- The dollar rose on Thursday as risk aversion increased. The S&P 500 dropped 27.23 points to 1,029.85. The treasury 30-year bond yield fell below 4% for the first time since April. US initial jobless claims increased, the ISM US manufacturing PMI declined and inflation remained subdued, casting doubt over the pace of the US economic recovery. Richmond Federal Reserve Bank President Jeffrey Lacker said the FOMC may need to hike interest rates before unemployment declines. Fed Chairman Ben Bernanke told Congress he does not see any risk to the dollar's reserve currency status as long as there is long-term fiscal stability. The yen was little changed as the Tankan survey improved in line with expectations. The euro fell after ECB President Jean- Claude Trichet warned of excess volatility. Germany's retail sales unexpectedly fell and the eurozone unemployment rate hit a 10-year high. Sterling fell, pressured by a second consecutive contraction in the UK manufacturing PMI. The risk-sensitive Australian and Canadian dollars plummeted as commodity and equity markets tumbled.
- The dollar is at important technical levels in most major cross rates. Technical importance can be summed up by the dollar index. The index is between important support at the 76 handle and resistance from its downtrend in the 77.50 area. A break of either direction will signal the future USD outlook. The dollar has been negatively correlated with risk appetite and US equities. Today's plunge in stocks pushed the dollar index against the resistance from its downtrend that coincides with the start of the equity bull market. If the dollar index downtrend is broken, the dollar outlook will improve and the stock market correction will likely deepen.
Financial and Economic News and Comments
US & Canada
- US personal income grew a slightly more-than-expected 0.2% m/m in August after an upwardly revised 0.2% m/m increase in July, while personal spending rose a more-than-expected 1.3% m/m, the biggest rise since October 2001, following July's upwardly revised 0.3% m/m advance, figures from the Commerce Department showed. Personal income fell 2.6% y/y in August while personal spending declined 0.3% y/y. Disposable personal income was up 0.1% m/m in August, up 0.8% y/y. The overall PCE deflator increased 0.3% m/m in August but declined 0.5% y/y. The core PCE deflator, which excludes food and energy, increased 0.1% m/m in August and rose 1.3% y/y. ?
- US initial jobless claims increased 17,000 to a higher-than-expected 551,000 in the week ending September 26 from the previous week's upwardly revised 534,000. The 4-week moving average declined 6,250 to 548,000. Continuing claims in the week ending September 19 decreased 70,000 to 6,090,000 from the preceding week's upwardly revised 6,160,000. The 4-week moving average fell 39,250 to 6,154,500. The insured unemployment rate for the week ending September 19 was unchanged at 4.6%.
- The ISM US manufacturing index unexpectedly declined to 52.6 in September from 52.9 in August, indicating US manufacturing activity expanded for a second consecutive month albeit at a slightly slower pace, data from the Institute for Supply Management showed. Most of the index's key components declined in September but remained above the 50.0 expansion mark. The new orders index declined to 60.8 from 64.9, the production index fell to 55.7 from 61.9, and the employment index slid to 46.2 from 46.4. The supplier deliveries index advanced to 58.0 in September from 57.1 in August. The prices paid index declined to 63.5 from 65.0.
- US pending home sales climbed a much more-than-estimated 6.4% m/m in August, a seventh consecutive gain, after a 3.2% m/m increase in July, data from the National Association of Realtors showed, registering the longest stretch of gains since records began in 2001. August pending home sales jumped 12.1% y/y. The figures indicate the US housing market is recovering.
- US construction spending unexpectedly increased 0.8% m/m to a seasonally adjusted $941.88 billion annual rate in August after a revised 1.1% m/m decline in July, according to figures from the Commerce Department. August construction spending fell 11.6% y/y.
- The eurozone unemployment rate increased to 9.6% in August, as forecast and the highest since March 1999, from 9.5% in July, data released by Eurostat showed.
- The eurozone manufacturing PMI was revised upward to 49.3 for September, above a previously reported 49.0 and August's 48.2, indicating the eurozone manufacturing sector contracted at the slowest pace in 16 months, while the German manufacturing PMI was unrevised at 49.6 for September, above 49.2 in August, indicating Germany's manufacturing sector contracted at the slowest rate in 13 months, according to final September manufacturing PMI data by Markit Economics. The September PMI figures show eurozone and German manufacturing industries are moving near a 50 mark that would indicate expansion.
- Germany's retail sales unexpectedly declined 1.5% m/m in August after a 0.7% m/m increase in July, according to data from the Federal Statistical Office. August retail sales declined a more-than-expected 2.6% y/y, following July's revised 0.8% y/y decrease.
- The UK manufacturing PMI unexpectedly declined to 49.5 in September from 49.7 in August, indicating UK manufacturing activity contracted for a second straight month, according to PMI data by the Chartered Institute of Purchasing and Supply and Markit Economics.
- Switzerland's SVME PMI rose more than expected to 54.3 in September from 50.2 in August, indicating Switzerland's manufacturing activity expanded for a second consecutive month, according to a survey from the Swiss Association of Purchasing and Materials Management and Credit Suisse.
- Business sentiment among large manufacturing and service companies in Japan improved for a second consecutive quarter but remained strongly negative in Q3 2009, according to the Bank of Japan's September Tankan survey. The large manufacturers index increased as forecast to -33 in Q3 from -48 in Q2, while the large manufacturers outlook improved more than expected to -21 from -30. The non-manufacturing index advanced slightly more than expected to -24 in Q3 from -29 in Q2, while the non-manufacturing outlook improved to -17 from -21. The Tankan all industries capex index, measuring capital expenditures by all Japanese industries except the financial industry, showed large manufacturers and non-manufacturers plan to cut business investment by 10.8% this year, more than the 9.4% planned three months ago.
- Japan's retail sales fell a less-than-expected 1.8% y/y in August, a 12th consecutive fall, after a 2.4% y/y decline in July, data from the Ministry of Economy, Trade and Industry showed. Sales at large-scale retail stores decreased 6.8% y/y in August, a 17th straight decline, following July's 8.4% y/y slide.
- China's PMI increased to a seasonally adjusted 54.3 in September from 54.0 in August, indicating China's manufacturing expanded at the fastest rate in 17 months, the Federation of Logistics and Purchasing said.
- China will expand 9.0% in 2010, more than a previously estimated 8.5% in July, while India will grow 6.4%, less than a previously estimated 6.5%, the International Monetary Fund said. Japan's growth outlook stayed at 1.7%. Developing Asia will expand 7.3%, faster than a previously predicted 7.0%. The global economy will grow 3.1% in 2010, more than a previously forecast 2.5%, the IMF said.
- The Australian Industry Group-PricewaterhouseCoopers Australian performance of manufacturing index increased to a seasonally adjusted 52.0 in September from 51.7 in August, indicating Australia's manufacturing expanded for a second consecutive month and climbed to the highest level since December 2007, the AiG and PwC reported. The production index rose to 56.0 in September from 53.0 in August. New orders grew only slightly in September after a large expansion in August, with the new orders index falling to 51.0 from 60.3.
FX Strategy Update