If ever an illustration was needed, to reveal just how the markets and the USA economy have entered a new normal ‘twilight zone’, then perhaps Tuesday provided it. The afternoon trading session allowed us to witness the complete dislocation between policy decisions, news events, the real state of the USA economy and the inexorable bullish rise of the main equities markets.
The headline read; “Consumer Confidence Decreases Sharply in October”, another headline read “retail sales fall” and because of these high impact news events, or despite them, the main markets rallied as investors took that lack of economic confidence to mean that the Fed will delay their taper further and continue to pump fresh new liquidity into the banking system. Yes, we really have entered a strange new world which will only end when (if) the USA finally pulls the plug on their monetary easing programme.
USA Consumer Confidence Decreases Sharply in October
[quote]”The Conference Board Consumer Confidence Index, which had declined moderately in September, decreased sharply in October. The Index now stands at 71.2 (1985=100), down from 80.2 in September. The Present Situation Index decreased to 70.7 from 73.5. The Expectations Index fell to 71.5 from 84.7 last month.”[/quote]
It’s becoming increasingly difficult to take Bloomberg’s news seriously as it appears determined to put a positive spin on any news event that is remotely negative from the USA. Retail sales fell by 0.1% in the USA last month, but that didn’t stop Bloomberg from running with a title suggesting that sales increased if you strip out auto sales.
Selectively removing the poor element in a data set is a new one on most analysts, but that appears to be acceptable over at Bloomberg towers. And in mentioning auto sales it actually flags up a real negative; many car dealers in the USA are selling vehicles on 9 year leases with no down payment required, yes, cars have become as disposable as an iPhone 4S. And if you can’t give them away on 9 year deals, does this indicate that the USA consumer is all tapped out and nervy over fresh personal credit?
Total retail sales in the USA dropped 0.1 percent, restrained by the biggest decrease at auto dealers since October 2012.
[quote]”Retail sales in the U.S. outside of auto dealers climbed in September, indicating households were sustaining the economic expansion before the government shutdown shook confidence. The 0.4 percent gain in purchases excluding vehicles followed a 0.1 percent increase in August and matched the median forecast of economists surveyed by Bloomberg, Commerce Department figures showed today in Washington. Total sales dropped 0.1 percent, restrained by the biggest decrease at auto dealers since October 2012.“[/quote]
The high impact news events occasionally become over-shadowed by an outlier news event. And so it was on Tuesday when a member of the ECB suggested that it’ll be some time before the ECB lowers its deposit rate or its refi rate. This comment caused spikes across many of the major currency and cross currency pairs involving the euro.
ECB’s Nowotny: No realistic prospect of refi or deposit rate cut. Comments from Nowotny;
[ordered_list style=”decimal”]
- Don’t see any tool we could use against strong euro
- Room to maneuver on liquidity but not on interest rates
- Don’t welcome euro appreciation but must live with it
- Prospects for eurozone growth ‘balanced and improving’
- Big consensus on the need to avoid a liquidity cliff.
[/ordered_list]
ECB officials do not want the ECB to ‘go negative’ on deposit rates. The comments boosted the euro and they’re a step farther on than what he said two weeks ago. What’s being overlooked is his drift toward another LTRO, which now sounds highly likely in Q1.
Market overview
The main indices in the USA, the DJIA and the SPX, reached record highs in the New York session. The dollar rose for a third day versus yen, as the U.S. Federal Open Market Committee began a two-day meeting amidst forecasts that they won’t announce any major changes to its asset-purchase programme.
The DJIA closed up 0.72%, the SPX up 0.56% and the NASDAQ up 0.31%. In Europe the bourses were equally bullish. The STOXX index closed up 0.95%, the FTSE up 0.73%, CAC up 0.62% and the DAX up 0.48%. The MIB closed up the most, up a stunning 2.27% on the day.
Commodities suffered a negative trading day on Tuesday; ICE WTI oil closed the day down 0.49% at $98.20 per barrel, NYMEX natural up 0.19% at $3.64 per therm. COMEX gold is down 0.12% at $1343.90 per ounce, with silver on COMEX up 0.04% at $22.50 per ounce.
Equity index futures (at the time of writing) are moderately up where USA bourses are concerned. The DJIA equity index future is flat, the SPX up 0.02% and NASDAQ up 0.15%. European equity index futures look stronger; STOXX up 0.90%, CAC up 0.60%, DAX up 0.39% and the UK FTSE up 0.71% as an equity index future.
Forex focus
The pound fell 0.6 percent to $1.6050 late in London after rising to $1.6257 on Oct. 23rd, the highest level since Oct. 1st. Sterling depreciated by 0.4 percent to 85.74 pence per euro after reaching 85.85 pence, the weakest since Aug. 29th. The pound slipped for a third day versus the dollar due to speculation that U.K. economic data (due this week) won’t be strong enough to sustain gains that propelled it to a one-month high.
The dollar strengthened 0.5 percent to 98.19 yen late in New York, reversing a decline that saw it weaken as much as 0.2 percent. The greenback appreciated 0.3 percent to $1.3745 per euro and touched $1.3737, the strongest level seen in a week. It has fallen 1.6 percent versus the 17-nation currency this month. The euro gained 0.2 percent to 134.96 yen.
The dollar index, which monitors the greenback versus 10 other major currencies, advanced 0.4 percent to 1,006.12 and reached 1,066.22, the highest since Oct. 17th. The index dropped on Oct. 23rd to 997.94, the least since February. The greenback has lost 0.5 percent over the past month in a basket of the 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indices. The yen fell 0.4 percent, while the euro gained 1.3 percent.
The Australian dollar dropped for a third day versus its U.S. peer after the Reserve Bank of Australia’s Stevens said the South Pacific currency’s level wasn’t supported by costs and productivity in the economy. The Aussie slid 1 percent to 94.79 U.S. cents.
The Canadian dollar slid to the weakest level in seven weeks after Bank of Canada Governor Stephen Poloz told lawmakers in Ottawa he would extend a three-year pause in interest-rate increases. The currency depreciated 0.2 percent to C$1.0469 and touched C$1.0471, the least since Sept. 6th. It rose earlier amid bets it had reached a low point.
Bonds
The yield on the current five-year note fell three basis points, or 0.03 percentage point, to 1.26 percent at late in New York. The 1.375 percent note due in September 2018 rose 3/32, or 94 cents per $1,000 face amount, to 100 17/32. Yields dropped to 1.25 percent on Oct. 23rd, the least since June 19th. The yield on the benchmark 10-year note declined two basis points to 2.5 percent. The price of the 2.5 percent note due in August 2023 rose 5/32, or $1.56 per $1,000 face amount, to 99 31/32.
High impact news events and policy decisions that may affect market sentiment on October 30th
The ‘flash’ Spanish GDP is expected to come in positive in the morning European session, the expectation is for a rise to 0.1% from the -0.1% the preceding month. German unemployment data is published, the anticipation is for a small rise of circa 1K.
Focus then moves to the USA where the ADP employment numbers will be published, the expectation is for an increase of 155K jobs for the month down from 166K previously. There may be the now customary revision of the previous month’s number as is the habit with ADP.
CPI is published in the USA as is crude inventories, which if low could affect the price of WTI oil, then we move onto the main event of the day in terms of high impact news events; the FOMC statement with the added drama of the interest rate setting which is anticipated to remain at 0.25%.
Further on in the evening New Zealand comes into sharp focus as the interest rate announcement is made, expected to remain at 2.5%, an accompanying statement from the RBNZ and a sentiment index is released expected to come in at circa 55.
