Morning Analysis – Dollar Index approaching the key 100 resistance level

Morning Analysis, by Junaid Wilson

Yesterday was a fairly quiet day in financial markets this is taking into consideration the Paris terror major attacks over the weekend. The Japanese Yen and Swiss franc opened the week higher on safe heaven attraction but both currencies ended the day lower across the board, stock indexes opened lower but came off low though-out the day. As analysts and traders see no major impact economic health.

The euro ended the day down -0.50% lower vs the USD, but stayed firm against the Japanese Yen with a rally towards the end of European session.

Eurozone inflation was revised slightly higher in the final report for October. A 0.1% monthly increase in the CPI was in line with expectations and enough to lift the zero percent yearly rate estimated in the flash data a tick higher to 0.1 percent. This was up 0.2% from its final September mark and that has month’s decline.

Looking forward today we have Inflation reports from the United Kingdom and the United states. With the DXY (US dollar) approaching the key 100 resistance level it should be interesting to see if it’s enough to set-of another rally heading into mid-week.

 

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MARKET ANALYSIS – by Junaid Wilson

Following the terror attacks in Paris over the weekend, I will expect the markets to become risk off in the short term (1-3 weeks) on the Tokyo open. We should expect to see the JPY, USD, CHF and Gold slightly strengthen over this period but don’t expect wild swings in the market. The attack was over the weekend and market participants have had time to digest the information flow so far. I will expect participants to have a rounded view of what has happened going into Monday, so we shouldn’t expect to see any panic selling.

Global equities should continue their decline from last week especially stocks and indexes across Europe and the United states. This will be on the back of a risk of environment and an anticipated rate hike

Traders and Fund managers with exposer to the travel and tourism industry should expect to see large declines following the terror attacks. France has the largest number of tourists in the world and the sector accounts for almost 7.5 percent of GDP. This may also lead to a fall in visitors to France or tourism across Europe taking into consideration the Russian plane crash.

 

Monetary Policy

The Federal Reserve is not the only central bank where virtually every word from policy makers is viewed for policy direction by investors and traders. The ECB, Bank of Japan and PBoC fall into this category as well.

Investors have carefully dissected speeches from U.S. Federal Reserve officials including Chair Janet Yellen, Vice Chair Stanley Fischer and regional Fed presidents William Dudley, Charles Evans and Jeffrey Lacker during the week. But so far, traders have been complaining that Fed speakers has provided little clarity as to when the Fed funds rate hikes will start. On the other hand, Investors are also looking at comments from the European Central Bank for signs of additional easing at its December meeting. Also in Japan where expectations are for the second consecutive quarter of negative growth in the third quarter and yet another technical recession.

With the latest NFP reading a 271,000 headline payroll surge, upped the odds for the Fed’s big move. But the strength of the employment report didn’t point to strength for retail sales nor to strength for the PPI report continue to showed no growth whatsoever.

 

Looking ahead

Manufacturing and housing will be the features of the week including a key update on inflation. Empire State, a key report that back in August decisively signaled a break lower for the factory sector, starts off the week with the first indication on November’s activity followed on Thursday by the Philadelphia Fed report which has also been weak.

Industrial production on Tuesday will offer the first indications on October’s factory activity and a needed bounce for the manufacturing component is expected.

Consumer prices will also be posted on Tuesday and some pressure is expected. But whatever the results, the CPI is capable of affecting December FOMC expectations.

 

Morning report 08/10/2015

The euro and the Canadian dollar ended the day lower vs the dollar yesterday. The British pound, Australian dollar and New Zealand dollar traded higher throughout the day.

As expected, the Bank of Japan left its key interest rate range at zero to 0.1 percentage. It said it would continue to buy JGBs (Japanese government bonds) at an annual pace of 80 trillon yen. The vote to maintain its policy was 8 to 1.

In its statement, the monetary policy board said that the economy continued to recover moderately and was likely to continue doing so. The MPB said that the core CPI was likely to continue to be about zero for now due to the decline in energy prices. However, both exports and output have been affected by the slowdown in the emerging markets. It noted that private consumption has been resilient but capex remains weak.

In Germany Industrial production was weaker than expected in August. A 1.2 percent monthly fall exactly an upwardly revised gain in July. The monthly headline decline reflected worrying losses in capital goods output was down 2.1 percent, consumer goods 0.4 percent and intermediates were only flat. Energy decreased 1.4 percent and construction was off 1.3 percent As such, the likelihood is that goods production has at best has a limited boost to real GDP in July-September points of a disappointingly sluggish increase in whole economy output. The euro traded lower after this data realise.

