Growth improving in the U.S., but for how long?
Growth was revised up for the second quarter in the United States and is now expected to be 3.3% from the 0.9% registered in the first quarter. The trade data contributed substantially to the increase. In fact, export numbers jumped to 13.2% from the originally estimated 9.2%, while imports declined to 7.6% from 6.6%. Housing continues to weigh on growth, while inflation's prospective stayed unchanged at 2.1% excluding food and energy. Consumer spending rose instead to 1.7% from 1.5% supported by the tax rebates. Americans are a bit more optimistic about their future, as commodity prices are softening from the highs and household revenues is mildly improving. In August, the Conference Board consumer confidence index rose to 56.9 (53.20 expected) from 51.9. The expectation index jumped to 52.8 from 42.7, the largest up move of the past three years. In effect, durable goods new orders climbed 1.4% in July, on the top of June's rise of 1.3%. Gains were solid with non-defense aircraft moving up 28% and core orders (non-defense capital goods excluding aircraft) rising 2.6% after increasing 1.3% in June. Will the positive momentum last? The international trade is trending, but not for long with the dollar rising and global growth declining. Then, there is personal consumption which is still benefiting from the stimulus package. As a result, numbers should be checked again, once money will not get into the mail anymore. Finally, jobless claims are strong and housing remains a drag the economy in the U.S.Current trends to continue for the short term, as hope in mounting
We are experiencing an apparent calmness. Rates are steady across the Atlantic and bad news is already discounted in recent prices. Are we out the cyclone or just in its eye? Time will tell. U.S. Presidential elections will come to an end in November and hope is mounting. Consequently, current trends in commodities (down), interest rates (down) and the U.S. dollar (up) could go on until a new President will be elected. In the meantime, the Federal Reserve is watching events carefully since the economy is not out of troubles yet. The S&P/Case-Shiller price indicator for twenty major cities fell again 0.5% in June and it is 16% below the level of last year. Nonetheless, the housing market is showing some vitality, although it stays volatile and highly instable. Numbers are swinging from month to month and this pattern should continue until a bottom is reached. When? Trying to catch a falling knife could be painful, but various support lines are converging and they could meet between the end of this year and the first half of 2009.In July, existing homes sales increased 3.1%, more than the expected +1.0%. Gains were distributed among single (+3.1%) and multiple homes (+3.4%) and only the Southern regions of the United States registered a decline. However, inventories of unsold homes are at record highs and rose to 11.2 months of supply from June's up move of 11.1 months. Consequently, prices continue to tumble. In July, they fell to 7.10% year on year from June's 6.1%. During the same month, new home sales moved up 2.4% to 515,000 units from the bottom of the past seventeen years touched in June's when only 503,000 new homes were sold. Here again, the Northern regions confirmed a good level of activity and increased almost 39%, while sales declined in the Central and Southern states by 8.2% and 2.5% respectively. Prices stay 6.3% below the level of last year, but inventories slid to 10.1 months of supply from June's 10.7 months.
Consumer confidence is tumbling in Europe
While Americans are experiencing the benefits of the tax rebates, Europeans are more pessimistic about the future. Consumer confidence is in a freefall in Germany, despite the unemployment rate declining to 7.6% from 7.8%. In August, the main IFO business sentiment fell to 94.8 from 97.5, the lowest level of the past three years. Both expectations and current conditions moved down. The German consumer confidence survey index from the GFK group declined instead to 1.5 points in September from August at 1.9 points. All the sub-indexes (propensity to buy, economic expectations and income expectations) remained extremely bearish. The European Central Bank (ECB) is still focusing on inflation, as Mr. Bini Smaghi confirmed last week, and only a strong downturn of the economy appears to motivate the central bank to change its policy. Nonetheless, current economic environment is ideal to touch rates to the downside, since commodity are receding for the highs and the bearish correction could go on for few more weeks/months. The Euro zone Consumer Price Index (CPI) preliminary estimate slid to 3.8% in August from 4.00% in July, while the M3 money supply eased to 9.3% (9.0% expected) from June's 9.5%.The worst has yet to come
In effect, growth is fading globally and Europe is not immune to it. For the third month, the Bloomberg Purchasing Manager's Index (PMI), which surveys almost 1.200 executives, remained below the important benchmark of 50.0, despite moving up to 47.7 in August from 46.0 in July. German retail sales declined to 44.1 from 46.4, while both Italian and French sales rose. The former increasing to 44.8 from 38.2, while the latter rose to 53.7 from 51.3 respectively. All three countries make up about 80% of the total sales activity in the Euro zone. The decline of German growth is an indication that Europe is facing a tough period. The German's Gross Domestic Product (GDP) moved down to -0.5% quarter on quarter in the second quarter from the +1.3% shown in the first quarter. The fall of the construction business, as much as a shrinking household's wealth, could undermine growth further in the coming months as well.USD short term trend up, but overbought conditions emerging
EUR/USD short/medium term trends point to the downside and the market could shortly reach 1.460/1.450, eventually 1.44 if 1.4470 is broken. Nevertheless, Euro/Usd seems to be oversold, a divergence between speculators and commercials is emerging from the COT data, and a breakout failure could take the price back to 1.50/1.52 without changing current downside pattern. A move blow 1.4320 will instead open the highway for a decline to 1.39.GBP/USD short term trend is down and price might decline further for the short/medium term. However, the market should stay below 1.8590 for 1.8000, 1.78.. A breakout failure could take the price back to 1.8690, 1.8750.
USD/JPY failed to rise above the important resistance line at 111.00 and is again testing the support at 108.00, 107.20. The market is consolidating within a tight range. A swing above 111.65 is necessary for 112.60, eventually 113.50. A move below 106.75 would target 106.20.
USD/CAD is consolidating from 1.07 to 1.04. A move above 1.0655 would target 1.07, 1.0750. Failure to breakout from the higher Bollinger band will take the price back to 1.04, eventually 1.03.
MG Financial Group
http://www.mgforex.com
Angelo Airaghi is a Commodity Trading Advisor, registered with the National Futures Association and the Commodity Futures Trading Commission. He has been an active professional since 1990 working for major international financial companies. In the past 10 years, Angelo Airaghi has been an analyst and commentator for national and international media.
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