Daily Economic Commentary: United States

[ForexGump]

Nice one, Uncle Sam! The US economy finally made it out of the recession as it printed a positive GDP reading for the third quarter this year. Good news for the US, not so good news for the USD. As investors craved more risk, the USD fell against most majors except for the JPY.

The US economy grew at an annualized 3.5% in the third quarter, marking its first quarter in positive economic growth for more than a year. The actual figure even beat the consensus of 3.2% GDP growth as it made a strong rebound over the second quarter's 0.7% contraction. Government stimulus policies, such as the "Cash for Clunkers" program and the rebates for first-time home buyers, contributed much to the expansion for the period.

Although the headline figure indicates that the US has officially climbed out of a technical recession, many still question whether this growth is sustainable. President Obama acknowledged that their economy still has a long way to go before having a full recovery. He mentioned that GDP is not the only benchmark for measuring economic health and that the US government is also working on creating jobs and encouraging business investment.

However, this week's unemployment claims data suggests that the US labor market is still in trouble. Initial jobless claims landed at 530K this week, higher than the forecast of 522K. Still, this report was unable to dampen the strong USD selloff.

Today, a couple more employment indicators are on tap. Employment cost index and personal income figures are due 12:30 pm GMT. Along with these, data on personal spending and core PCE price index are due. Chicago PMI and University of Michigan's index of consumer sentiment is due later on, at 1:45 pm GMT.

The employment cost index is projected to rise by another 0.4% in the third quarter while personal income is expecting a modest 0.1% uptick. Personal spending is predicted to be down by 0.4% in September after rising by 1.3% in August. Meanwhile, the Chicago PMI is expected to step up from 46.1 to 48.8 in October. Lastly, consumer sentiment is projected to rise from 69.4 to 70.1 this month.

Mostly upbeat reports seem to be on the US economic front for today. We could see a continuation of yesterday's USD selloff as traders carry on with capitalizing on higher risk tolerance. Does this mean another bad day for the USD?

[ForexGump]

If you’re a USD-hugger, then Friday was a day to remember for ya’. After printing a GDP growth of 3.5% just last Thursday, which of course lifted the spirits of all risk-hungry investors, the US equities markets (Dow, Nasdaq, S&P 500) all fell by more than 2.5% to close the month of October. The only thing that was green that day was the… greenback.

While the Chicago PMI (54.2 vs. 48.8) and the revised UoM consumer sentiment index (70.6 vs. 70.1) both registered some better-than-expected figures, the 0.5% drop in consumer spending brought the US capitals markets down in the red zone. The selling pressure was further intensified when CIT Group Inc., a 101-year-old commercial lender in the US, filed for bankruptcy. All the indices closed sharply lower while the USD rallied.

Later today, the ISM manufacturing PMI for October and pending home sales in September will be published. ISM’s manufacturing figure is seen to rise marginally to 50.1 from 49.5. The gain in pending home sales, on the other hand, is projected to slow to 0.2% from 6.4% due to the expiration of the government’s tax subsidy for first-time home buyers.

Several high-impact reports will be issued on November 4. On tap that day is the release of ADP’s non-farm employment change in October. Based on the initial estimates, about 188,000 additional jobs were lost in October on top of the 254,000 in September. The ISM non-manufacturing PMI, which is estimated to come in at 51.6 from 50.9, will also be released about an hour after.

The Fed’s interest rate decision, however, is the one going to take the center stage. The central bank is still expected to leave the rates unchanged at 0.25%. But with the 3.5% GDP growth in the third quarter the bank may already discuss its exit strategies.

On November 6, several high impact accounts will be reported again. The NFP employment change is seen to print a loss of -173,000 employees on top of the previous month’s -263,000 tally. Such will bring the country’s unemployment rate to 9.9% from 9.8%. Volatility is usually high during these times so be wary. A weak employment picture from these two accounts will push the broad markets lower and the dollar higher.

[PipDiddy]

The dollar lost some ground in yesterday’s trading session when better-than-expected economic reports from the US caused risk appetite to surge. Dollar sell-off proved to be short-lived, however, as it managed to retrace some of its losses when the initial selling frenzy faded out.

The ISM manufacturing PMI, a survey designed to see whether the manufacturing industry is expanding or contracting, beat expectations as it printed a strong 55.7 figure for the month of October. The estimate stood at 53.1 only. Remember that a number higher than 50.0 means that the manufacturing industry is expanding. The sudden rise in the reading was attributed mainly to the government’s “Cash-for-Clunkers” program as it was able to help stimulate demand for cars.

