French Consumer Spending dives
EZ Industrial New Orders print better than expected
UK CBI Industrial Trends Hits 9-Month Low
Only Richmond Fed on tap in US. FOMC starts 2 day meeting
Another quiet night of data as the G-3 economic calendar does not truly become active until tomorrow and the FX markets reflected that fact with EUR/USD drifting lower on the back of persistent dollar strength before the upcoming FOMC announcement on Wednesday. As we noted yesterday, we believe traders have greatly overestimated the hawkish intent of the Fed. At best the Central Bank is likely to keep rates steady in the next few quarters rather than raise them. One of the key reasons for Feds recent hawkishness has been record level of Dow Jones Industrial Average which reached a high of 12,116 yesterday. Typically the Fed will not loosen monetary policy until US equity markets begin to show weakness. Yet the rise in US stock market has been driven more by prospects of a benign interest rate environment rather than underlying fundamental growth. (Note the latest warning from CAT and Fords massive Q3 losses.) Therefore, any strong indication by the Fed that it may resume rate hikes is likely to trigger a sell off in equities which ironically enough may force the Fed to ease off. Thus trapped between a rock and hard place we doubt the US monetary officials will do anything but remain still for the time being.
On the economic front the EUR/USD dipped early in European session off weaker than expected French Consumer numbers which printed a disappointing 2.7% month over month decline versus 1.3% projected. However, the pair regained ground on upward revisions of EZ Current Account deficits and a sharp jump in Industrial New Orders which increased by a whopping 14.3% on a year over year basis versus 9.7% projected. Industrial Production has consistently beat expectations this quarter suggesting that the EZ export sector, which has been the primary engine of growth in the regions recovery, continues to perform well. The consistent out performance of the EZ producers lends support to better prospects for Q4 growth. This dynamic is especially important in the EZ where production plays a far more important role in GDP growth. In contrast to the US where consumption comprises nearly 70% of GBP, consumption in EZ only makes up approximately 55% of GDP and thus production related statistics are of greater importance to the euro.
Turning briefly to the yen, we note that the currency continued to suffer post Watanabe comments which downplayed the impact of carry trades and noted that Japan has not yet fully beaten deflation. Yet even an inveterate yen dove like Mr. Watanabe noted that I see no reason for a further deterioration in the yen given the strength in the Japanese economy. No doubt Japanese consumers have been spooked by the NK nuclear crisis causing a temporary retrenchment in spending but as the rouge nation comes under the calming control of China, tensions are likely to ease and Japans recovery should proceed uninterrupted. In the meantime the benchmark 10 year JGBs have bounced off their recent lows in 1.600s % to presently yield 1.805% while the 20 years posted a two and a half month high of 2.300%. All of this is our way of saying that at 119.50 USD/JPY appears to be a far better value as a sell rather than a buy. If 10 year JGBs march towards the 2.000% yield, the currency should rally in kind. Only a hyper hawkish Fed and widening rate differentials will negate that yen bullish scenario.
