U.S. DOLLAR: BERNANKE SIGNALS GROWTH IS ON ITS WAY
It has definitely been a good week for stocks but not so much for the dollar. The S&P 500 rose for a fourth straight day, posting a 2.1% advance for this week. Both oil and the S&P reached new 10 month highs in today’s trading. Currency markets finished a very volatile day with large intraday swings. However, many pairs just oscillated and ended pretty much where they started. GBP/USD fell 9 pips while the USD/JPY only advanced by 12. The dollar did meet some broad selling pressure resulting in decent gains in the euro and commodity currencies.
Jackson Hole
A meeting is underway in a remote portion of Jackson Hole Wyoming in which Ben Bernanke and other central bankers from both the U.S. and around the world are evaluating the current health of the global economy. The mood has definitely changed from last year’s gathering; we are now approaching the one-year anniversary of the disastrous collapses in our financial system and things are surprisingly starting to stabilize. Fed President Ben Bernanke has already opened the meeting with a relatively glowing assessment of the current state of the economy. Bernanke’s speech indicated that “the prospects for the return to growth appear good.” Of course, it would be irresponsible of him to leave out the cautionary statements about the restricted access to credit and a recovery that will start off on relatively slow grounds. Bernanke took pride in the fact that the Fed has spared no effort and that things would have been much worse if they did not act the way they did. Lacking from his speech was any insight as to the future of monetary policy. The meeting will kick into high gear into tomorrow which shows scheduled appearances from the ECB’s Jean-Claude Trichet and the BoJ’s Masaaki Shirakawa. Trichet has already made comments today indicating that he feels ‘uneasy’ with current situations and the prospects for recovery. If this meeting accomplishes anything, it may be to highlight the growing disconnect amongst these major world policy makers. The break-down in coordination between central bankers has been brought to focus with the BoE’s surprising decision to expand asset purchase programs (unfortunately the BoE’ Mervyn King will not be attending). We have made a large shift from the early days of the crisis when central banks acted in unison to now. Some countries are expanding stimulus, some are planning exit strategies, others are putting them into place, and still others are speculating rate hikes. It has been noted that this disorganization may result in more market volatility. Aside from intensifying disagreements and other economic assessments, it is unlikely that the meeting in Jackson Hole presents anything significantly market moving for currency markets.
Home Sales and the Week to Come
Existing home sales were the big surprise that gave market rallies new legs. Home Sales are now lying at two year highs, and were boosted by an impressive 7.2% this month. In addition to being the biggest one month gain on record, evidence has been mounting for what seems to be the beginning of an overall housing recovery. Pending Home Sales presents just such an example, coming in much better than expected earlier this month. However, the housing recovery thesis does lose some momentum considering the recent drop in Housing Starts. We also cannot attribute these new sales to healthy demand, as prices continue to drop by an additional $30,000. It will be hard to assess the true strength of the market until prices have officially stabilized. This gives added importance to next Tuesday’s S&P/Case Shiller Home Price Index which will shed more light onto how fast prices are falling. On the same day we will also have Consumer Confidence. The week’s events continue with Wednesday’s Durable Goods Orders and New Home Sales followed by annualized GDP for Thursday. To finish up the week there will be Personal Income and Spending for Friday. Trading next week may also be shaped by the fact that many commodity-related firms in China will be reporting earnings. Given the fact that US markets and forex took its cue from China this week, the effect will be felt if there are any extreme surprises.
EUR/USD: PMI TURNS OUT TO BE A BIG SUCCESS
EUR/USD continues its stride higher on excellent economic data but has come off of daily highs on better US data which translated into some dollar strength. The Euro-zone reported PMI today that have almost become the most powerful argument that the region has escaped the clutches of recession. The Euro-zone composite index finally reached the 50 threshold for the first time in four months. However, the real story comes from the results from France and Germany. German Services and France Manufacturing stunned markets by not only exceeded estimates but making a strong advance above the 50.0 level. German Services actually rose to 54.1, which was well above the 48.6 estimate and indicates that domestic demand is finally becoming available. For both reports, these are the best levels that have been seen in about 16 months. The German Manufacturing Index was stronger as well, but came in just short of 50. European equities were very happy with the news and jumped to a ten month high while posting the biggest one day gains in a month. Such impressive data has revitalized speculation about when the ECB will start to raise rates. Many economists are starting to indicate that mid way into next year will start the new hawkish monetary cycle. Economic data for next week includes German GDP for Tuesday, the Ifo Survey for Wednesday, and Consumer and Economic Confidence for Friday.
GBP/USD: POUND STAGES AN ABOUT FACE, LOSING EARLIER GAINS
The lack of economic data did little to suppress pound volatility. Early trading saw a huge knee-jerk reaction that saw sterling reach new highs for the week only to give back all gains in the matter of little more than an hour. Despite the intraday action, GBP/USD only faces very slight losses on the day. U.K. equities on the other hand are headed in only one direction, reaching new 10 month highs. Data for next week does not kick into high gear until Thursday. The latter half of the week will hold Total Business Investments and Gfk Consumer Confidence on Thursday. Friday will present second quarter GDP. Many have been painting the U.K. as one of the weakest performing countries out there, but some data still suggest that growth may be stronger than expected. The country was one of the first to break into expansionary grounds in Services PMI and maintains an inflation rate that is significantly higher than many other nations. Friday will also give us Private Consumption and the Index of Services, which should perform well given the recent improvement in PMI.
China just bought 50bn worth off australia I think
