The future of inflation and the US housing market have been two of the key issues for dollar fundamentalists for months. This morning, both groups received a positive boost to suggest each may act as a boon for the US currency rather than diverting bids like in the recent past.
Price action in the majors traced out the strength directed by the sessions indicators, but pervasive dollar selling held most pairs in check. The EURUSD worked its way from a 1.2980 high marked in the overnight session, only to be stopped 80 points lower on a double touch on yesterdays intra-day low. Mirroring the euro, USDCHF rallied a sizable 120 points from the Asian session low around 1.2430, though a turn at a new high at 1.2550 settled the pair back to the middle of the new range. For the British pound, a strong push drove GBPUSD temporarily through big resistance seen at 1.9750 in the European session, though a 145-point swing lower solidified the importance of the area. Finally, USDJPY skipped much of the back and forth moves in other pairs as a disappointing BoJ meeting allowed the dollar to steadily appreciate 115 points to 121.60.
Unlike the mix issued yesterday, todays economic releases were consistently supportive of the US economy and the dollar. The main attraction for the day (and perhaps the week) was the Bureau of Labor Statistics report of consumer inflation. Following modest improvements in both the Import Price Index and the Producer Price Index, the more policy-pertinent consumer gauge also revealed increases of its own. For the month of January, headline inflation accelerated 0.5 percent for the first positive read in four months. Statistically, this was the biggest monthly jump in prices in eight months. However, the other calculations for the data played down the remarkable. For one, the annual gauge accelerated from a 2.0 percent pace in November to 2.5 percent. Though the pickup was significant itself, the rate is still well off the 3 to 4 percent pace that encouraged the Fed to action in its last string of hikes. Furthermore, the core numbers are still rather stable. The annual CPI indicator excluding the effects of energy and food price changes held steady at 2.6 percent following two consecutive declines from its decade high in September. This divergence between the headline and core numbers highlights the influence the 4.6 percent rise in energy and 8 percent jump in gas prices actually had. Nonetheless, both headline and core inflation are running outside the Feds comfort range. Now policy makers and traders will turn to Januarys numbers to weigh the effect the most recent drop in energy prices will have on inflation gauges.
Though the CPI was the most heavily anticipated report for the day, it shared its time slot with a few indicators that produced bigger surprises. Stoking ever-present employment speculation, initial jobless claims for the week ending January 13th dropped to 290,000, the lowest read in 11 months. Elsewhere, the outlook for the housing market received a considerable boost with stronger than expected housing starts and permits releases for December. Taking advantage of the warmest December since 1957 and a recent rebound in sales, developers broke ground on 1.64 million residences last month. Even more impressive was the rise in permits which are used to estimate construction activity in the following month. Filings for building approval jumped to 1.596 million units on an annual basis for the biggest monthly increase in four years. Together with the recent sales data, these two housing reports give weight to growing speculation that the bottom has been found in the housing market slide.
Equities were pressured lower once again in the morning hours of Thursdays session as particular earnings reports weighed on the broad market and Fed Chairman Bernanke gave little clue to future policy in his testimony before the Senate Budget Committee. By 15:30 GMT, the NASDAQ Composite touted the biggest move for with a 1.01 percent plunge to 2,454.27. The S&P 500 was more reserved in its 0.28 percent slide to 1,426.60 while the Dow edged 0.15 percent lower to 12,558.40. Stealing all the headlines this morning, shares of iPod maker Apple dropped 4.3 percent to $90.83 even though a 78 percent jump in profit for the fiscal first quarter was far better than expected. The disappointment instead came from a dour projection for the current quarter of $0.54 to $0.56 per share. Elsewhere, shares of Dow-component GE fell $0.48 to $37.50 after announcing it may be close to a deal to buy Abbott Laboratories.
Treasuries investors, like currencies, were little impressed by todays economic numbers. Ten-year treasury notes were trading 2/32nds higher at 98-27 at 15:30 GMT with yields off a basis point at 4.771. T-bonds were quoted 3/32nds higher at 94-12 while its own yield shed a basis point to 4.863.
