GDP Quickly Loses its Affect, Rate Decisions Ahead
Investors experienced a rollercoaster ride last week as economic data had a major impact on the currency market. Even though the major news came on Thursday in the form of a better than expected GDP result, the news quickly wore off on Friday as the markets dropped lower. Friday’s session was a major turnaround as the market nosedived and closed down sharply for the week. The S&P 500 index finished the week down 4 percent or 43 points at 1036. The Dow Industrial average settled unchanged for the month.
The market started the week on the defensive side, led down by transportation, financials and healthcare stocks. Even though previous news from large names, such as IBM, helped to prevent a major drop, consumer confidence numbers prevented the previous week’s momentum from continuing. Tuesday and Wednesday the market continued to show weakness as market participants waited for the US GDP release on Thursday. The correlation between dollar strength and US equity market weakness was extremely strong during the week, as the dollar rebounded from oversold levels. As one can see on the chart below, the Dollar jumped higher for the week along with an S&P sell-off.
Thursday was the major day of the week as a wave of news hit the boards. Japanese industrial production expanded for the seventh month in September, the longest run in 12 years. Output climbed 1.4% from a month earlier, more than the 1% expected. The US released new on Gross Domestic Product (GDP), which came out much better than the consensus. Gross domestic product expanded at a 3.5% seasonally adjusted annual rate in the third quarter, a rise that leaned heavily on government spending. Some of the largest components of growth came from spending on cars and house building, two areas propped up by federal programs. Out of the 3.5% growth, approximately one percent came from sales of motor vehicles and parts. Auto sales were accelerated by the “cash for clunkers” trade-in program.
On Friday, Consumer spending and the Chicago Purchasing Managers Survey took the stage. Consumer spending tumbled 0.5% in September with the end of the “cash for clunkers” auto trade-in program, while incomes remained flat. According to a published Commerce Department report, analysts are now concerned that the economic recovery could lose steam in the absence of government help, despite projected figures.
U.S. Economic Data
The Dollar Bounces Higher for the Week
The dollar stole the show last week, rebounding against most major currency pairs as traders looked for a safe haven in the currency market. The Euro was hammered during the week, selling off 5 big figures. Economic figures released Friday by the European Union’s statistics agency Eurostat showed the rate of unemployment in the 16 countries that use the euro rose to the highest level since records began in 1999. The euro-zone jobless rate inched up to 9.7% in September from 9.6% in August. Eurostat said 184,000 people joined unemployment rolls across the euro zone in September following a rise of 165,000 in August. That brought the total number of jobless to 15.3 million. The figures showed that 3.2 million people have lost their jobs in the year as of September. From a technical point of view, the EUR/USD came down to an important trend line on Friday, one that will be closely watched by traders. A break of support could lead to low levels.
Last week’s sell-off was broad based and even had an impact on the British Pound. Even though the Pound has showed relative strength against its counterparts over the last week, headlines added to the pressure, preventing it from rallying. News from Nationwide that UK house prices gained 2.0% y/y, the first increase in 19 months and an improvement Gfk consumer confidence to -13 from -16 had little lasting impact. Looking forward, the pound is likely to come under pressure ahead of next week’s events including the BoE meeting where the MPC is expected to extend Quantitative Easing (Q/E) after the contraction in Q3 GDP.
On the other side of the globe, the Bank of Japan announced that it would phase out emergency measures, put in place to help ease credit conditions, in coming months. As expected, the program of buying commercial paper and corporate debt will be allowed to expire at the end of this year. Other programs including paying interest on excess reserves will however continue. With a low rate environment, together with low inflation one can now understand why the news was positive for the Yen, helping it to gain strength against the Dollar, Euro and Pound.
The Week Ahead
Looking forward, a wave of important economic data will be released this week, including the market moving NFP result. The data released on Friday, will show whether recent growth figures are government backed or whether unemployment has reached its top. One must note that higher unemployment levels often mean that the end consumer is avoiding purchasing due to lack of work. Furthermore three central banks are schedule to release their rate decisions. Even though all the banks are expected to maintain current rate levels, investors will be observing their statements to see whether a healthy economic turnaround will lead to rate hikes in the future.
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