Meanwhile, the report on pending home sales also helped prop up risk appetite as it unexpectedly showed that sales jumped by 6.1% in September, which was significantly higher than the 0.2% anticipated.

On today’s chopping board we have the factory orders report at 3:00 pm GMT. It is expected to show that orders increased 1.1% in September, opposite the 0.8% decline seen in August. If the actual result comes out significantly higher, we might see another dollar sell-off on account of risk appetite.

[PipDiddy]

Mixed trading in yesterdays action, as the USD finished higher against the EUR and CHF, but lost out against the GBP and CAD. It seems that traders are gearing up for the FOMC statement - could we be in for some explosive moves later today?

The dollar was able to post some nice gains against the EUR, touching levels it hadn’t reached in over month, as concerns regarding the banking industry sparked risk aversion yesterday. It appears that banks are still having trouble digging out of this mess. If these concerns continue to grow, this could cause traders to lean towards risk aversion.

A report indicated yesterday that factory orders in the month of September rose by 0.9%, marking the 5th time in the last 6 months that orders have risen. Some suggest that more orders will follow, as companies are ready to replenish inventory levels that were cut down during this recession.

We could be in for a bumpy ride today, as a lot of high impact speed bumps will be coming up throughout the US session. Firstly, we’ve got the ADP non-farm employment change report at 1:15 pm GMT. The ADP is predicting that 188,000 jobs were lost in October. Take note however, that the last few months, the data has come in worse than expected, so watch out for some wild swings when the report is released.

Later at 3:00 pm GMT, the ISM non-manufacturing PMI will be available. The ISM index is expected to show further expansion in non-manufacturing industries, with a reading of 51.9 for last month. I wouldn’t be surprised if the report comes in a little better than expected – remember, the manufacturing PMI report released last Monday did come in to show a pleasant surprise.

Lastly, the US Fed will be releasing its FOMC statement and interest rate decision at 7:15 pm GMT. FOMC members have not been dropping any hints or clues as to what may possibly happen in the meeting. Many believe that the Fed will keep interest rates at low levels, despite the recent report that showed that the US economy grew by 3.5% in the past quarter. Still, we could still see the Fed take a cautionary stance and point to the continuous problems that the labor market is encountering. If the Fed talks about potential exit strategies, we could just see the USD drop as it could possibly spark some risk taking in the markets...

[PipDiddy]

With the exception of the JPY, most major currencies clobbered the USD after the release of the FOMC statement. Weak US economic data, which usually causes a USD rally from risk aversion, may have even crippled the USD.

As expected, the Fed kept rates at their current levels, noting that economic conditions hardly changed since September. The usual challenges to growth are still existent: increasing job losses, slow income growth, and tight credit conditions. However, the Fed announced that they would scale back their debt purchases from the initial $200 billion to $175 billion, reflecting the limited amount of agency debt. Just like the FOMC mentioned in their previous statements, they would also gradually slow the pace of their purchases of mortgage-backed securities until the first quarter of 2010.

Meanwhile, other economic data from the US painted a bleak picture of their economy. ISM non-manufacturing PMI dipped from 50.9 to 50.6 in October, falling short of the forecast at 51.6. Although the index is still safely above the 50.0 mark which indicates industry expansion, the unexpected decline indicates that growing job losses may still be dampening activity in the services sector.

Indeed, the US labor market is still in a rut. The ADP non-farm employment change failed to meet the consensus as it printed 203K in job lossses for October. Does this imply that tomorrow's non-farm payroll report would also be worse than expected? Still, it's worth noting that, based on the ADP report, the increase in unemployment has been tapering off from 532K in May to 203K five months later.

For today, we have a few more labor market indicators on tap. Data on weekly unemployment claims, which is due 1:30 pm GMT, could show 523K in jobless claims, down from last week's 530K. Non-farm productivity for the third quarter may print a 6.2% increase in labor efficiency. Unit labor costs, on the other hand, are expected to slide down by 3.8% in the third quarter.

[PipDiddy]

Participants were particularly active in buying up the US equities markets in yesterday’s trading. Better-than-expected unemployment claims plus a strong third quarter earnings from Cisco carried the Dow and the S&P 500 by 2.08% and 1.92%, respectively. Despite these robust market performances, the USD did not weaken as much.

Cisco, which is the country’s leading supplier of networking equipment and network management for the internet, logged a very strong third quarter earnings. It also announced that it would add about $10 billion more to its $3 billion share buy-back plan. This positive corporate report carried the broader markets to one of the best daily single session advances this year.

