The USD was weak again to start the day, but conditions in favour of further weakness may not last for much longer. Next week sees key data for more input on the US economy, but will be low on new input from the Fed.
The US suffered until the early North American hours today before stiffening its resistance a bit as we have seen a solid bounce-back in risk after the previous sell-off wave. That bounce is certainly part of the normal ebb and flow of the market action after a steep selloff, but some of the bounce may be driven by the nauseating anticipation of more QE from the Fed after the recent appearances by the important Fed officials, Janet Yellen and Dudley (of the important NY Fed), both of whom spoke in favour of the Fed holding rates low until late 2014 as spelled out in the most recent FOMC statements.
Still, Dudley did mention a concern that fresh bond purchases could spark inflation fears, so the market may be getting over-excited about the prospects for QE in the near term, also despite yesterday’s weak jobless claims number. And remember my previous arguments that the Fed always needs a very weak market to precede any call for new easing measures, so we’d need to see the S&P 500 trading closer to 1200 or even worse, rather than 1400. Earnings season is upon us as a key input for the direction in equities as well.
The Ticker Guy (a.k.a. Karl Denninger) posted an analysis of a great, if “clumsy” statement made by PIMCO’s El-Erian, who said that “In the last three plus years, central banks have had little choice but to do the unsustainable in order to sustain the unsustainable until others do the sustainable to restore sustainability.” The “others” El-Erian refers to are the politicians, and therein lies the longterm concern for our democracies as well as the markets – does the voting population want to hear the truth and vote for the right people to change the course or must we careen toward some catastrophe before any kind of behaviour change is possible? The critical point appears sooner in Europe than in the US, where the test could wait until after this fall’s election.
Looking Ahead
Next week is fairly well populated with interesting data from the US. This includes the NAHB survey on Monday (this is most forward indicator I have researched on the US housing market, and it began stalling out last month after an impressive run higher, so it is interesting to see which way momentum is running) and the US Housing Starts and Building Permits for March on Tuesday.
Also on Tuesday, we have the US Retail Sales for March and the first of the major regional manufacturing surveys, the Empire Manufacturing survey, where the focus will be whether the positive effects of a warm winter provided a one-off boost to the sector or whether the strong manufacturing sector has legs. The Philly Fed survey follows on Thursday, together with the latest weekly jobless claims number. The next FOMC meeting is not until the following week and the schedule of Fed speakers is not particularly heavy, with only Pianalto (voter) and Bullard (non-voter) out speaking, and we already know of their more hawkish views.
Data elsewhere includes the Bank of Canada meeting on Tuesday – they have tended to the hawkish side in recent meetings but are unlikely to rattle the cage too much with USD/CAD below parity. Oil prices and risk appetite are important inputs. Also Tuesday we have UK inflation, which has been in a generally downward trend, and the Germany ZEW survey, which has seen a massive bounce over the last several months and where it is likely time for a round of mean reversion back lower, considering the rising worries again in the eurozone.
Wednesday features the BoE minutes and Sweden’s Riksbank, which is likely to pause after cutting at its last two meetings. Other highlights for the week include Japan’s latest Trade Balance numbers on Thursday and on Friday, the German April IFO, UK March Retail Sales, and Canada’s March CPI.
Overarching everything next week will be the continued aggravation of risk spreads in Europe and the upcoming French election, where the first round of the election will take place on Sunday the 22nd. An article today from Bloomberg suggests that the ECB would prefer to start bond purchases again to deal with systemic risks rather than offering new 3-year loans.
In terms of market action, the latest bounce-back rally may fade soon (or already be fading today) as it is typical to see violent swings as the market is rolling over. The EUR/USD hold at the 1.3200/10 55-day moving average area is a key resistance for now for those looking for a near-term roll-over again there, though the proof of the USD standing strong again is in a break of the 1.3000 level.
The likes of AUD/USD, meanwhile, will need to see a strong reversal again lower for the bears to freshen up their downside views and we’ll need to see a higher momentum selloff than we saw previously to believe that a bigger move lower is in the works. The going may be treacherous there for both bears and bulls there, just as it has been in USD/CAD, which has executed something like its 19th reversal around the parity level.
Economic Data Highlights
- Italy Feb. Industrial Production fell -0.7% MoM and -6.8% YoY vs. -0.7%/-5.1% expected, respectively and vs. -4.6% YoY in Jan.
- UK Mar. PPI Input out at +1.9% MoM and +5.8% YoY vs. +1.4%/+4.8% expected, respectively and vs. +7.8% YoY in Feb.
- UK Mar. PPI Output out at +0.6% MoM and +3.6% YoY vs. +0.5%/+3.5% expected, respectively and vs. +4.1% YoY in Feb.
- US Mar. CPI out at +0.3% MoM and +2.7% YoY as expected and vs. +2.9% YoY in Feb.
- US Mar. CPI ex Food and Energy out at +0.2% MoM and +2.3% YoY vs. +0.2%/+2.2% expected, respectively and vs. +2.2% YoY in Feb.