Daily Economic Commentary: United States

[ForexGump]

The USD knocked the hell out of the other heavyweight currencies except the JPY in Last Friday’s ‘match’. Market participants regained their confidence in the market last Thursday. The USD weakened as a result as they switch back to higher yielding assets like the AUD and the EUR. Their optimism, however, faltered once again which gave support to the USD.

The US’ trade balance in May was due last Friday. The USD gained ground ahead of the report in anticipation that its trade deficit would balloon to -$30 billion from -$28.8 billion. Trade balance measures the difference US’ exports and imports. A trade deficit (negative trade balance) means that imports exceed exports. Instead of widening, its trade balance surprisingly came in at -$26 billion. The USD’s gain was shortly reversed.

The preliminary result of the University of Michigan consumer sentiment survey was also reported. The index is based on about 500 consumer surveys regarding the relative level of current and future economic conditions. The account came in at 64.6, well below the expected 70.9 reading after registering a score of 70.8 during the month prior. The USD headed north following the report.

Today (6:00 pm GMT), the US Federal budget balance will be announced. Market participants expect the US budget deficit to narrow to -$65.5 billion from a high of -$189.7 billion. A lower deficit could mean that government spending would also lessen. However, such could be seen positively (for the USD) given the US’ surging debts.

[ForexGump]

The USD generally lost ground against most major currencies yesterday as money flowed back in the foreign exchange markets. Given the way the USD failed to extend its gains from last Friday, it seems that the currency’s direction is still uncertain. Risk tolerance is shaky at best, and it looks like it’s all a matter of picking which major currency is the strongest... Or, to be more accurate, least weak. With this week’s relatively light economic calendar, we might just see more range bound movement as we get deeper into the summer doldrums!

Today, US’s economic bag is packed. Later afternoon at 12.30 pm, we will see the numbers on US retail sales, both headline and core. The headline report is expected to print a 0.4% increase while the core retail sales, which excludes highly volatile items such as automobiles, is predicted to show a 0.5% rise. Also release at the same time is the US produce price index for June. The PPI basically records the monthly change in price of finished goods and services sold by businesses. The consensus is a 0.9% increase. Finally, at 2 pm, we will see the report on business inventories for May.

Lots of reports due today but nothing ground breaking so the USD would probably trade sideways versus most currencies with a bit of volatility spikes here and there. Still, like I always say... You never know with the markets today so be careful for any risk sentiment shifts or surprise news!

[ForexGump]

We saw some mixed trading yesterday for the USD. In general, it fell against most majors, most notably against commodity currencies, as traders pounced on headline news from the US. Could this signal a shift in risk assessment? Or will the recent consolidation continue to persist?

Retail sales rose last June by 0.6% from the last month, which was the largest rise this year. In addition, the PPI report showed that prices paid to producers rose 1.8% in the same period, double the expected 0.9% rise. Yet, these numbers are a little deceiving, as the large rise was mostly due to rising gasoline costs and an increase in automobile sales. Take these two items out, and retail sales actually fell for the 4th consecutive month. It seems like traders are just jumping on anything that signals “recovery” without looking at the underlying data.

In other news, a report showed that US business inventories are continuing to fall. Last May, inventories fell by 1.0%, which is in line with expectations. Companies have been forced to cut inventory levels during this recession in order to adjust to demand.

Later today, a slew of economic reports are scheduled for release. One of the reports to watch out for is the CPI m/m report. Have traders already acted on inflation data (PPI) that came out yesterday? Other reports to take note of are the Empire State Manufacturing Index (12:30 pm GMT) and Industrial Production m/m (2:30 pm GMT) reports. Also, the minutes of the last FOMC meeting are due at 6:00 pm GMT.

Tomorrow, we have the weekly unemployment claims (12:30 pm GMT), which is expected to fall below 600,000 for the second consecutive week. Also scheduled for release are the TIC Long-Term Purchases and Philly Fed Manufacturing Index (which is supposed to be highly correlated to the Empire State version). These reports are due at 1:00 pm and 2:00 pm GMT respectively.

