Despite weaker than expected U.S. economic data, most of the
major currencies are trading higher against the U.S. dollar. The
Federal Reserve won't be happy with the latest reports which show
evidence of deterioration in the labor market, the housing sector
and manufacturing. The improvement in growth that we saw in the
first quarter is fading quickly in the second, boosting
expectations that the Fed will take action to prevent a deeper turn
in growth. Although there was nothing good in today's report, we
still believe that the U.S. central bank will reserve QE3 for a
more desperate and troubled time in the global economy. A few
pieces of weaker data will not be enough for the Fed to add to a
highly controversial form of monetary stimulus.
In the meantime, it is official - manufacturing activity is
slowing. Earlier this week, we learned that manufacturing activity
in the NY region slowed to its weakest level in 5 months. This
morning, we saw evidence of a sharp slowdown in Philadelphia. With
2 key parts of the country experiencing slower manufacturing
growth, there is a very good chance that this is a widespread
problem. The housing market isn't faring much better with existing
home sales falling for the second month in a row by 2.6 percent.
The amount of existing homes sold dropped from 4.6M to 4.48M.
Leading indicator growth was stronger than expected, but still
significantly weaker than the previous month. Yet the ugliest
report was jobless claims - weekly claims came in at 386k compared
to a forecast of 370k. Last week's figures were revised to a four
month high of 388k.
The jobless claims figures were also very ugly. Federal Reserve
officials have been deeply concerned about the labor market and the
recent uptick in claims points to another month of weak payroll
growth. Although equity valuations were firm in March into early
April, there were more layoffs in U.S. companies which suggests
they have become less confident about the outlook for the U.S.
economy. So far this month, jobless claims are consistent with
payroll growth between 100k to 150k. This disappointment will most
likely exacerbate the sell-off in risk and pare gains in
USD/JPY.
Although part of this morning's optimism can be attributed to
the successful Spanish bond auction, investor demand has not
stopped borrowing costs from rising with 10 year Spanish bond
yields hitting 5.83 percent. Instead, there is a general belief
that the EUR/USD is being supported by European repatriation. We
won't know for sure until the ECB and BIS data are released but by
that time, it will be irrelevant. The thought is that banks are
repatriating funds to shore up capital which if true is more
negative than positive for the euro because it means that the
EUR/USD is being artificially held up by short term unsustainable
flows.