US economic data helped provide a boost to equities, and thus weighed on the US dollar and Japanese yen, though trading ranges across the majors were so small one might believe it’s a holiday.
Looking to the data on hand, the Conference Board's leading economic index rose for the fourth straight month in July, this time by 0.6 percent thanks to improvements in the average workweek, jobless claims, stock prices, and the interest rate spread. Meanwhile, the Federal Reserve Bank of Philadelphia's manufacturing index unexpectedly surged to 4.2 in August from -7.5. This was the first positive reading, signaling an increase in business activity, since September 2008 as prices paid, prices received, new orders, and shipments all rose significantly from the previous month.
The "Philly Fed" improvement was in line with what we saw in Monday's release of the Federal Reserve Bank of New York's "Empire" manufacturing index, but also highlights the fact that the only strong-points in the economy have been related to manufacturing, and more specifically exports and automobiles. First, the sustainability of growing exports is questionable as GDP is likely to remain quite low in the economies of the nation's biggest trading partners through the end of the year. Second, the recent increases in auto sales have been attributed to the "cash for clunkers" program, in which consumers get a cash rebate if they trade in their old car for a newer car with better gas mileage. That said, the impact of the program will not last forever, as it ends next Monday, and an enduring US economic recovery may not be possible until demand for other consumer goods improves, which will be difficult in the face of rising unemployment and the shift away from spending via credit to increased saving.
Other second-tier US data was disappointing, with initial jobless claims rising by 15,000 during the week ending August 15 up to 576,000, while continuing claims rose by 2,000 during the week ending August 8 to 6,241,000. Adding to the mix, the Mortgage Bankers Association of America said that mortgage delinquencies rose to 9.24 percent in Q2 from 9.12 percent, the highest since recordkeeping began in 1972.
Friday's release of NAR existing home sales could highlight the still-lackluster status of the housing market, as starts and building permits were both mildly disappointing on. Bloomberg News is currently calling for sales to rise for the fourth straight month to an 11-month high of 5.0 million from 4.89 million. While there are many reasons why sales could increase, including the US government’s $8000 tax credit for some homebuyers, low interest rates, and cheaper prices, there are also reasons why recovery in the housing sector may take a while, namely: rising unemployment. As long as the unemployment rate continues to climb, there will be a perpetual downdraft on property sales, which means that growth in the housing market may be quite meager throughout the rest of the year.
The main piece of event risk that traders should be watching, though, will be Federal Reserve Chairman Ben Bernanke’s 10:00 ET speech at the Jackson Hole Conference. The speech is entitled “Reflections on a Year of Crisis,” making it sound like most of his comments will focus on what the Fed has done in response to the financial crisis. No matter what is said, US dollar volatility is likely to pick up quite a bit, but if the speech sticks with a very neutral bias, as we saw in the Federal Open Market Committee’s policy statement last week, the US dollar may continue lower. On the other hand, any comments that stoke fears amongst investors have the potential to spark risk aversion, with flight-to-safety benefiting the greenback and Japanese yen. Regardless, given the very small trading ranges we’ve been seeing and low liquidity throughout the financial markets, there seems to be a big risk of breakouts throughout the majors on Friday.
Check out the Daily Fundamentals in its entirety for a look at what happened across the majors.
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