The US data coffers have been bursting at the seams for the past three sessions. However, where extraordinary surprises from some of the top market movers in the past two days have failed to budge the dollar, todays ISM report reestablished the connection and sent the greenback climbing.
When the action started, EURUSD responded with a 40-point slide that broke through a short-term rising trendline and brought the pair to a 1.3155 low. For USDCHF, the pair moved to within a few points of marking a double bottom with the 2-month low 1.2145 before rallying 90 points. Against the British pound, the greenback pulled in for 90 point run peak-to-trough move to 1.9555, though the pair is still tracing out a wedge on the higher time frames. Finally, carry trade unwinding took USDJPY for another ride worth 190 points for those short from Asian session highs around 118.90. Dollar bidding only afforded the pair an 85 point rebound by mid-day.
Drawing a surprising correlation to the fundamental scene on Tuesday, market participants were torn over whether to make trades off of legitimate data or the blatant wave of carry unwinding last night. Though not as volatile as the previous swell of bids for cheap yielding currencies, the counter moves in the popular trading strategy proved quite potent. On the other hand, while high yielding currencies like those from Australia and New Zealand were severely hit across the board, the dollar was relatively unscathed outside of the USDJPY pairing. This allowed for the recently overlooked economic calendar to exert its influence on jumpy markets.
Though the market waded through a number of indicators Thursday morning, the New York session trigger proved to be the ISM manufacturing read. The top market mover through 2005, the national factory activity gauge proved its dominance on the economic food chain when a printed a better then expected improvement. Going into the release, the official and unofficial expectations for the release were aiming considerably lower than the actual print. A consensus for 50.0 was taken some days ago. However, since then, many economists had lowered their projections. The markets outlook was worse. After the weak showing in the Philly and Richmond area surveys, and especially the contraction in the Chicago PMI, rumors of a dip to rival Januarys 45-month low 49.3 were not easily brushed off. When the February number ran across the wires at 52.3, the weight of the poor showing in the housing market and the drop in regional factory indices was lifted all at once. The breakdown confirms the Feds predictions that the manufacturing sector will rebound through 2007. After months of burning off excess inventories, firms increased production on jumps in domestic and export orders, while at the same time boosting employment for the first time in four months.
Despite the markets singular focus on the docket, there was a number of indicators that will play into future market movers and possibly on Fed policy making. The Commerce Departments spending, earnings and inflation data will likely accomplish both. In January, income grew 1.0 percent the most in a year- and spending slowed to 0.5 percent. Taken together, this was the first time income growth outpaced spending in four months. These figures highlight two overriding macro themes for policy makers at the Fed and Capital Hill: the low level of the national savings rate and the consumer sectors ability to carry growth while housing and trade waver. In another vain of data, the PCE readings (the central banks preferred inflation statistics) improved on both the monthly and annual markings. Elsewhere, the mature decliner in the economy housing offset the improvements in factory activity. Construction spending in January, on the heels of the biggest drop in building since July and new home sales going back 13 years, dropped 0.8 percent. Conversely, the quarterly house price index picked up slightly with a 1.1 percent pace in the fourth quarter, sector inflation is still near its lowest level since 1999.
The equities market started the day off with a remarkable gap lower, though the benchmark indices fought their way back as the day wore on. By 16:30 GMT, the NASDAQ Composite was lagging in the retracement as it was still off 0.32 percent at 2,408.39. The Dow was off 0.17 perecnt at 12,247.72 while the S&P 500 edged 0.07 percent lower to 1,405.90. The overwhelming fear amongst stock investors was obvious as shares of Home Depot held 0.6 percent underwater at $39.34 even though the FT wrote that 3 private equity firms were looking to bid on the companies Supply Unit. One strong performance was Oracles $0.52 or 3.2 percent rally to $16.95 after announcing its agreement to buy Hyperion Solutions for $3.3 billion.
By mid-day treasuries were trading near even, suggesting the risk aversion across the globe hadnt cemented its influence on US debt. The ten-year T-note was unchanged at 100-15 with a yield of 4.563 by 16:30 GMT. Bonds were 1/32nds lower at 101-02 as yields held steady at 4.683