It has been a week where the numbers released have been less important than the continuing events In Syria. The latest meeting between Secretary Kerry and his counterpart, Russian Foreign Minister Sergey Lavrov, have not gone well. And as a precondition to turning over the chemical weapons, Syrian dictator Assad is demanding that the US stop arming the rebels. The threat of an attack on Syria might be postponed, but the Syrian problem will remain an evolving issue.
Markets took different paths this week suggesting there is much more at play than the latest posturing about Syria. The US DJIA shrugged off the Mid-East turmoil and climbed about 2.4%, but gold was hit hard, down about 6% for the week. Crude was also lower, but down less than 2% on the week to 108.60. The USD was slightly weaker for the week.
A partial reason for the lower USD hay have been caused by some weaker numbers. Friday, US Retail Sales fell short of expectations. All US Retail Sales were up 0.2%, less than the expected 0.5%, and excluding autos, the number was up 0.1, less than the expected 0.3% advance. Later in the day the University of Michigan Sentiment Survey came at 76.8, the biggest downsize miss from the expected 82 in months. These are signs the US economic recovery is very tepid indeed.
There is no question the US consumer is being squeezed. As an example from a low under 87 in April, crude has steadily climbed to above 110, and is now 108.50. This hurts current retail sales, but going forward when will the sales of cars, and especially trucks take a hit. Wages are stagnant, and while the unemployment rate is down so are the people remaining in the US work force.
Combine the plight of the consumer with interest rates in the US, up over 100 basis points in the last year to about 2.90% will this not halt the mini US housing boomlet? On Wednesday we may get a clue as the government releases the new US Building Permits, 950K up from 943K, and the starts, 915K, up from 896K.
Later in the week we see the existing home sales, 5.25M down from 5.39M. This should help us determine the strength of the US housing sector. That is, if we can believe the numbers. Like more people these days, I wonder if the government is not giving us the numbers they want us to hear.
The most important report in the coming week comes on Wednesday. The FOMC Meeting notes will be released. Bernanke will then hold a press conference where it is expected he will gradually reduce the amount of stimulus that is injecting money into the system. Should the Bernanke taper fall short of expectations, this should be bearish the USD. Remember the cheap US money, gave risk takers the opportunity to borrow USDs for almost nothing and find higher global yields. The market seems to be pricing in higher rates and the return of some of this hot money back to the US.
For the week the euro was a gainer on the USD (EURUSD FXE, UUP, UDN) though we should probably say the USD lost to the euro. We are now trading at about 1.33 as we end the week, which is in the middle of the range for the last three weeks.
Prior to the re-election of Frau Merkel in a few weeks, there is a shortage of economic news, perhaps because they are fearful it may hurt Merkel's chances. We should note, however, the bond trade suggests there is trouble in Italy. The yield on Italian ten year bonds is up 35 basis points in the last month, taking the yield to 4.57% of 2.6% higher than the yield in Germany. Italy, with the third largest amount of outstanding sovereign debt in the world, has a growing problem for the euro and for themselves.
In the most recent COT report released this afternoon, we see the spec position in the euro is about even. The large specs are still long, about 14K contracts and the small specs are short a like amount.
One of the big winners versus the USD for the week has been the British Pound. At 1.5870 we tie the high for the year made in January. Earlier in the week, we looked at the pound, and pointed out that the economic news continued to be favorable at a time when the specs were big shorts. The COT report based upon positions through Sept. 10th show the specs covered about 14K of their shorts. They are still about 36K contracts of short remaining.
There are some meaningful reports next week from the UK. On Monday, the m/m CPI is released, up 0.5 versus unchanged in the previous month. For the year the CPI is forecast to be up 2.7 versus 2.8 in the last report. This will be followed with the Bank of England Meeting notes on Wednesday and retail sales on Thursday. Should the y/y CPI number come in as forecast there may be those who start to worry about the UK inflation rate.
This market has been on a run but with the 14 day RSI at 73.4 we prefer to watch.
The yen was unable to defend the 100 handle and faltered, backing off to 99.3. The COT shows the specs sold more yen contracts. We prefer to have a more detailed look at the yen early next week.