- FX and Equity Investors Like the Spanish Budget
- USD: Weaker US Data a Headache for the Fed
- GBP: Uptick in Consumer Spending
- AUD: Lifted by Chinese Liquidity Injection
- CAD: GDP on Tap
- NZD: Weaker Business Confidence
- JPY: Busy Night for Japan
FX and Equity Investors Like the Spanish Budget
The rally in the euro along with the rise in U.S. stocks and drop in Spanish bond yields tell us that investors like what they saw today from Spain. Risk appetite improved dramatically after Spain released its 2013 Budget. While the market was initially worried about the delay in the announcement and the people’s reaction to the country’s plan to raid its social security reserve to fund their liquidity needs, the amount of detail provided in the Budget gave investors hope that Spain’s goal of reducing budget deficit to 4.5% of GDP from 9% last year can be achieved. The Spanish government wasn’t shy about introducing tough austerity measures but investors were relieved to see that most of the new reforms involved reduction in spending and not tax increases. Tax revenue has already been higher than originally budgeted thanks to the recent increase in the Value Added Tax. To contain social unrest, the government also raised pensions and grants. Spain went above and beyond in terms of laying out a detailed timetable for economic reforms – they promised to roll out 43 new laws over the next 6 months which to us screams of an attempt to lay the groundwork for a bailout in the next few weeks.
The reason why the Spanish government seeks to impress now versus later is because they are hoping that if and when they ask for a sovereign bailout, the EU won’t respond with demands for more cutbacks. While investors are pleased by today’s Budget, they still won’t be satisfied until Spain bites the bullet and asks for help. Only then will uncertainty be removed, putting EUR/USD on its way to a stronger rally. In the meantime however, investors will remain on edge, allowing only a moderate recovery in risk appetite. Friday marks the end of the month and the end of the third quarter. Spain will remain in focus with details on the banking sector stress tests scheduled for release tomorrow along with a possible announcement from Moody’s about their decision on Spain’s debt rating. They may have been waiting for the Budget before making their final decision on whether to downgrade Spanish bonds to junk status. For Prime Minister Rajoy the clock is ticking because Spain has a major bond redemption in October. They must pay back 20 billion euros next month, the largest single month redemption this year. The euro also received support from news that Greek leaders have reached an agreement on the “basic outlines” of a new austerity package. German retail sales are scheduled for release tomorrow and a strong report will highlight the growing divide between growth in Germany and the rest of the region.
USD: Weaker US Data a Headache for the Fed
Positive developments in Europe eased demand for U.S. dollars but weaker U.S. economic data also made the greenback less attractive to global investors. Based on this morning’s economic reports, the Federal Reserve has their work cut out for them. The sharp decline in durable goods and downward revision to second quarter GDP were a complete surprise. While none of this data reflects the impact of QE3, they explain why the central bank could not wait any longer to ease this month. A decline in durable goods was expected but no one anticipated a double digit drop as large as the one seen today. Durable goods fell 13.2%, the steepest drop since January 2009. Orders for every single product covered by the report outside of electrical equipment fell last month, but the biggest decline was in orders for nondefense aircraft, vehicles and parts. The data shows that we are not seeing any eagerness to spend by businesses who are being overly conservative because of slower growth. Adding salt to the wound and pressure on the U.S. dollar was the downward revision to second quarter GDP. Since very few economists anticipated changes to the Commerce Department’s third and final release of Q2 GDP, everyone was shocked when they saw GDP growth revised down to 1.3% from 1.7%. Pending home sales also dropped 2.6% in August, eliminating the past month’s rise. Lost in the shuffle was the improvement in jobless claims, which was actually the most important piece of U.S. economic data today as it provides clues on how the economy could perform going forward. Claims dropped to 359k from 385k in the week of September 15th and this is very good news for the labor market. Had claims increased further instead of dropping to a 2 month low, we would be looking forward to a very ugly non-farm payrolls report next week. The drop in claims eases pressure on the labor market and suggests that companies are not as eager to fire or wary to hire as the prior data had suggested. However despite this improvement, the rise in claims this month still points to the strong possibility of even slower job growth in September. Personal income, personal spending, the PCE deflator, Chicago PMI and the final University of Michigan Consumer Sentiment numbers will be released tomorrow. It is also the end of the month, which means that fixing flows could affect how the dollar trades. Given the strong rally in equities this month, most portfolio adjustments will involve selling U.S. dollars.
GBP: Uptick in Consumer Spending
For the first time in 8 trading days, the British pound appreciated against the U.S. dollar. Unlike the U.S. whose GDP numbers were revised lower, the U.K. economy shrank less than initially reported. In the second quarter, growth fell 0.4% compared to a previous estimate of 0.5% thanks to an increase in disposable income. Although wage growth has been muted, the latest data showed incomes rising 1.9%, the largest increase in 3 years. While the upward revision implies that the U.K. economy is not doing as poorly as we had expected, 3 consecutive quarters of negative GDP growth is still bad news. The country’s current account deficit also widened significantly last quarter from -15.4B to -20.9B. According to Bank of England Deputy Governor Paul Tucker, the central bank still believes that Quantitative Easing works but in his opinion, “it does not have the same bite it used to have.” This suggests that given the opportunity, Tucker may not vote for additional QE even though he voted to increase Quantitative Easing in July.
AUD: Lifted by Chinese Liquidity Injection
It has been a good day for the Australian, New Zealand and Canadian dollars, which benefitted primarily from China’s massive liquidity injection. Overnight, the Chinese government announced that they would conduct a RMB50 billion of 14-day reverse repo at 3.45%, and RMB130 billion of 28-day reverse repo at 3.60%, putting their weekly total at RMB365billion, its highest level ever. The decision to add liquidity comes ahead of Golden Week, a semi-annual 7 day national holiday in China. The central bank will oftentimes increase the availability of money during this period to tide the financial system over during the holidays. Chinese industrial profits continued to fall last month, confirming the need for more stimulus from the People’s Bank of China. The question now is whether this is a prelude to more action ahead of the Chinese leadership change. Despite the sharp rise in the New Zealand dollar, business confidence declined in September. While activity could increase, businesses in general are worried about the overall outlook for the local and global economy. Job vacancies in Australia rebounded, helping to lift the Australian dollar. No economic data was released from Canada but higher oil prices kept the currency supported. CAD GDP numbers are due for release tomorrow and even though the market is looking for slower growth, the sharp rise in retail sales in July favors an upside surprise.
JPY: Busy Night for Japan
For the seventh consecutive trading day, the Japanese Yen traded extended its gains against the U.S. dollar. Considering that the Yen weakened against all other currencies, its strength against the greenback tells us that this divergence is due to dollar weakness. Tonight is a very busy night for Japan with manufacturing PMI, jobless rate, consumer prices, retail trade and industrial production scheduled for release. Very little improvement is expected in the month of August with consumer prices expected to decline further and retail sales and industrial production expected to fall another month. The Japanese economy is struggling under the weight of weak global growth and a strong currency. No replacement for Finance Minister Azumi has been announced.