Dollar Advance Curbed By Weak Spending, Inflation Numbers

Last Friday, the market absorbed the quarterly growth and inflation numbers. Since the data overlapped the March indicators due this morning, few event traders were projecting the type of movement the majors actually made. However, the granular view has revealed a deceleration in spending and inflation that may help tip the Fed towards a rate cut.

Leading the anti-dollar charge in the morning hours, EURUSD officially halted its meek declines at 1.3590 resistance before rallying 90 points - just points below Friday’s record. At the same time, USDCHF didn’t reach the same relative extremes. The pair round out a solid advance to 1.2105 in the Asian hours to pull back to 1.2040 which is well above big support. Pound sterling traders took advantage of a weakened dollar with a 140-point rally to 2.0030. Finally, USDJPY is proving resilient to short-term flows. The carry pair was rejected by sturdy resistance at 119.75 but slipped only 45 points to stay above any considerable floors.
Fundamentalists were prepared to write off most of today’s economic data since indicators released over the previous week covered much of the same ground. However, to the extent that market participants were prepared for the outcome of today’s numbers, they were expecting changes similar to the quarterly growth and inflation numbers from Friday. Both personal spending and income growth through March came out on these grounds. Income bested economists’ predictions by growing 0.7 percent for the month. This was in comparison to the same pace from February after the Commerce Department revised the figure higher from the initial 0.6 percent clip. On the other hand, more prophetic for the strength of the economy, personal spending slowed far more than expected. Consumers tempered their spending habits, cooling the gauge to a 0.3 percent pace of growth from 0.7 percent in February, as the housing market’s woes festered and gasoline prices rose. For economists, the number is even worse since spending adjusted for inflation dropped the most since September 2005.
At the same time, the acceleration in the GDP’s price gauge was in direct contradiction to this morning’s inflation numbers. Though the quarterly report encompasses the monthly PCE activity, the more frequent releases can more readily reveal trends. Therefore, the dip in the personal consumption expenditure calculations (the FOMC’s favored) should throw up caution flags for rate hawks. According to the numbers, core price pressures were unchanged last month, leading the annual report to decelerate from a 2.4 percent gait match a year-low 2.1 percent. This should help to revive projections of a rate cut in the short-term forward rate curve. Also of interest from today’s economic flow was the Chicago PMI print for April. Like the Philly and Empire survey’s before, the Chicago-area factory report came in close to expectations by dropping off of its near two year high 61.7 read to 52.9. While the regional indicators are not very accurate in projecting the national ISM number, the low volatility from the smaller reads may project a stable change in the broad manufacturing read tomorrow.
The financial media continues to track the Dow’s relationship to record closes, even though those gains are coming slower despite strong earnings and M&A announcements. By 15:50 GMT, the NASDAQ Composite’s 0.2 percent drop to 2,552.13 made it the biggest mover for the day. Elsewhere, the Dow was up 0.8 percent to 13,131.26 while the S&P 500 was marginally higher at 1,494.19. The earnings flow continued Monday morning with Verizon Communications. Shares of the conglomerate rose 0.9 percent to $38.24 after the board released figures that soundly beat the Street’s consensus. Turning to merger and acquisition activity, the International Securities Exchange made public a $2.8 billion bid Deutsche Bourse made for the company. Share value jumped on the news by 42.5 percent or $19.42 to $65.14.
Government bond yields took heavy losses on the combined effects of the weaker than expected price and spending reports. By 15:50 GMT, the benchmark 10-year note was up 15/32nds at 99-30 while its yield slipped 6 basis points to 4.632. On that same note, the long-termed bond was 28/32nds higher at 98-27 as its own yield also dropped 6 basis points to 4.823.