US Economic Data Begins Today

The currency market was on the tame side for the better part of the day. The dollar index fell on the day as the euro (EUR) finished well above 1.36, however gold and silver didn’t see the same type of love and sold off even more… I’ll get more into currencies here in a bit.

First out of the gates this morning, we have a few economic reports coming out here in the US. As Chuck mentioned yesterday, we have the S&P/Case Shiller Home Price Index along with another house price index, both of which report November figures. Neither of these measures are expected to show much of anything, however the overall consensus is leaning toward a slight fall in prices.

The housing market hasn’t displayed any type of sustained improvement and remains near recession levels even as the overall economy has started to show some life. As foreclosures continue to depress home prices, buyers still don’t have a sense of urgency to go out and buy as prices remain static or as some buyers try and wait for prices to drop even lower.

We also have the Conference Board’s confidence index for January and a secondary confidence measure from ABC consumer confidence. The one that people will actually look at is expected to show a sharp rise, but that would be an increase from the unexpected fall that took place in the December release. I still think consumers are very cautious and risk still remains that they don’t increase spending by the amount needed to push the economy over the hump. With that being said, I think rising stock prices will be enough to put consumer woes on the back burner, for now at least, and support the January index increase called for by most of the economists out there.

Other than that, we have another second tier data release as the Richmond Fed Manufacturing Index is expected to show a slight decrease. These smaller index measures are fairly volatile so we’ll see if there are any surprises. The big boy data release for the week is going to be the initial release of fourth quarter GDP so all eyes will be focused on Friday. The experts are looking for a rise of 3.5% and this will be the all-important proof needed to either confirm or expose the economic state. Chuck will bring you much more on this as we near the end of the week.

As I mentioned at the beginning, the dollar was sold pretty much across the board on the day, but remained in a relatively tight range. At the top end, the Swiss franc (CHF) rose about 1% but the Canadian dollar (CAD) and pound sterling (GBP) couldn’t muster any type of advance and finished the day down by a fraction of a percent, so call them break even. All of the other currencies finished somewhere in between.

The Swiss franc started the day on an upswing in European trading as their stock markets sold off and prompted Europeans to move into francs on safe haven buying. The rise in the euro helped, in part, to support the franc in US trading along with intervention fears from the SNB being cast aside for the moment. The franc saw a round of selling last week as SNB members hinted they may entertain intervention thoughts, but this would appear to be an action of last resort as they have mounting currency losses on their previous measures.

The Australian dollar (AUD) finished the day toward the top as it rose about 0.75%, mainly as a result of higher stock prices here in the US. Investors were feeling comfortable with higher risk assets, so the woes from the profound flooding were overshadowed on the day. We all know that Australia is a commodity currency and commodity prices have a large impact on its direction, but developments in the Chinese economy will loom large as well. Continued confirmation of Chinese expansion, or lack thereof, will remain in the driver’s seat until the US and Europe get back on track.

The rest of the currencies finished the day anywhere between breakeven and up around 0.50%, so I’ll just take a brief look at a few of them. (See, I told you there wasn’t much action yesterday.) Anyway, the Norwegian krone (NOK) has seen some solid growth recently as the debt concerns in Europe seem to be contained, for now at least. The Norwegian consumer is slated to be a big part of the reason for updated economic output to the upside this year and any sustained improvement in growth from Europe will be big. Rate hikes aren’t expected to start until summer, but if home prices and consumer credit continue rising unchecked, we could see them step in a bit sooner.

New Zealand had a decent day as well but they just can’t get anything going as the central bank isn’t in any hurry to raise rates. They meet later in the week and there isn’t any expectation of a move, so they will continue to focus on the economic recovery from the earthquake last year. The most optimistic rate outlook I saw was calling for a hike in June but most don’t see one until the third quarter, as there is little to justify any tightening at the moment.