With all the reports coming out, should make for some exciting, volatile trading over the next couple of sessions!

[ForexGump]

The USD sold off like pancakes at a state fair yesterday, with strong economic data as risk appetite boosters. The rise in consumer prices, improvement in manufacturing, and the uptick in industrial production pushed the USD lower against most currencies, except the JPY.

Price levels rose by 0.7% in June, as indicated by the CPI. Core CPI, which excludes the costs of food and energy, climbed by 0.2%. This indicates that much of the increase in consumer prices could be accounted for by higher energy costs.

The Empire State manufacturing index leapt from -9.4 to -0.6, its highest level in a year. This beat the forecast at -5.3. This index is considered an early indicator of the Institute of Supply Management's factory survey, which posted a 44.8% uptick in the latest report. Investors are hopeful that the next reading would exceed 50%, which is the threshold for growth.

Positive economic reports just kept coming as capacity utilization rate recorded at 68% increase. This implies that a higher percentage of available resources are being utilized by manufacturers, mines, and utilities. It is also considered a leading indicator of consumer inflation because manufacturers tend to raise prices as they are nearing full capacity.

Industrial production fell less than expected, posting a 0.4% decline instead of the projected 0.6% drop. After sliding down by 1.2% in the previous month, industrial production data in June indicates that the factory slump is gradually easing.

Investors were far too focused on the positive economic reports that they appeared oblivious to the upward revision in the Fed's unemployment forecasts. From the prior 9.4% forecast, unemployment rate is now expected to hit 9.95%, with a high of 10.5% as the worst case scenario. Nonetheless, the Fed provided comfort to investors as they also made upward revisions for the US GDP. The central bank expects the economy to slow down by 1.25% this year, compared to the previous forecast of a 1.65% contraction.

Heads up for earnings reports due today! JP Morgan, IBM, and Google are scheduled to release their 2nd quarter earnings and these should have a significant impact on equities and currencies. TIC long-term purchases and Philly Fed manufacturing index are also expected this Thursday. And oh, that reminds me! Weekly jobless claims are also on the schedule for today.

Treasury International Capital (TIC) long-term purchases are expected to climb from 11.2 billion USD to 16.7 billion USD, reflecting higher demand for US securities. The Philly Fed manufacturing index, on the other hand, is predicted to slide from -2.2 down to -4.9. Lastly, unemployment claims are projected to be slightly lower than last week's 565K. Could this mean that we should gear up for another run of risk appetite today?

[ForexGump]

The USD regained some its losses from yesterday throughout the entire trading session in Asia. Higher yielding currencies such as the EUR, GBP, AUD, quickly made headways and left the USD behind upon the opening of the London market. The USD was mostly choppy during the US session. Despite its effort to pull through, the selling pressure is far greater which led the USD back in the blue once again versus most of the other majors.

The US saw a mixed economic data from the yesterday’s unemployment claims, TIC long-term purchases, and Philadelphia Fed manufacturing index results.

The unemployment claims for the week ending July 11 came in better than expected at 522,000. The number of people who filed for unemployment insurance for the first time during the past week was projected to reach 550,000 during the week after previously registering a 569,000 count. The latest number is its lowest level since January of this year. However, hiring remains to be limited and the US unemployment may still rise over 10% by 2010. Nonetheless, the better-than-expected unemployment results helped boost confidence in the capitals markets.

The net long-term TIC flows in May, however, unexpectedly sunk to -$19.8 billion. The figure was expected to rise to $16.5 billion from the April’s mark of $11.2 billion. The account measures the difference in value between foreign long-term securities purchased by Americans and US long-term securities purchased by foreigners. A negative account means that the total value of foreign issues that Americans bought is larger than the American issues that foreigners purchased. This indicates that the international demand for US assets is slowing. The drop in international demand was caused by the diversification done by Russia, Japan and other countries.

