AUD PPI hotter than expected
JPY Supermarket Sales soften this month
CAD Retail on Tap
Housing and Fed the focus of the week ahead.
A very quiet night of trade in FX land in both Asia and Europe as the whole G-3 calendar is literally empty without even a minor release on tap. The major news of the night comes from Australia where PPI data printed hotter than expected at 1.0% versus 0.8% consensus leading Aussie to climb above .7600 and gain substantially on the crosses against both the euro and the yen. With CPI release due Wednesday expected to show year on year growth of 3.7% traders are upping the chances of an RBA rate hike at the Central Banks next meeting on November 7th and Aussie is benefiting from potential carry flows.
Rate expectations are also behind tonights softness in the EUR/USD which has slipped below the 1.2600 figure in early European trade. The markets are handicapping a relatively hawkish message from the FOMC announcement on rates due tomorrow at 18:15 GMT. While almost no one expects a rate hike this month, the anticipation is that the Fed may indeed suggest that further tightening will be necessary in near future to control inflationary pressures. Certainly the rhetoric from the majority of FOMC members have been hawkish with Lacker, Yellen and Moskow all hinting at the need for additional action to contain rising prices levels.
Yet if the Fed were to signal such a course of action, it may, in our opinion, be one the most colossal mistakes they could make. The US economy is clearly slowing. As we wrote in our weekly, Signs of slowdown are everywhere. Philly and Richmond Fed numbers both printed lower than expected with the former registering a reading of 0.7 versus 7.0 expected while the latter came in at 8 versus 9. Industrial Production contracted a much sharper than forecast 0.6% vs. 0.1% consensus and even the LEI number couldnt meet projections rising only 0.1% versus 0.3% expected. Yet despite these signs of weakness at the periphery, consumer demand remains relatively buoyant, helped in no small part by the massive slide in gasoline prices which are nearly 33% lower than just a few months ago. If the large crowds and long lines at our local Filenes are indicative of national trends, then clothing retailers should enjoy a relatively healthy Christmas season and US growth which is 70% dependent on the consumer should maintain pace.
At present, there is only one sector that could bring the US economy crashing to the ground housing. And there is only one sure way to tip housing in to a full blown recession raise interest rates. With real wages essentially stagnant and housing supply outstripping demand to the tune of 6 listings for every 1 sale, even a miniscule increase in mortgage rates could have dramatic implications on future US GDP growth by triggering very sharp declines in US consumers single greatest store of wealth. Therefore while dollar longs may rejoice at greenbacks temporary resurgence, if their scenario actually materializes the consequences may not be nearly as benign as they believe. In the inimitable words of Rolling Stones, be careful of what you wish for.
