U.S. Dollar Remains The Key

The Fed’s decision not to announce the start of its taper program caught out many market participants, which is odd, as even a cursory glance at recent employment data would have revealed that the likelihood of the taper starting in September was extremely low. As I have already written, one of the most alarming figures in the employment data set is the ‘participation rate’, which has now fallen to a 35 year low, and is highly suggestive of an economy struggling to gain traction.

However, this week’s batch of economic releases may finally give the Fed (and the markets) some clues as to the true state of the US economy. Well, as true as we are ever likely to see in print (the ‘true numbers’ are shocking, and would send markets into meltdown). The numbers we, and the market see, are sanitized versions for public consumption. The releases start later today, Tuesday, with the CB Consumer Confidence number which has a current forecast of 79.9, down from last month.

Wednesday sees Core Durable Goods, which is the change in the total of value of new purchase orders placed with manufacturers, and should provide a further clue as to the labor market. This release is followed 90 minutes later by New Home Sales, which until last month had been rising steadily throughout 2013, but fell sharply last month, which surprised the markets. Pending Home Sales data is due the next day.

Other consumer data expected this week includes the Core PCE price index, personal spending and on Friday the UoM (University of Michigan) consumer sentiment release. All these numbers will come under careful scrutiny both by the Fed and the markets, and will likely dictate the timing and pace of any slowdown in QE.

Under normal circumstances it would be interest rates which would be the market’s primary focus. However, these are not ‘normal’ times, indeed anything but. As a result, economic releases such as those outlined above take on a dramatically increased significance, particularly those that are likely to hint at structural changes in the underlying economy. Homes and homes related data are one such, given that this is generally a signal, not only of an increasingly buoyant housing market, but also sending a clear statement - that developers are creating supply to fulfill potential demand, not something they undertake lightly. This then ripples into the economy through every service and manufacturing sector, and ultimately through to jobs.

Two other items to watch closely will be revision of Q2 GDP, followed on Thursday by the ‘Preliminary Benchmark Revision’ from the Labor Department. In layman’s terms, in this report the Department replaces estimates with hard data, so giving us even more evidence of the true state of the labor market.

As always, the principal charts to watch, regardless of what you are trading, will be the US Dollar Index and the VIX in order to monitor traders’ reactions to any of the above.The daily chart for the VIX continues to reflect the ebb and flow of market sentiment, rising and falling between 12 to the downside and 19 to the upside, and creating on the chart a sustained region of price consolidation.

Meanwhile the US Dollar Index has been sliding lower, and during last week’s volatile session finally breached a key support at 80.84. It is now looking set to test the next logical area at 78.78, a level last seen in 2012.

Finally there is one other important item to consider, namely the debt ceiling in the US, which is under negotiation once again. The ceiling is currently limited to $16.7 trillion, and if an agreement is not reached before mid-October, could lead to the first default by the US on its debt obligations.

At this point, I would also frame the importance of European data, but in my humble opinion, it is the US which is likely to dominate market behavior in the short term. Angela Merkel now seems secure, and was the only ‘fly in the ointment’ for the euro. The focus now, and for the remainder of the year is likely to be the US economy, coupled with any key news from China. Strange bedfellows, but now deeply interdependent, one on economic growth and the other on US Treasuries.

The key as always is the US dollar, and the USD index is always the place to start, whatever you market or style of trading. From there, everything else flows and falls naturally into place.