The Philadelphia Fed manufacturing index in also fell further to -7.5. The account was only expected to drop to -4.9 from -2.2. The drop in the figure marks its 10th consecutive monthly contraction. The index measures the manufacturing activities in the US mid-Atlantic region. A negative reading indicates that conditions are worsening.

None of the above economic reports, however, was the key driver yesterday. The main catalysts that boosted the capitals markets up were the better-than-expected earnings reports by the tech giants IBM and Google. JPMorgan Chase also reported better earnings results but it wasn’t able to give support to the financials.

Data on housing starts and building permits for the month of June will be published today at 12:30 pm GMT. The number of new residential building permits issued is expected to come in at 520,000. The number of housing starts is also estimated to reach 530,000 for the period.

Bank of America, Citigroup, and General Electric will report their quarterly earnings today. Much of the attention will be given to them since these giants were the ones that almost collapsed amid the recession. Positive earnings will fuel risk appetite while dismal profits would surely cause a little panic.

[ForexGump]

When a country’s positive economic data hit the shelves, basic logic would dictate that its domestic currency would appreciate as well. For the USD, This doesn’t necessarily hold true in today’s tough times. The reason? Risk tolerance.

Investors tend to associate good US data with economic recovery. They believe that if US economic data are showing signs of recovery, the rest of the world would soon follow. We saw this last week as corporate earnings printed better-than-expected results, prompting investors do away with the low-yielding USD in favor of relatively higher yielding currencies such as the AUD, EUR and NZD. It only makes sense... the best “bang for your buck” right?

Optimistic headline numbers on housing starts and building permits also kept USD buying to a minimum. The June report on housing starts printed an annualized number of 580,000, much higher than the 530,000 initially predicted. This was also an improvement from last period’s revised up figure of 560,000. Building permits shared the same firm tone. It reported an annualized number of 560,000, better than the 520,000 forecast. Economists see the reports as leading indicators for economic health. It’s like an infectious laughter! The more houses and buildings are built, the more workers and employees are needed to construct them. Furnishings and equipment must also be purchased which, in turn, stimulates demand and production. This puts more money in the pocket of consumers, enabling them to have more money to spend. You get the picture!

Looking ahead, we’ve got a pretty light week for the US with regards to economic data. The only hard market hitting economic due this week will be the report on existing home sales on Thursday. Before that though, we might see quite a bit of volatility tomorrow at 2 pm. Federal Reserve Chairman Ben Bernanke is set to testify before the House of Financial Services Committee in Washington about the Fed’s monetary policy. Bernanke’s talks have the tendency to cause some waves in the FX market so be careful when trading during that time!

[ForexGump]

And the rally continues! Well.. the rally for higher yielding assets that is! Other majors continued their strong moves against the US dollar, as risk appetite continues to persist. Risk tolerance has been boosted as of late due to good news that has been propping up as of late. With US Fed Chairman Ben Bernanke scheduled to speak later today, could this prompt a change in sentiment? Or will it add fuel to the fire?

Only one report was released yesterday, but it appeared that that was all that was needed to help inject more optimism in investors. The CB Leading Index rose by 0.7% in June, better than the expected 0.5% forecast.

Risk sentiment is really driving the markets right now and even a statement of “weak growth” by Fed member Dennis Lockhart could not dampen optimism. Lockhart said that there were many obstacles (labor conditions, healing of the banking system) that would slow down economic recovery and that it would take time to overcome these problems.

With no economic reports coming out today, watch out for the aforementioned speech by Ben Bernanke at 2:00 pm GMT. He will be talking in front of the House Financial Services Committee to give the Fed’s semi-annual monetary policy report. Bernanke could outline the future direction of monetary policy by the Fed. He could also mention a timeline for exiting previously implemented strategies. The report will last until tomorrow, so be on the lookout for any news releases. We may see liquidity dry up as traders will be waiting for the results of the report.

[ForexGump]

Props to Big Ben! Fed Chairman Ben Bernanke's speech boosted the USD as he assured that the central bank is prepared with an exit strategy for its quantitative easing and that they are ready to implement it when the right time comes.

