Strong US economic data – always the least straightforward data to trade – is it good or bad for risk and good or bad for the USD? Meanwhile, we’ve got the spiking euro ahead of the EU summit to deal with.
The US housing numbers have been the most consistently improving numbers of the last year or more, showing steady upside surprises month after month with only a minor hiccup here and there. The September data took the degree of surprise to a whole new level, however, as the housing starts number surprised by more than +100k and the building permits number did nearly as well.
I have argued before that these numbers are simply about housing no longer being a net drag on the US economy and shouldn’t have us predicting a kick off for a whole new housing boom. After all, this September data is the first time that the housing starts number has risen above the pre-2008 20-year low in starts! For perspective, the average annualized rate of starts has been closer to 1.5 million compared with the Sep. figure of 872k, and the demographics of the US are pointing to a lower rate of household formation.
Still – the numbers are good and most of the US data has been surprising to the upside, with Citigroup’s economic data surprise index for the US arching above 50 recently. It tends to move in up and down waves that peak out from here up to 100. But what does the market do with this data?
As usual, it is not necessarily good for the USD as the theme has been that strong US data means buying higher risk assets, usually against the low yielding US currency, with a Fed that is interesting in maintaining the printing press at max speed until the economy gains traction (which it won’t as long as the medicine is only about the pumping of liquidity rather than restructuring, but the every attempt to fight the Fed has been so thoroughly punished over the last few years that the market doesn’t think it has any choices anymore - with danger ironically rising as this increasingly becomes the case).
Euro-squeeze
Last night we had S&P out confirming its rating on Spanish bonds, which touched off a renewed squeeze in the euro higher after the close of the US equity trading session. That looked more like stop-loss desperation and there was word of massive short-dated EUR/USD call volume going through – likely insurance against existing short positions?
Today, the single currency had a tough time adding on to recent gains in today’s European session, perhaps due to the steepness of the ascent, but the implication of the trend-line break we pointed out yesterday is clear and must be respected until proven otherwise. Also, Spanish 2-year yields plunged 34 bps today and 10-year yields posted a new low since April just below 5.5%
Besides ad hoc developments for the rest of this week, we’ll have to see how the world looks post the EU Summit. It’s usually after the big event risk that the market wakes up and decides that nothing has really changed and we may see that cycle repeating – or rhyming if we are to use history as a precedent – next week. Recall the crazy 2011 summit in late October that saw a last spike higher in the euro before it brutally collapsed.
Elsewhere
Elsewhere, GBP was weak against the spiking euro, but put up a bit of a fight and rose sharply again versus the USD after the BoE minutes showed “divisions” on further easing and voted 9-0 to do nothing at the most recent meeting. As well, the UK jobs data was a bit better than expected. AUD/USD is up challenging that key final resistance mentioned this morning and the USD/CAD push higher yesterday has mostly turned tail today on the renewed rally in risk as it appears the USD is really up against the ropes for the moment.
Looking ahead
Again – much of this market at the moment is about the euro squeeze and the broader global sentiment swings that are amplified by the various news items out of Europe. So it’s more euro than US dollar driven, and in that respect, the next few days are critical for the euro’s outlook, though this will also impinge on the greenback. It’s hard to believe we are looking at a major new leg down in the dollar before the outcome of the presidential election is known, but let’s see where we stand by the end of the week as this EU summit is a major event risk hurdle we’ll need to see the other side of before the market might pause for some perspective.
Look out for the Chinese GDP, Industrial Production and Retail Sales numbers out tonight in Asia.
Economic Data Highlights
- UK September Jobless Claims Change out at -4k vs. 0k expected and -14.2k in August
- UK August Average Weekly Earnings ex Bonus up +2.0% 3mYoY as expected and vs. +1.9% in July
- Eurozone August Construction Output out at +0.7% MoM and -5.5% YoY vs. -6.2% YoY in July
- Switzerland October Credit Suisse ZEW Survey out at -28.9 vs. -34.9 in September
- US September Housing Starts out at 872k vs. 770k expected and 758k in August
- US September Building Permits out at 894k vs. 810k expected and 801k in August
- US Weekly Crude Oil and Product Inventories (1430)
- Australia RBA’s Edey to Speak (2245)
- Australia Q3 NAB Business Confidence (0030)
- China Q3 GDP (0200)
- China September Industrial Production (0200)
- China September Retail Sales (0200)