The positive sentiment was also buoyed by a couple of good economic reports, namely the weekly unemployment claims and the third quarter non-farm productivity. Unemployment claims for the week ending October 31 fell to 512,000 from 532,000. While the initial jobless claims are still high, it is still better than the 523,000 estimate. Non-farm productivity during the third quarter also rose by 9.5% in its preliminary report, which is rosier than the 6.9% score in the previous period.

Today (1:30 pm GMT), all eyes will turn to the release of the much awaited NFP report. The change in non-farm payrolls is seen to be -173,000 in October from -263,000 logged in September. The latest forecast is the first time this year that lost jobs falls under 200,000. The unemployment rate, however, is still expected to rise to 9.9% from 9.8%.

Volatility is quite high around the time of the report so be careful.

My friend, Forex Gump, wrote a very insightful article on today’s NFP release. Check it out by clicking this link: October Jobs Fest – Time to Celebrate?

[glide21]

NFP has been pretty good to me this year, always an opportunity to scalp into volatility. Not fot the faint hearted I'm afraid, but if you're fully conscious and in total focus, you can make some quick profits here. On the whole, the USD tends to move with risk, so a good NFP figure (lower than expected) will send equities up and take the Euro, GBP, Aussie etc with it. This has not always been the case as good figures used to be good for USD. Well, market and perceptions change, and we with them (or perish). Just to remind that Canadian emplyment change is out at 12:00 GMT so watch the USD/CAD for potential scalps.

[PipDiddy]

As expected, the US employment report caused a lot of wild volatility swings in the market last Friday. Like the previous reports, however, any serious move in one direction failed to materialize. Exchange rates eventually returned close to their price levels prior the release after the initial market frenzy died down.

According to the report, joblessness in the US rose to 10.2% in October, from 9.8% in September. In addition, another 190,000 net jobs were lost indicating that hiring among business remains subdued. The only “good” news from the report was that wages employee wages grew 0.3%, higher than the 0.1% consensus. The labor market outlook is bleak, especially since hiring takes awhile to pick up even when the recession is over and a country returns to growth. As my buddy Forex Gump said in his blog, it took a more than two years after the GDP report posted growth in the last recession before employment started picking up.

We’ve got a lot of data upcoming this week but, unlike the last week, nothing fireworks worthy. In any case, expect to see the usual unemployment claims report on Thursday, 1:30 pm GMT. The forecast is that 512,000 people claimed for jobless insurance for the first time last week. At Friday, watch out for the US trade balance at 1:30 pm GMT and the University of Michigan Consumer Sentiment Report at 2:55 pm GMT. The trade balance is predicted to show a deficit of -$32 billion in September, up from -$30.7 billion in August while the UoM Consumer Sentiment is predicted to have risen to 71.2 this month from 70.6 last month.

[PipDiddy]

The USD got off on the wrong foot yesterday, as it stumbled around in yesterday’s dance-off. The USD got left behind by all other major currencies, as traders danced to beat of “Sell the USD”!

Risk appetite ran rampant in yesterday’s trading session, as traders were more than happy to partake in some risk taking. It appears that the markets reacted favorably to the G20 statement that revealed that G20 nations would continue to provide more stimulus. The report also showed that finance leaders were not too concerned about current currency levels. This prompted a dollar sell-off. If G20 nations are promising to keep rates low and to keep providing stimulus, shouldn’t this mean a run back to risk aversion? Hmmm… It seems that the markets are really looking at fundamentals right now. If so, we could see dollar weakness for quite awhile…

Later today at 3:00 pm GMT, the IBD/ TIPP economic optimism index will be available. The index surveys consumers on current economic conditions, measuring consumer confidence using a score of 50 as the base that separates optimism from pessimism. It is projected to have a reading of 50.3, up from October’s release of 48.7.

Also, FOMC members will be speaking throughout the day. They may drop hints about current monetary policy, as well as the direction that the FOMC will be taking in terms of when to unwind economic stimulus. Just be careful as any slip up may cause a strong market reaction.

Tomorrow is Veteran’s Day in the US. People will be honoring those who have served in the US military, so we could see less liquidity in the markets.

[glide21]

Fitch said that UK is most at risk of downgrade. This caused a rapid drop in GBP/USD of around 150 pips at 6:00 UK time. The price ploughed thru S1 and is now back at S1 at 6646 area. UK Trade balance out at 09:30 UK time and that should give further direction.