Aside from the services activity in the US all the major releases last week were indeed very strong. The ISM has recorded the 7th straight improvement, getting close to the 50 points barrier, and the British and the Japanese ones have actually surpassed that level indicating an actual rise in output. Fore mostly though, the July’s payrolls were not only better than in June, but significantly better than the market expected. A reading at -247k was confirmed with a drop in the unemployment rate – the first one since April 2008, when the rate was still below 5% (compared to 9,4% now).
With such a bullish data it is hard to find excuses even for a moderate correction on the stock markets. The futures for the S&P500 have reached 1016 pts. on Friday, not only 10-moths high but also a 38,2% retracement of the whole bear market. This is a significant point from the technical perspective, since a major reversal here would be a confirmation of the long-term downtrend. While the market used this level to cash some profits, with the current sentiment the bulls look ready to charge again sooner rather than later.
One had to notice a striking reaction of the EURUSD though. Initially, after the release of payrolls the pair moved up – along with a well settled positive correlation with stock markets, however it soon reversed course and eventually moved down by a whopping 250 points to 1,4150. This is more than just a complication of the technical picture on the pair. The market might be already playing the “hike” game. That would mean that the USD data would be harder to interpret in the EURUSD context. The positive correlation (as a reversal of the “flight to quality” process) with stock indices and the expectations for the Fed to start the tightening cycle could in contrary directions.
As it happens, the Fed meeting on Wednesday is the most important event this week. While any major move at this stage is highly unlikely, even a slight improvement in the judgment of economic conditions or a signal of withdrawing of some liquidity mechanisms could fuel the speculation for the hike in rates to come in a not-so-distant future. And this has already been initialized. It is worth to look at some more distant FRA contracts. The 12x15 rate has moved last week by massive 40 bps, which means that after those few days the market expects nearly two extra 25 bps hikes in around one year’s time. Ben Bernanke has signaled repeatedly that he wanted to avoid a rise in hike expectations so he will need to maneuver the communiqué very well to keep investors calm.
On top of the Fed’s meeting, some important US data released are scheduled for this week. Those include the trade balance on Wednesday, the retail sales report on Thursday and the output and the CPI data on Friday. Finally, an initial estimate of the GDP in the eurozone will be released on Thursday.
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Przemysław Kwiecień  |
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