One of our favorites at this point and a currency we feel that functions well as proxy to China, the Singapore dollar (SGD), was able to finish the day in the middle of the pack. We saw Singapore’s inflation rate rise 4.6% year-over-year in December, the highest level since December 2008, and could put further pressure on the central bank to allow the SGD to trade higher.

The Singapore government uses the exchange rate instead of interest rates to manage inflation, so as inflation rises, the exchange rate would tend to appreciate as well. The central bank next meets in April to review its policy, so if inflation remains uncomfortably high, look for additional currency appreciation. The economic outperformance in Asia looks to remain in tact for this year so additional tightening measures would seem reasonable.

As Chuck mentioned yesterday, comments from Germany’s Angela Merkel and tough talk by Trichet last week on inflation not only gave some comfort to the markets but have some economists rethinking their interest rate forecasts to the upside. I saw an article calling for rate hikes out of Europe and the UK before the US and Japan finally make their decision to tighten.

When evaluating inflation, the pressures are highest in the UK and then followed by the Eurozone, the US, and then finally Japan. Whatever is making investors more comfortable about the euro had prompted it to trade up to 1.3686 and was around 1.3645 when I left for the evening. Investors have been very fickle over the past couple of years, so this comfort level is certainly fragile. Just to give you an idea, I saw articles this morning with one calling for a fall back to 1.28 and another for continued pressure up to 1.40.

Chuck left me with some words of wisdom this morning that play right into this…

Well… The more I looked around yesterday on the newswires, TVs and currency screens, the more I saw the thought that I gave you yesterday… And that is, that it seemed to me that the markets were beginning to believe German Chancellor, Angela Merkel, and her vow to do anything to protect the euro. As the day went on, it was almost a like a Tent Revival, with the country preacher man, lining up the people who had just become believers… Traders, investors, hedge funds, and so on, began to believe that Merkel was telling no lies… And the more they believed, the more they bought the euro… You know… Ever since January 10th – when China said they would buy euro debt, and Merkel began her euro protection campaign – the euro has gained 5% versus the dollar!

I keep hearing the Monkees singing “I’m a Believer”!

So… In today’s world of fiat currencies, fundamentals and sentiment drive markets – not charts… And since there has been a lack of fundamental trading since the collapse of Lehman Bros. over two years ago, sentiment is the driving force… And right now, the sentiment toward the euro is changing again… Investors are coming back…

Now, the problem with basing trading trends on sentiment is that sentiment can change on a dime… Haven’t we seen that happen quite a few times in the past year? Yes we have! So… For now, the sentiment toward the euro is favorable…and the Big Dog is back! You should have seen all the little dogs yesterday… They were sitting on the porch, panting, and eagerly edging toward the edge of the porch, just waiting for the Big Dog (euro) to get up and begin chasing the dollar down the street… Once that happened, the little dogs followed, and soon outran the Big Dog… Norway, Sweden, Aussie, Canada, South Africa… They all joined the chase…

Thanks again, Chuck, for that insight. As I came in this morning, the currencies were all wearing yesterday’s clothes with the exception of pound sterling. The currency is trading down well over 1% from yesterday as their first peek at fourth quarter GDP showed disappointment. Britain’s economy unexpectedly shrank 0.50% from the third as the coldest weather in more than 100 years restrained retail, construction, and the services industry. Even if weather had cooperated, economists figure the numbers would have still come in below the initial estimate of a 0.50% expansion. So far, the other currencies haven’t seen any adverse impact from the British disappointment, but the day is still young and we still have US data to digest. Gold and silver can’t catch a break either, as both are down once again.

To recap… We start the economic data releases here in the US with gauges of November home prices and January consumer confidence figures. If we throw in the Richmond Fed Manufacturing Index, that rounds out the day but all eyes are focused on Friday’s fourth quarter GDP numbers. The dollar finished the day down with the Swiss franc leading the charge. Singapore inflation rose to a two-year high in December, and British fourth quarter economic expansion was derailed. Gold and silver are down again.

Chris Gaffney
for The Daily Reckoning