Manufacturing Declines in NY Region..

The Empire Manufacturing survey gave a cold blow to the US fundamentals being the first release out of the gate for this week. It showed that New York manufacturing sector in contraction for the third straight month. The expectation had been for around a flat to slightly positive reading and the -7.7 reading instead shows that the manufacturing sector overall in the US looks likely to have another poor showing in August.

  • The general business conditions index, which is the headline number, was led lower by a drop in the new orders index which remained below zero at -7.8 as well as a drop in inventories.
  • Employment and shipments remained in positive territory with employment improving and the price index continued to retreat, with the prices paid index falling 15 points to 28.3 and the prices received index falling three points to 2.2.

There's certainly a lot riding on the fundamental data this week for the US as it will be a key determinant in the direction of equities. This manufacturing release shows us that the sector is going to have some more trouble in August and that is a negative for the US data stream. We saw a sharp reaction in the currency markets as a result, with the US dollar losing against its rivals on the back of a fundamental bias shift. More weaker data from the US will increase calls for more monetary stimulus from the Federal Reserve.

Dated TIC Data Shows Demand for US Treasuries Falling Sharply Back in June...

The latest TIC, or Treasury International Capital data, for the month of June, showed that foreign investors bought less US government debt In June. Treasuries were sold to the tune of $18.3 billion, which is the biggest one-month slide since June of 2000. If we look at a broader category,  overall foreign investors bought a net $3.7 billion of long-term US assets in June which is down sharply from $24.2 billion in May.

But, we should take this data release as one that is quite dated. The drop was likely a result of the escalating budget and debt ceiling debate we had in Washington during the month which extended well into July, and into the beginning of August. We should therefore see July's TIC data come in weaker than expected.

In August however, we saw a resumption of capital flows towards US treasuries as equity markets around the globe fell and we had a "flight to safety". That happened even despite the S&P downgrade of the US credit rating was a main catalyst for the sharp equity selloff.

If would take a look inside of the data we see that the official demand from foreign investors - that is central banks - increased during the month, as China for instance increase its holdings of Treasuries in June. The declines were concentrated in Luxembourg and the Cayman Islands, which suggests that it's private funds that were doing most of the selling during the month.

...S&P500 Still Rallies as M&A Activity Boosts Confidence.

So even despite the weaker US data we saw a general positive tone towards sentiment in equities which created a double whammy for the USD. On the back of weaker fundamental data, it lost some of its allure as a safe haven as risk eased out of the market.

Current stock valuations as well as a pickup in takeovers overshadowed the economic data in the US and we saw stocks extending their rebound with the S&P 500, which is now up 6.6% since August 10 - the biggest three-day rally since March of 2009. As we remember that was our bottom following the financial crisis of 2008.

The biggest takeover was Google buying up Motorola Mobility, but also Time Warner Cable buying Insight Communications. These types of merge-and-acquisition developments usually are done when expectations are for stronger economic growth or valuations are key and it helped comfort investors which just came off one of the most volatile weeks in history. Therefore stronger stocks both in the US and in Europe helped to boost higher yielders and those currencies sensitive to risk sentiment while weakening the safe-havens including the US dollar.

USD Slumps vs EUR and Others in Reaction..

The Euro/US Dollar had one of the strongest reactions climbing from around 1.4320 prior to the release through resistance at 1.44 as well as 1.4450 reaching a high just above 1.4470 in the early in the New York morning trading session. This is the strongest the euro has been against the US dollar since June 27th. Our next clear level of resistance comes in at 1.4535, our highs from that period in late July.

Following the release we saw general US dollar weakness against higher yield, including the GBP, but also safe havens such as the JP Y and CHF. Commodity currencies, though not participating as strongly in the rout against the USD, because weaker manufacturing data from the US implies a weaker global growth rate, still managed to gain on the back of some positive risk sentiment.

The US dollar had the added misfortune of a weak economic release which shifts the fundamental bias against it. So in times of a good risk sentiment and weak US data we see the US dollar sold off.

It'll be important to monitor the rest of this week's key US indicators especially now on manufacturing. The worse the data, the more the calls will increase for another round of QE from the Fed which from a fundamental standpoint is a negative development for the US dollar.

Nick Nasad
Chief Market Analyst