Recessionary sentiment in US

The US Conference Board sentiment index tumbled in August to 44,5 pts. from 59,2 pts. Sentiment actually hasn’t recovered after a previous recession and now is in a recessionary territory again. The drop exceeded expectations (52 pts.) but is understandable – recent issues like a high unemployment rate and high gasoline prices were compounded by a political mess, a rating cut and a sell-off on equity markets. Now the question is to what extent it is going to hurt personal spending.

Despite an initial reaction, equity markets were quite resilient yesterday and the upward momentum is maintained. However, downside risks clearly prevail. In a long term, sentiment index may serve as a contrarian indicator – moods are usually the lowest just before the bull market starts. However, that might not be the lowest point. In October ’08 the index fell to 38,8 pts. yet the bottom was reached five months later (at 25,3 pts.). During that period stocks suffered ca. 20% losses.

Fed minutes – too much attention

The Fed minutes centered attention yesterday on the US monetary policy again with market speculating if the Fed may once again decide to purchase assets after as many as three voting members were against a pledge to keep interest rates low for a defined period (mid-2013). Obviously, a decision to buy more bonds could have a short-term effect on equities and the dollar yet the market seems to pay too much attention to this issue. The key remark from the minutes to us is astonishingly blunt about the ammo that is left at the Fed’s disposal atm:

At the same time, some Fed officials judged that none of the tools available to the Fed would likely do much to promote a faster economic recovery.

With all the talk about the QE3 the interest rates market actually favors the dollar as the EURUSD hasn’t reacted to expectations for a cut in the euro zone. The pair has been locked in a consolidation for a long period of time and at the end of the day some large movement can be initiated. Not only interest rate picture but also a downside risks for equities and commodities favor the dollar.

ADP report today

The labor market is far from buoyant but it actually may support moods this week as expectations ahead of the ADP (8.15 ET, 14.15 CET, consensus +100k) are conservative, at least in comparison with the picture drawn by weekly claims.

Przemysław Kwiecień PhD, Chief Economist

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