In the UK the goods producing sector had a positive August. A 1.0 percent increase in output versus July (revised to -0.3 percent) was much stronger than market expectations and the largest rise since May. Annual growth improved from 0.7 percent to 1.9 percent. It was also a decent period for manufacturing where output was up 0.5 percent on the. Compared with a year ago the sector’s production was still down 0.8 percent but even this constituted a market improvement from July’s steeper revised 1.2 percent contraction. Within overall manufacturing six of the thirteen reporting subsectors posted monthly rises in output. The best performer was transport equipment which climbed 4.6 percent and alone contributed 0.4 percentage points to the change in industrial production. Metals products, which added 0.2 percentage points, also fared disproportionately well. On the downside manufacturing and repair fell 2.0 percent.

The big events to watch today are the Bank of england announcement and minutes we also have the minutes realised from the ECB.

Morning analysis 07 October 2015

Yesterday was light on the data side we had data realises from Germany and Canada. The euro traded higher yesterday. The Canadian dollar stayed strong and the GBP bounced of the key support level.

Manufacturing orders in Germany were weaker than expected in August. A 1.8 percent monthly fall followed a steeper revised 2.2 percent drop in July and constituted the first back-to-back decline since January/February. However, with orders down 5.3 percent from a year ago, annual growth still rebounded sharply to stand at 2.2 percentage

The monthly decrease was led by capital goods which were down fully 2.8 percent. However, weakness was broad-based as consumer and durable goods dropped 1.5 percent and basics were off 0.4 percent.

In the US a surge in imports of the new iPhones helped feed what was an unusually wide trade gap in August of $48.3 billion, up from July’s revised $41.8 billion.. Exports were down nearly across the board including industrial supplies at minus $2.2 billion, consumer goods at minus $0.6 million, autos at minus $0.5 million, and foods/feeds/beverages at minus $0.3 million. Weakness in exports reflects weakness in foreign demand together with the strength of the dollar.

The unadjusted Ivey PMI rose 7.7 points to 63.3 in September, its highest reading since May. However, this is due to seasonal factors last month and adjusted for these the headline index fell 4.3 points to 53.7. This is still above the 50 growth threshold but also indicative of a clear deceleration in activity rates from August

Within the adjusted results the employment index edged 0.8 points higher to 57.1. This should point to a decent employment gain in Friday’s labour market report. Delivery times were slightly slower than in August (49.8 after 48.2) while inventory unwinding was replaced by fresh accumulation (52.1 after 42.4). Finally prices (64.4 after 66.3) rose at a slightly slower rate than in mid-quarter.

Looking forward after FOMC

The September employment report came in weaker than expected at 142,000 which was well under low-end of the consensus which were at 180,000. Rounding out the weakness are average hourly earnings which also came in below the low-end estimate, showing no change month-on-month and a year-on-year rate of 2.2 percent that was unchanged from August.

One of the most noticeable surprises in the September employment report was a sharp dip in the labour participation rate to 64.4 percent a 40-year low. At the same time unemployment remains very low at 5.1 percent and job openings, as tracked in the recent JOLTS report, are unusually high.

As Friday wore on, the currency rebounded, equities recovered all of their losses and then some while bond yields continued to retreat. On the week, the dollar was down against all majors, with the exception of the pound.

Many of the U.S. dollar’s woes can be directly linked to soft growth globally. The stronger dollar has made U.S. exports expensive and imports cheap which in turn, weakens goods manufacturing.

Europe

After healthy gains in August, all equity indexes retreated with heavy losses of over 3 percent in September.

The weak employment report now has many investors thinking that an interest rate increase by the Federal Reserve later this month or even in December is unlikely. That line of thinking led investors to speculate that the European Central Bank, which is meeting on Thursday, may need to announce further stimulus measures. According to ECB President Mario Draghi, Eurozone growth is returning. He also reiterated his commitment to pursuing full monetary union in the region. September manufacturing in the Eurozone PMI was 52.0, down slightly from 52.3 in August output rose for a 27th successive month reflecting further growth in new business.

Asia Pacific

Equities were mixed last week. However, that wasn’t the case for September all indexes retreated on the month and for many, a second consecutive month of decline.

The Nikkei was down for a third consecutive week, losing 0.9 percent. The index tumbled 8.2 percent in August and 9.0 percent in September. The economy contracted in the second quarter and recent data indicate that the third quarter may be negative as well, sending the country into another technical recession. Business sentiment as reported in the September Tankan weakened from the previous quarter. August industrial production disappointed and retreated on the month. Household spending surprised with a much larger than expected increase after sliding in July while retail sales were up by a timid below consensus 0.8 percent.

