US Durable Goods Orders data is a positive read, for month-to-month trend, at least. Focus now on US New Home Sales now.
MAJOR HEADLINES – PREVIOUS SESSION
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Japan Jul. Adjusted Merchandise Trade Balance out at ¥342B v. ¥194.5B expected
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Japan Aug. Small Business Confidence out at 41.8 vs. 41.1 in Jul.
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Germany Jul. Import Price Index out at -0.9% MoM vs. -0.8% expected
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Sweden Aug. Manufacturing Confidence out at -20 vs. -15 expected and -19 in Jul.
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Sweden Aug. Consumer Confidence out at 3.1 vs. -0.4 expected and -3.7 in Jul.
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Germany Aug. IFO out at 90.5 vs. 89.0 expected and 87.4 in Jul.
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US Weekly MBA Mortgage Applications rose 7.5%
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US Jul. Durable Goods Orders out at +4.9% and +0.8% MoM, vs. +3.0%/+0.9% expected, respectively
THEMES TO WATCH – UPCOMING SESSION
(All times GMT)
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US Jul. New Home Sales (1400)
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US Weekly DOE Crude Oil and Product Inventories (1430)
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US Fed's Lockhart to Speak (1610)
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New Zealand Jul. Trade Balance (2245)
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UK Aug. Nationwide House Prices (0600)
Market Comments:
Today's European session saw a replay of yesterday's US session, when positive news failed to further boost the rally in risk. This time it was the German IFO, which came out at 90.5 vs. 89.0 expected. A look at the internals of that number are an interesting study in what is going on here across almost all markets: the IFO Current Assessment component has barely picked itself off the floor, still mired at 86.1 - only a few points off its record low in March of this year. The Expectations component, meanwhile, has exploded to the upside and is at levels not see since May of 2008 . And there you have it - this is the story that nearly all markets are trying to sell us at the moment. The current situation may be awful - but it's stable and soon everything will be better. If this were a roulette table, then all chips are on the recovery numbers. The disappointment will be extreme in coming months if the rosy expectations are dashed.
The US July Durable Goods Orders were very strong on the headline, if a bit weaker ex Transportation. A breakdown shows nothing to suggest that this wasn't a strong report, with strength evident in new orders almost across the board. Still, we are down -19.7% for year on year ex-defense total shipments. There is a lot of wood to chop if the US is going to get its economy back to where it was just a year ago before it's slide into the abyss. The classic W-shaped recession argument suggest that we are seeing a restocking cycle (the middle hump in the "W") that gets everyone's hopes up before final demand fails to come through once again and leads to the second. Everyone is obsession to such a degree over the shape of the recession that commentators have even come up with the "square-root" shaped recession (the kind with a flat right side under which a variable lies), in other words, we had a short, sharp financial panic, but we will soon get back on track, if with uninspiring growth. Our model for what is going on here suggests that the W-shaped recession is more likely, unless someone can design a square-root symbol with a downward arc on the right side...
We previously gave the USD a reasonable chance of etching a new bottom as the risk rally could seem to find insufficiently credible opposition. But the reaction to the very positive data yesterday (Existing Home Sales and Consumer Confidence) and the lackluster response to the German IFO today suggest that the momentum risks fading here for risk. Still, we need stronger signs in the charts that we are on to something in the USD and JPY strength department. EURUSD needs to take out 1.4250 decisively and then some AUDUSD needs to take out the trendline (see below) and other levels. If equities simply find that this has been a speedbump and charge higher once again, then the USD will likely test lower within the range in the near term. The strong bond market continues to look very odd considering the market optimism - it seems a strong recovery would mean that long bonds are not the place to park our money. The short end of the curve is strong as well. Yesterday's auction of US 2-year notes, which yield a paltry 104 bps at last check. Something doesn't fit - our guess is that risk appetite could be in for a reality check soon. Strong fixed income markets will continue to boost the Yen, though we must grapple with a sea-change election this weekend in Japan. More on that in coming days.
So looking across the market, we see the commodity currencies struggling mightily - a sign that risky positions are being taken off in this market. The huge reversal in oil yesterday after the US API inventories showed a big drop and the BoC warning on the loonie boosted USDCAD very sharply. It is interesting to note that reasonably hawkish words from an RBA official and the comeback rally in Chinese stocks are failing to give AUD any lifeline today. GBP is also struggling against the USD and the EUR after the very dovish recent rhetoric from King and company.
The remaining focus for the day is the New Home Sales data for July. It would not be a surprise to be a strong figure considering that many new home buyers are first time buyers and that population of buyers is being given a once in a lifetime tax break this year if they are able to purchase a home before December 1. If this number is particularly weak today, it would be a rather strong confutation of the other stronger housing numbers of late (CaseShiller and Existing Home Sales). Besides, over the last 24 hours, we have seen that positive data seems to be losing its ability to boost the market.
Chart: AUDUSD
AUD has been interesting to watch lately, as it has seemed to have lost its ability to respond as positively to strong data and surrounding market conditions as it did in the past. This could mean we are setting up for a large correction lower if other risk markets ever turn more decisively negative. The first triggers are the 0.8235 area - the last gasp Fibo retracement support for the latest little wave. Then we have the longer term rising trendline not far below that and the 55-day moving average in waiting just below there at around 0.8140 currently. If the price crosses down through all of these, we could see a larger wave down toward the July low at 0.7702.
