The overall health of the US economy was back in traders crosshairs Wednesday as financial markets took in a disappointing first revision of fourth quarter GDP. Increasing the granularity, updates on two of the US most questionable sectors (housing and manufacturing) further weighed on hopes of a dollar rebound.
While a positive fundamental indicator was no where to be seen, technical levels held up nonetheless. The symbolic leader of the currency market, EURUSD retained a 50-point range above 1.3185 and therefore leaving the 1.3260 resistance level intact. Marking more gradual moves, USDCHF rose all the way up to 1.2240 in the overnight before but has since ranged with a floor near 1.2185. The British pound has finally displayed some volatility in a 115-point swing down to 1.9530 against the dollar before completely retracing the move by the early North American hours. Finally, the extreme moves in USDJPY have settled somewhat with congestion trading between 117.95 and 118.80.
Once again, the economic tap was wide open. However, action in the dollar-based majors was not reflecting such action. Instead, investors seemed more interested in the normalization of mass risk aversion. Should carry trades reaffirm themselves and allow other macro factors to influence the currency action, todays data would certainly act as a good fill-in. Though there were a number of surprises today, the most highly anticipated indicator was the governments second reading of fourth quarter growth. Initially coming across the wires at 3.5 percent in late January, the GDP revision offered a considerably reduced 2.2 percent annual pace. In terms of expectations, this was only slightly below the markets official 2.3 percent consensus, though realistically it raises considerable concern for the future of the US economy. Comparing the advanced and preliminary numbers in the breakdown, drops in personal consumption, investment and inventories were the most concerning. Gross private investment through the three months dropped 15.6 percent following an initially reported 11 percent decline. In turn this was influenced by a cut in inventory growth from 35.3 percent in the first measurement to 17.3 percent.
When the growth numbers were fully absorbed, the real event risk hit the wires. The Chicago Purchasing Managers Index, measuring factory activity in the Chicago area for February, upset expectations with a drop to the gauges lowest level since October 2002. Though the official economist consensus laid projected a pick up a modest pickup, many market participants revised their own outlook to account for the weak performance of the Philly and Richmond area reports early in the month. Now traders will move on to tomorrows ISM report with considerably lower expectations. Manufacturing wasnt the only sector to take a beating in the calendar today; new home sales completely undid the bullish sentiment underlying the pick up in existing purchases. According to the Commerce Department, sales of previously unoccupied homes plunged 16.6 percent in January the biggest monthly decline since January 1994. Little comfort is taken in the nominal level at 937,000 units annually, which is the slowest pace since February 2003. Some industry professionals suggest the turn in the weather played a considerable role in the monthly contraction, but the market will undoubtedly err on the side of caution when it comes to housing number in the months ahead.
After the major indices suffered their biggest one-day decline since 2001, many institutional and retail investors moved in to buy on the cheap. By 16:05 GMT, the broad S&P 500 was trading 0.9 percent higher at 1,411.57. Trailing behind, the Dow rose 0.74 percent to 12,306.21 while the NASDAQ Composite climbed 0.59 percent to 2,422.08. Just as yesterday had its leading decliners, a few firms stepped up to the role of headline advances. Telecom giant Sprint Nextel led the tech sector on its rebound with a 5.4 percent, $0.99 rally to $19.44 after announcing profits and earnings above expectations. In the pharmaceutical group, Merck & Co. put up its own 1.9 percent advance on raised earnings forecasts for the current quarter.
Treasury markets gave back a lot of their gains from yesterday as concerns over liquidity in risky assets cooled. Then ten-year note was trading 14/32nds lower at 100-15 by 16:05 GMT, with a yield 5 basis points higher at 4.566. Thirty-year instruments were trading 26/32nds off at 101-03 as yields dropped 5 basis points to 4.682.