Business conditions in Japan worsened during the third quarter, as the closely watched Tankan survey conducted by the Bank of Japan showed. The outlook index matched forecasts although it was down sharply from the previous quarter. The Markit/Nikkei Japan manufacturing PMI remained in expansion territory, with a reading of 51.0 in September down from 51.7 in August.

Investors were disappointed by the string of mediocre economic data from the U.S. and abroad. In Japan, the data indicates that perhaps there could be a technical recession in its future. In the Eurozone, some stabilization is evident.

Central banks are front and centre this week. No policy change is expected from the Reserve Bank of Australia, Bank of England or from the Bank of Japan this week, although some analysts expect the BoJ to take action at its meeting at the end of the month.

US open

The S&P/Case-Shiller index of U.S. house prices will probably show a year-to-year rise of 5.15 percent, the fastest in 11 months. U.S. consumer confidence for September at 10 a.m. will help expectations for whether a Fed rate increase is likely this year. Confidence is expected to fall back from a seven-month high struck in August, possibly in reaction to the turmoil that caused havoc in financial markets over the summer.

Japan’s Prime Minister Shinzo Abe, who is beginning a second three-year term as leader of his Liberal Democratic Party will speak in New York investors and traders will be scrutinising his speech.

Royal Dutch Shell Plc’s decision to end its $7 billion search for oil in the Arctic Ocean off the coast of Alaska is the latest bit of bad news for a state that went from producing one in every four barrels in the U.S. to an afterthought during the shale boom. “Alaska used to be the No. 1 oil producer in the U.S.,” said Carl Larry, head of oil and gas for Frost & Sullivan LP in Houston. “Now there are a lot easier places and better ways to find and produce oil.”

Alaskan oil production topped out in 1988 at more than 2 million barrels a day. It’s declined steadily since then, falling below 500,000 last year for the first time since the late 1970s, according to the Energy Information Administration.

In Europe

Euro-area economic confidence unexpectedly increased in September as sentiment in the industrial and services sectors improved. The index of executive and consumer confidence rose to 105.6 in September from a revised 104.1 in August, the European Commission said. Economists predicted a decline to 104.1.

US economic data recap

Today’s economic news has been mixed. Durable goods orders were weak this highlights the current weakness in exports. New home sales came in very strong, highlighting the strength of the domestic economy. Also very low levels of jobless claims are highlighting the best argument that the FOMC hawks have, that the available labour supply is tight and getting tighter.

-Durable goods orders

Transportation equipment, particularly aircraft orders, once again have played a huge role in durable goods orders which fell 2.0 percent in August as expected. Excluding transportation, durable goods were unchanged which was still lower than expected.

Looking at transportation equipment, both aircraft and motor vehicles were weak. Orders for civilian aircraft fell 12 percent in the month while vehicle orders fell 1.5 percent. Vehicle shipments were down 1.6 percent but follow July’s big 4.7 percent surge.

This report falls in line with last week’s industrial production data where manufacturing held flat in August. Weakness in exports is the one factor tipping the factory sector away from growth.

-New Home Sales

New home sales can be very volatile month-to-month as they are in the August report where, at 552,000, the annual rate came in far above the high-end estimate. This is the highest rate since February 2008

Volatility aside, this report is impressively strong and likely marks an upturn for housing data which, like Monday’s existing home sales report, had been showing limited and uneven strength.

-Jobless Claims

Initial jobless claims continue to hold at near record lows, a lower than expected 267,000 in the September 19 week. The 4-week average is down slightly to 271,750. There are no special factors affecting the report, one that points to tight conditions in labour market

At 2.242 million, continuing claims are down nearly 25,000 from the August week prior with the 4-week average, now at 2.252 million, down nearly 15,000. The unemployment rate for insured employees is unchanged at a very low 1.7 percent.

 

Not a great CPI report heading into the FED meeting

Consumer prices came in soft in August and will not be fazing the doves at the FOMC. Pressured by the oil and gas sector, the CPI fell 0.1 percent in August with the year-on-year rate up only 0.2 percent. The core, which excludes energy and food, rose only 0.1 percent with the year-on-year rate at plus 1.8 percent and still under the Fed’s 2 percent goal.

And details are not great. Energy prices fell 2.0 percent in the month including a 4.1 percent decline in gasoline. Airline fares were down sharply for a second month, 3.1 percent lower.

Showing some rising pressure is apparel, up 0.3 percent for a second straight month in what is the back-to-school . Otherwise, components are flat to steady such as food at plus 0.2 percent or medical care at no change.

The 1.8 percent year-on-year core rate is good but with commodity prices at current levels and the global economy fragile, the outlook for price acceleration remains hard to find.