in time of all out risk aversion.
The commodity currencies of Australia, Canada, and Norway all finished the day with marginal gains while the Japanese yen and Singapore dollar rounded out the currencies that ended in positive territory. The Japanese economy has done nothing to warrant its 2% rise in July other than functioning as a destination for liquidity flows, so its decline of June industrial production didn’t deter investors. The government also downgraded its assessment of this area for the first time since September and economic growth is expected to show more disappointment.
Since risk aversion was present in the markets yesterday, the South African rand and Brazilian real ended the day at the bottom of the barrel. Rate cuts from the South African central bank have been on the minds of investors as inflation has remained within the 3% to 6% target for the past two months. While government officials tried to dispel rumors of more rate cuts, the currency just couldn’t escape the gravitational pull of the euro since the eurozone is their largest trading partner.
The Brazilian real lost nearly 1% for the same reasons as the rand since investors are betting on more rate cuts down the road and it looks like those perceptions will be in place until there is strong evidence the economy can stand on its own. India is on its own island as inflation continues to build even though economic expansion is hovering at a nine year low. The Indian government is caught between a rock and a hard place since they can’t really take expansionary measures and risk stoking an already uncomfortable level of inflation.
As I came in this morning, the bias has been toward a weaker dollar as most currencies are sitting on slight gains. The Australian dollar is currently trading at a four month high of 1.0525. It seems the better than expected building approval figure got things rolling again among those calling for the central bank to keep rates on hold next week. The economic news in the eurozone showed more deterioration as June unemployment rose to a record 11.2%. While the euro is sitting on a slight gain so far, the employment report is just another reason for the increased skepticism.
Then there was this…Thousands of layoff notices might go out right before the US election according to a story in the Washington Post. Driven by a sharp cut in U.S. spending, tens of thousands of layoff notices might go out at government contractors days before the presidential election. The Labor Department said sending out a large-scale dismissal notice would be "inappropriate" because it is uncertain that spending reduction will take place.
To recap…The trading pattern in the currency market was already predetermined by the time I arrived to the office yesterday morning as European concerns took over. Draghi has painted himself into a corner with his whatever it takes rhetoric and any disappointment could send Italian and Spanish bond yields right back into a code red situation. The Dallas manufacturing report was yet another in a string of results pointing toward slowness and things really kick into high gear today. It was a mixed bag for currency returns as the euro and emerging market currencies all finished with losses and the Swedish krona along with the commodity currencies were able to remain in positive territory.
Currencies today 7/31/12. American Style: A$ $1.0526, kiwi .8094, C$ .9988, euro 1.2287, sterling 1.5696, Swiss $1.0223, . European Style: rand 8.1865, krone 6.0411, SEK 6.8102, forint 226.08, zloty 3.3385, koruna 20.5712, RUB 32.1863, yen 78.22, sing 1.2437, HKD 7.7538, INR 55.5450, China 6.3617, pesos 13.2387, BRL 2.0411, Dollar Index 82.70, Oil $90.06, 10-year 1.50%, Silver $28.33, and Gold. $1,625.50. and to take a look at the U.S. Debt Clock. click here.
That's it for today…in addition to admiring the competition in the Olympic games, it’s always interesting to watch sports that don’t have the same coverage or popularity in the US as other places in the world. I got sucked into watching handball, for example, so it was a nice change of pace from the handful of events that garner most of the attention. I’m running a little late, so I’ll cut this short but Chris will take us through the end of the week and then Chuck will be back on Monday. So until next time, Have a Great Day!!
Assistant Vice President
EverBank World Markets