It was a long-time coming, but dollar bulls finally found fundamental justification to owning a positive outlook for the economy. After last weeks report of a contraction in the manufacturing sector tallied a second detractor from the economy, the positive turn in todays ISM services read has curbed some of the doubt that has pushed the dollar to levels many traders are calling over sold.
In price action, the EURUSD was bid up to a touch on resistance to 1.3365, but dollar bidding helped swing the pair 75 points in the dollars favor. The yen was active in the overnight sessions with a 100-point move to 114.45 against the dollar, but dollar bids helped pull the pair back to 115.20. The pound sterling cross broke support this morning on a 75-point drop in the dollars favor to 1.9680 before profit-taking helped GBPUSD retrace some of its losses. Finally, USDCHF marked a new one-and-a-half year low in a short-lived jaunt below 1.19, but the break proved temporary as momentum quickly turned over to a 75 point rally.
The first truly market-moving fundamental release scheduled for this week, hit the newswires this morning in New York. However, before the ISM non-manufacturing report even stepped up to the podium, other indicators were already coloring the glass traders would interpret the factory gauge through. First out this morning, the Challenger Job Cuts indicator helped market participants tweak forecasts for this Fridays NFP report. According to the November report, job cuts year over year dropped 22.7 percent, the most since July. Clouding the bullish cut this Challenger report initiated, revisions to third quarter non-farm productivity and unit labor costs followed at 13:30 GMT. Non-farm productivity, a measurement of output per hour for the average worker, was amended with a slight 0.2 percent increase, though the adjustment was below the 0.5 percent growth expected. Unit labor costs on the other hand, dropped more than expected to a 2.3 percent pace from 3.8 percent initially printed. The latter will be particularly interesting for Fed Chairman Bernanke who expressed concern over wage growth stoking inflation.
By the time capital market liquidity hit its high, the sessions major releases were on deck. The lesser of the two releases, October factory orders, supported the weak manufacturing reports that have hit the wires recently. Perhaps setting up the poor November ISM manufacturing release last week, orders booked with factories the previous month sank 4.7 percent, the most in six years. This was yet one more indicator that proved the weakness in one of the United States largest sectors had more momentum behind it than was originally thought. Alone this gauge would revive fears of an imminent contraction in the worlds largest economy, but strength in the service sector kept the most pessimistic in the market from gaining control. Accounting for 90 percent of gross domestic product, services expanded at a greater than expected clip last month as shown by the surprise 1.8 point jump in the survey to 58.9. From the breakdown in the components, the contrast between the manufacturing and service sectors was obvious. While activity, new orders and employment all dipped below the contractionary/expansionary 50.0 level for factories, service-based firms reported improvement in all three. Now the dollar, barring any unexpected external change in the markets, will be left to drift until NFPs can rally momentum.
Equities were moving broadly higher this morning as softer inflation and a better services performance supported hopes that the economy would find a positive bottom. Leading the evenly spread advance by 16:05 GMT, the Dow was up 0.29 percent to 12,319.10. Only slightly behind, both the S&P 500 and NASDAQ Composite Indices were sporting a 0.27 percent advance to 1,412.88 and 2,455.03 respectively. From the list of market movers, auto bellwether Ford Motors was taking a 3.4 percent hit on a $0.19 percent drop to $7.70 after announcing it plans to take on an additional $3 billion in debt. Looking in the small cap group, Sirius Satellite Radio was 6.7 percent lower on a $0.28 push to $3.89 after cutting down its 2006 subscriber forecast.
Yields on treasury instruments were rising heartily by mid-day Tuesday as strength in one of the nations largest sectors led traders to cut back predictions of rate cuts in 2007. The t-note was pressured 8/32nds lower to 101-11 by 16:05 GMT with yields up 3 basis points to 4.456. Longer-termed bonds were off 19/32nds to 98-23 while its own yield grew 4 basis points to 4.579.
