Everyone who is not on vacation this week is back on the desk and their rose colored glasses are coming off. This morning's U.S. economic reports continues to make the Federal Reserve worried about the outlook for the U.S. economy. According to S&P Case Shiller, house prices fell 12 out of the last 13 months. Although the 0.06 percent decline was nominal, it is still indicative of general weakness in the housing sector. With the limit on federally guaranteed loans dropping to $625,500 from $729,750 on October 1st, it will be a while before we see a more meaningful recovery in housing. Consumer confidence also slipped to a 2 year low of 44.5 from 59.2 in the month of August. Not only was this reading far worse than expected, but falling below the 50 level is very significant because it is indicative of recessionary conditions in the U.S. economy. The last time we had a drop of this magnitude was in October 2008 when the stock market crashed, sending monetary authorities around the world scrambling. Considering all of the challenges that Americans have to deal with including high unemployment, the psychological impact of a ratings downgrade and volatility in the financial markets, deterioration in sentiment is not a surprise. Nonetheless, the dollar sold off following the report as traders add this data set to a laundry list of reasons why the Federal Reserve should increase stimulus in September or November.
The FOMC minutes are scheduled for release this afternoon and the details will show just how divided central bankers are on the outlook for the U.S. economy. This morning, FOMC voter Evans sent the dollar tumbling and gold prices soaring by throwing his support behind more accommodation. He should be able to get more FOMC officials to join his call after today's consumer confidence report. Although Evans is typically one of the more dovish members of the central bank, his unambiguous call for more stimulus reflects the general direction that the Fed is moving towards. We expect this afternoon's minutes to weigh on the dollar as the 7 members of the FOMC who voted for a change in the extended language of the FOMC statement argue about the reasons why it is necessary to set expectations for a prolonged period of easy monetary policy.
Despite the sell-off in the dollar and the potential drag that the FOMC minutes could have on the greenback, the euro and British pound remain under water. The reason is because European traders are finally realizing just how disappointing Italy's decision to replace a tax on higher earnings with a focus on finding tax evaders is. This morning's Italian bond auction yielded poor results. European confidence numbers also fell more than expected, showing that the deterioration in sentiment is not unique to the U.S. Looking ahead, we expect currencies and equities to remain weak going into the release of the FOMC minutes.