This may be a busy week for U.S. economic data but this morning's reports had very little impact on the U.S. dollar. The G20 came up with nothing this weekend and investors are beginning to realize that their recent optimism could be misplaced. Over the past few weeks, there has been a general belief that behind closed doors, European officials are working on a Grand Master Plan to save the euro. However European officials have gone to lengths to temper the market's expectations, dashing hope that a deal will be reached before the G20 leaders Summit in November. German Finance Minister Schaueble and Chancellor Angela Merkel said that the EU Summit would not present a definitive solution to the Eurozone debt crisis. Although U.K. Finance Minister Osborne expects "something quite impressive" from the Oct 23 EU Summit, if Germany refuses to agree on bank recapitalization, an expansion of the EFSF or a new package for Greece, the meeting will be another bust. At this point, it is not even clear if EU policymakers will be able to agree on releasing the next tranche of aid to Greece before the end of the month. These recent comments illustrate how much of a challenge it is to come up with a plan that all 17 Eurozone nations find agreeable. Given the amount of time and effort that it took to have the July EFSF expansion approved, doubling or tripling the size of the EFSF, will be an even steeper uphill battle. Investors are finally beginning to realize that there is no fast and easy solution to the Eurozone's sovereign debt crisis and we will be lucky if an agreement can reached before the end of the year. With this in mind however, there is still a small chance that the conflicting comments from European officials represent a smart strategy of managing market expectations. If they dropped hints that a deal is in the works, there would be more short covering in the euro and the currency's reaction to the announcement would be far more tempered. Instead, they would make a much bigger splash if they disagreed for weeks, keeping the general market short euros, then suddenly announcing a big comprehensive plan that would squeeze the currency pair sharply higher.
Meanwhile the reaction to this morning's U.S. economic reports show that investors are no longer fazed by weaker U.S. economic data. The Empire State Manufacturing index rose from -8.82 to -8.48 in the month of October. Economists had anticipated a more significant rebound but demand did not recover as much as they had expected. However given that the contribution of NY manufacturing activity to national manufacturing output is small compared to the Philadelphia and Chicago regions, we need to see similar deterioration in Philadelphia or Chicago for investors to adjust their QE3 expectations. Industrial production activity rose 0.2 percent last month, which was in line with expectations but still weak after the downward revision to last month's report. Courtesy of the comments from German officials today, expect currencies and equities to trade heavy for most of the U.S. session.
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