Though the dollar continued to push to fresh record lows Friday, its decent had cooled from the previous two days’ losses.
In part, the dollar’s stability was endowed through a dramatic shift in risk appetite that provided incredible greenback rallies against the New Zealand and Australian dollars. At the same time, the typical carry trade funding currencies latched on to the same reversal in risk sending USDJPY and USDCHF to new three year and record lows respectively. Among its European counterparts, the euro finally lost its bullish gait, printing a modest loss against the dollar. The British Pound-denominated pair was put through a third session of chop as disappointing economic data reminded currency traders that the BoE is easing monetary policy and the UK economy is on the verge of following the US in cooling – and it has a long way to fall.
The Fed’s problems seem to never end. Economic data raised another red flag on both stumbling economic expansion and accelerating inflation trends – and in turn, undoubtedly converting a few more market participants into believing the US economy is heading for stagflation. Beginning with the growth numbers personal spending doubled expectations by jumping 0.4 percent through January, though it was clear from the data the pick up was based in rising prices rather than more sales. At the same time, as prices eat into consumption, income was doing its part by cooling its pace from December by rising only 0.3 percent. Making matters worse, the PCE inflation report for the same period unexpectedly hit a September 2005 high – putting an exclamation point on Bernanke’s mention of upside risks to price pressures in front of Congress. Later in the session, the data printed a grade worse. The Chicago PMI report (the last before next week’s ISM), joined the previously released regional reports by plunging to its weakest reading since the end of 2001.
Looking ahead to the coming week, there are a number of noteworthy releases on the docket. The fundamental pressure will pick up quickly on Monday with the ISM manufacturing report for February. After so many regional figures plunged into negative territory, the national figure is unsurprisingly expected to cool. A lull in the middle of the week will see the ISM services report and the ADP report; but the action picks back up on Friday with the NFPs. Outside of the US docket, rate decisions from the ECB, BoE, BoC, RBA, RBNZ and BoJ will no doubt have an impact on general risk trend if the shift in global policy doesn’t effect the Fed-weary dollar directly.
The stock markets finished off the week retracing the week’s gains as the economic outlook for the US remains bleak, and increased the downside growth risks as investors turned sour. The DJIA shaved a stunning 315.79 points to leave the index at 12,266.39 as all of the big 30 saw share prices falling, with AIG group taking the biggest hit as the insurance giant tallied up the biggest write-downs in its 90 year history. The broader S&P500 lost 37.05 points as it fell to hold at 1,330.63 points led by Freemont General Financing and Abitibibowater Inc, while World Fuel Services topped the handful of winners.
Rising turmoil lowered the risk appetites of investors, which sent treasury prices soaring as investors unwound their position in risky assets and ran straight for the safe haven of US Treasuries. As a result, the benchmark 10-Year yield fell lower to 3.51 percent, while the 2-Year yield was bumped up to 1.64 percent.