US Dollar, Stocks Prepare For Another Fundamental Build Up

Personal Spending (MAR) (12:30 GMT; 8:30 EST)
Chicago PMI (APR) (13:45 GMT; 09:45 EST)
Expected: 0.5%
Expected: 54.0
Previous: 0.6%
Previous: 61.7

[B]How Will the Markets React?

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The past week has been a busy one for the US financial markets - in terms of fundamental activity, not price action. A number of big ticket indicators hit the wires, yet each one failed to pull the dollar, equities and treasuries off of their well beaten paths. Before Friday, the explanation for the flat price action was simple - everyone was waiting for the all-telling, first quarter GDP report. However, even the growth report failed to trigger the markets on the big moves that instruments are still obviously set up for. A let down was a real possibility heading into the report though. The unofficial outlook on the economy was rather bleak as investors weighed in on the sub-prime crunch’s effects on the already battered housing market as well as a very clear turn in consumer sentiment. Consequently, when the expansion report printed a 1.3 percent annual pace (the slowest in four years) most traders were sufficiently prepared. What’s more, a 16 year high in the quarterly price index component helped remind the market that the Fed’s hands are tied. After a period of steady build up followed by distinct disappointment, the week ahead looks like it could devolve into the same type of situation. The calendar heats up quickly Monday morning in the US session with indicators covering income, spending, inflation, housing and manufacturing - the full spectrum for fundamentalists. Sorting through the data, the monthly PCE numbers will be passed overlooked since the GDP price index has already set the tone for inflation hawks. On the other hand, the income and spending numbers will offer up to date measures of consumers spending habits that may clear the air on weak sentiment. Altogether, the later released Chicago PMI and construction spending numbers will keep the ball rolling on the ailments in housing and factory activity. Looking beyond Monday, everything clearly leads up to Friday’s NFPs. However, with payrolls stabilizing in recent months, will it fail volatility just like GDP?

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Bonds - US 10-Year Treasury Note Futures

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<SPAN style=“FONT-SIZE: 9pt; FONT-FAMILY: Arial”>One thing was sure about the past week for the Treasuries market - event risk was high. Nevertheless, the active futures contract on the benchmark 10-year T-note could not even muster enough of a move on the data to reach major support or resistance. Friday was another interesting day for price action. Headline GDP clearly disappointed reactive traders who drove the note futures to 108-04 before cool-headed market participants leveled things out. With the price index at 16 year highs and the wage and salary component of the ECI at 7 year highs, the Fed won’t be able to pursue rate cuts anytime soon. Looking out at the week ahead, Monday’s data won’t push 109-10 or 107-05, but it can pull spot up to these levels so that Friday’s non-farm payrolls report can finish the job.

FX - USD/CHF

Is this the end of US dollar declines? While the currency saw spiky price action on the release of dismal GDP figures for the first quarter, the greenback has yet to choose a firm direction. Trading the US dollar over the course of the next week may be done most easily via USDCHF, which is not only trapped in a thin range, but is nearing the apex of a triangle, signifying the potential for breakout. Whether the pair will surge higher or lower will be contingent on economic data released over the course of the next week, with Friday holding the marquee event: Non-Farm Payrolls. Monday could get the ball rolling, however, with Personal Spending and Chicago PMI set to be released. Both figures are anticipated to ease back, but consumption has proven fairly resilient in the US, so an unexpectedly rosy report could result. Furthermore, Chicago PMI may actually show a gain in output, as a weaker dollar has benefited exporters tremendously. In all, the data could actually be encouraging enough to give USDCHF a boost through 1.2100.

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Equities - S&P 500 Index[/B]

A fresh batch of strong earnings updates pushed Wall Street stocks to historic highs this week, as the Dow Jones Industrial Average breached the 13,000 point threshold for the first time on Wednesday. However, a stronger-than-expected slowdown of US GDP in the first quarter turned sentiment on the S&P 500 index negative, with the average down 0.1 percent at 1,494.07. Broad equity indices were boosted by companies that were supported by a weak dollar and strong growth overseas. Whirlpool rose 17.6 percent to $106.41, in spite of a US housing downturn, on the back of strong appliance sales abroad. Meanwhile 3M, the Post-it Note maker rose 4.9 per cent to $81.55 on strong profits.

On the flip side, railways and steel, which are more exposed to the US economy, fared less well. The S&P Rail index fell 3.5 per cent this week amid signs of weak traffic volume while CSX fell 2.9 percent to $43.74. Moreover, profit updates from a number of steel groups undermined hopes that the steel cycle was on the up trek. US Steel slipped 3.6 percent to $103.04 as Nucor fell 4.1 percent to $64.94.

Given the lack of real impact of significantly weak GDP figures on equities, Monday’s economic releases aren’t likely to have a very strong effect either. Nevertheless, the S&P 500 is still holding below its recent highs of 1,498.02, and should both Personal Spending and Chicago PMI ease back in line with expectations, shares could fall down towards 1,400.00. On the other hand, consumption has remained fairly resilient, so Personal Spending could surprisingly improve and give equity traders even more reason to go long.