The trio of releases from the US today - Personal Incomes & Spending, Pending Home Sales, and Factory Orders - all came in below expectations, extending the string of negative reports we have seen from the US economy.
In our live coverage on Monday, we had talked about the precarious position the currency markets and the US Dollar are in. If data in the US continues to show an economy that was slowing - but not lurching back towards a double dip recession - and data from around the world remained relatively upbeat we could have a continuation of the theme we have seen recently. That is, enough risk appetite to bolster higher yielders and continue to weakness in the greenback as its slower growth is priced into the value of the Dollar. However, if the sense is that the slowdown in the US economy is worse than expected and we do face a double dip scenario, then risk aversion could win the day, hurting equities and sending traders looking for safe haven in the US Dollar and US Treasuries and away from higher yielders.
After an overnight session in which the EUR/USD rose to a 4-month high at 1.3260, the round of US reports gave US equity markets a jolt, tilting risk sentiment towards the second scenario - a worry over global growth prospects. However, US stocks rallied, and as of noon time NY seem to be threading that sweet spot where we have risk appetite and weakness in the US Dollar due to its fundamentals, without investors feeling to safety.
OK, now for the releases.
Personal Income and Spending
First up, the data on personal incomes and spending was weaker than expected and shows that the second quarter finished on a fairly soft note. Both incomes and spending were flat in June, when expectations had incomes rising 0.2% and spending up 0.1%. It was the first time in a year that incomes were not positive. Also May's figures were revised lower - incomes rose 0.2%, rather than 0.3%, and incomes were up 0.3%, not 0.5%.
The data implies then that US families have less money to spend and are cutting their purchases. We saw this deceleration in personal consumption in the 2nd quarter GDP data. The data does point out however that the savings rate - at 6.4% - rose to its highest level in a year.
Also as part of this release, we got the core reading for the Personal Consumption Expenditure (or core PCE) a favorite reading of inflation for the Federal Reserve. It showed a flat reading, meaning price pressures remain subdued.
Pending Home Sales
In the second release, pending home sales fell 2.6% in June following a large 29.9% decline in May. Expectations had been for a small rebound of 0.5% following that large drop, but instead we continue to see weakness in the housing sector. Pending home sales are used as a leading indicator as they are measures at the signing of a contract to buy, even when the actual closing of the home purchase happens about a month or so later.
In the third release, factory orders dropped 1.2% in June, following a downwardly revised fall of 1.8% in May. Expectations had been for a smaller 0.2% decrease. This report confirms the cooling we have seen recently in other manufacturing readings.
US Dollar Should Continue to Be Pressured as a Result of Weak Data
All in all, we are seeing consumers more hesitant to spend, home sales continuing to be weak, and now manufacturing slowing. These three reports will add to the evidence already available that the US economy is hitting a particularly bad patch of weakness heading into the 2nd half of the year.
The weak data has been pressuring the US Dollar the past two months and will likely continue to do so, until other parts of the world show weak data and increase overall risk aversion.