More pleasant surprises from the US lifted sentiment. Despite thin trading ahead of the employment report, DJIA and S&P 500 gained +0.49% and +0.91%, respectively, after rallying strongly in the previous day. Crude oil reacted in synchronization with equities and surged for a second day to 75.02, gaining +1.50% at close. Focus of gold yesterday was on ECB's meeting. The euro was a tad higher after the central bank revised up growth and inflation forecasts and this benefited gold as the 2 returned to traditional positive correlation last month. The benchmark contract for gold settled at 1253.4, +0.42%, yesterday.
US pending home sales unexpectedly jumped +5.2% m/m (consensus: -1.5%) in July, following contractions of -29.9% in May and -2.8% in June. Despite the rise, sales remained below 2010 average and the index only slightly picked up from the unprecedentedly low level recorded after expiry of tax credits. We do not view this as signaling a recovery in the housing market but the gain may indicate a rebound in existing homes sales data as pending home sales usually lead by 1-2 months.
Initial jobless claims dropped for a second week, by -6K, to 472K, taking the 4-week average down to 485.5K in the week ended August 28. Continuing claims for the week ended August 21 fell to 4.46M from 4.48M in the prior week. While the result is welcomed by the market, investors should note that the series remains at elevated level and would not affect consensus of the August non-farm payrolls.
Risk-selling investors turned away from bonds, sending the 10-year Treasury yields higher for a second day while comments from 2 top Fed officials about further easing steepened the yield curve further. Philadelphia Fed President Charles Plosser said that lowering interest rates 'is not going to solve the unemployment problems and it is dangerous to think that it will'. Moreover, the Fed should only act if 'fears of deflation were to become real' but the Philly Fed President does not think that is the risk. Meanwhile, Dallas Fed President Richard Fisher said he's 'reluctant' to expand the balance sheet to boost the economy 'unless or until fiscal and regulatory initiatives are aligned with the needs of job creators'.
In contrast with its recent trading pattern, gold climbed despite rise in bond yields as the ECB left the policy rate low and the euro climbed modestly. At the September ECB meeting, President Trichet announced to leave the main refinancing rate unchanged at 1% and delayed the exit of unconventional easing measures by extending the full allotment procedure for the 1-month MRO and the 1-month special-term operations at fixed rates for 'as long as necessary' and at least until January 2011. The will be 4 3-month LTROs (in September, October, November and December) with full allotment at rates fixed 'at the average rate of the MROs over the life of the respective LTRO'. Furthermore, the Governing Council will carry out 3 additional 'fine-tuning' operations at the end of September, on November 11 and on December 23 when the remaining 6-month and 12-month refinancing operations mature. This signaled the ECB will maintain an 'accommodative' monetary policy at least until mid-January 2010.
The focus was however upgrades in ECB staff's economic projections. The new set of economic forecasts suggests that GDP will expand+1.6% in 2010, compared with June's projection of +1%, and +1.4% in 2011, compared with June's projection of +1.2%. The upward revision for 2010 was to reflect the much stronger 1H10 growth that ECB's previous forecasts while the upgrade for 2011 was mainly to 'carryover effects' from stronger growth in late 2010. HICP projections for 2010 and 2011 were revised up to +1.6% (June's projection: +1.5%) and +1.7% (June's projection: +1.6%) respectively, hinged 'largely on account of higher commodity prices'. Strong-than-expected economic forecasts sent the single currency higher against both USD and JPY, though gain were than pared
The message sent from the ECB was indeed mixed, thus limiting euro's upside. While the upgrades were obviously bullish, extensions of unlimited liquidity to the market limited gains in the currency. However, the decision to peg rates of 3-month LTROs to 'average rates of the MROs over the life of the respective LTROs' somehow triggered speculations for a hike rate in 1H11. This actually thrilled some hawks as current market consensus is that the ECB will not hike until 2H10.
Focus of the day is US' employment report for August. The market anticipates non-farm payrolls dropped -105K in August after a decline of -131K previously. The unemployment is expected to have risen to 9.6% from +9.5%.