The US dollar was mostly lower against the major except for the JPY and was relatively flat against the EUR amid Fed speakers and a stronger than expected rise in US retail sales. Sentiment was higher as equities advanced, US treasury yields rose, and the dollar weakened. The JPY was the clear underperformer in the G10 space amid a stabilization in risk, and the EUR consolidated ahead of this week’s EU Summit.
Spain and Portugal yields rise, Greek yields tumble
For now, it appears that an aid request from Spain will not be forthcoming until after key events such as Thursday’s bond auction and this weekend’s regional elections. Spanish 10-year yields rose by about 19.2bps on the day as investors adjust expectations of a Spanish bailout and Portugal’s bond yields were higher as well, however EU sovereign yields were mostly lower on the day. Greek bonds outperformed with Greece’s 10-year yields falling by nearly 48.3bps after Prime Minister Samaras indicated that Greece will soon get its next bailout tranche.
Fed speak: Dudley, Lacker, Bullard
NY Fed’s Dudley reiterated the need for aggressive monetary policy with QE but said that the stimulus “won’t last indefinitely”. He said the economic outlook is “somewhat cloudy” as there are significant risks from Europe and the fiscal cliff. Dudley went on to urge the US to strive for a “sustainable” fiscal plan and said that the issue of the fiscal cliff will influence Fed decision making.
Lacker defended his dissent of the Fed’s latest round of QE and said the additional purchases will only give a small boost to labor while pushing up prices. He said that the Fed’s ability to influence unemployment is limited and that the best contribution to employment is stable inflation.
St. Louis Fed President Bullard (who is not and FOMC voter this year, but will be next year) also spoke today and said that he sees “faster growth” going forward and predicts that unemployment will continue to tick down. Bullard also noted that unemployment is “an imperfect metric” for the labor market and that the Fed will have to adjust as the situation changes. He called QE3 a “state contingent policy”, not wanting to tie any specific date or triggers to end the program.
Empire manufacturing for October improved from the prior month’s -10.41 but remained negative at -6.16. Furthermore, the reading was below the market consensus of -4.00. This was overshadowed by retail sales which rose by more than anticipated with a 1.1% increase from the prior month that was revised upward to 1.2% (previous 0.9%). Excluding autos and gas, retail sales managed to post a strong gain of 0.9% (cons. 0.4%). This was the third consecutive monthly increase in retail sales which shows a pickup in consumption – a positive for growth. August business inventories were also released and grew by 0.6% (cons. 0.5%).
U.S. equities advanced on the back of strong retail sales and positive earnings releases. The Dow Jones Industrial Average climbed by about +0.72% to close out the session while the S&P 500 rose by +0.81% on the day. Commodities were broadly lower with gold, silver, and crude oil lower by -0.94%, -2.16%, and -0.24% respectively.
Data Watch: NZ CPI, RBA minutes
Due out shortly are New Zealand 3Q consumer prices which may show inflation rising to 0.5% q/q from the prior 0.3%. The Reserve Bank of Australia (RBA) will release the minutes from the October meeting which will be watched for clues that may suggest a cut at the upcoming November meeting. Recent commentary from RBA Governor Stevens indicate that the Bank has scope to move on interest rates and markets view the current stance as dovish. The bias is for the AUD to move lower on expectations of another rate cut with the risk that a more neutral stance may see the AUD rally. AUD/USD is facing a key technical pivot around the 1.0265/70 level where the 100-day simple moving average (SMA) and 23.6% Fibonacci retracement of the decline from September highs to October lows comes in.
Fig. 1: Retail sales in Q3 have rebounded sharply after declines Q2
Source: Bloomberg, FOREX.com