Bernanke kept a cautious yet optimistic stance regarding his outlook for the US economy when he said that "tentative signs of stabilization" can be seen. According to him, consumer spending has been relatively stable so far this year and that the decline in housing activity appears to have moderated.

Additionally, he remarked that the central bank's monetary policy is still focused on fostering economic recovery. If economic conditions indicate that a tightening of the monetary policy is necessary, then the central bank has a number of tools to raise interest rates as needed. He also said that it was time to work towards reducing the nation's deficit.

Bernanke is scheduled to deliver another speech at 2:00 pm GMT today, this time with the Senate Banking Committee as audience. No sentiment-shifting economic reports are expected from the US today. Only the housing price index, which is due at 2:00 pm GMT, and crude oil inventories, which is set for 2:30 pm GMT, are on tap.

[ForexGump]

The USD continued to slide yesterday against the other major currencies. Though, the degree of its decline was a bit muted compared to the previous days.

Fed Chairman Bernanke made another testimony before the Senate yesterday. That time, he fought for the independence of the Fed as he wanted to shield the central bank from political intervention. He, however, noted that the Fed should also be responsible for how they are using the taxpayers’ money. Another topic that was brought up was about the potential defaults in commercial lending. Some people have suggested that a wave of possible defaults in the commercial lending sector may even dwarf the recent home-mortgage defaults in the US. Bernanke responded by saying that the bank will continue to monitor the sector’s health. It is also open to an extension of the TALF program if the need arises.

Today, the unemployment claims for the week ending July 18 in the US will be released at 12:30 pm GMT. The number is expected to reach 551,000 from the 522,000 mark of the week prior. A weak labor market continues to be the US' weakest link. An increase in the number could cause a little worry in the market but could be bullish for the USD in the short term.

Data on existing homes sales for the month of June will also be published today at 2:00 pm GMT. The annualized number of existing homes sales for the period is expected to have increased to 4.83 million from 4.77 million. An increase in the number would support investor confidence. It would, however, be bearish for the USD as investors would likely switch to higher yielding assets away from the USD.

[ForexGump]

Risk hungry investors totally blew the USD out of the water yesterday! Well, in the Euro/US session overlap at least. It managed to retrace some of its losses as the US afternoon session went by. It looks like the sentiment on risk taking isn't over as more and more economic data show that the global economy is starting to pick up.

And who were the prime suspects in yesterday's trading session? The jobless claims and existing home sales reports of course! Jobless claims showed that 554,000 people asked for insurance, a bit higher than the 551,000 initially expected. Even if this is the case this is certainly a far cry from the 600,000++ numbers we were so used seeing the previous months before. Existing home sales, on the other hand, printed that 4.89 million (annualized number) homes were sold in June. This was an improvement from the 4.82 million consensus, which is giving more evidence that the general trend in existing home sales is up.

Sentiment is King and if you can capture this, there is a high probability that a huge sum of cash is closely behind. Investors believe that the worst is behind us and the economy has nowhere to go but up! In addition, "less bad" economic data is popping up here and there, which is propping up investors appetite for risk. Notice how the USD has generally lost ground versus most major currencies since early this year. If this kind of sentiment continues, investors could push riskier assets highers and higher, much to the demise of the USD. I guess what I'm saying is... Do not underestimate the power of market sentiment. Even if fundamentals are still shaky, market sentiment could easily overpower it and shove it aside.

In today's economic slate, the revision on University of Michigan's July report on consumer sentiment is due for release today at 1:55 pm GMT. Economists are expecting initial reading of 64.6 will be revised up to 65.1. Federal Reserve Chairman Ben Bernanke will be speaking for the third time also later afternoon at 2:30 pm GMT. He'll be discussing the issue of regulatory restructuring with the Financial Services Committee in Washington DC.

It's the end of the week and traders will be closing their books for the weekend. Will they end up on the riskier end of the market or will they run back to the safety of the USD and JPY today? I wish I knew for certain too!