By Dean Popplewell
The problems in Spain and Italy cannot be waved away by mere words and Draghi’s intervention, forceful it has been, is only leading to more questions. The market has heard most of the forceful rhetoric that was going to do most of the biggest FX damage, now it’s wait and see for the FOMC and ECB. What are they going to deliver? It been reported that Bernanke may be taking another look at cutting the interest rate the Fed pays on bank reserves to bring down short-term borrowing costs and spur the slowing US expansion. The market expects the ECB to introduce some sort of policy easing to ease stresses in the euro-zone. There are several options for the ECB to tackle the debt crisis. The market is speculating another round of LTRO or a cut to the main policy rate. This being said, traders are trying their hardest not to be drawn into any new positions ahead of the ECB.
Apart from the Olympics there has been some influential euro data to digest this morning. Consumer data in the regions two biggest economies went in opposite direction last month, but with each indicating weakness. German retail sales data fell on the month, defying expectation for an increase (-0.1%). It was the third consecutive fall. For France, It also showed weakness, slowing on the month (+0.1% vs. +0.5%). Analysts suggest that the data point to an economic contraction in France, while Germany, Europe shoulders, probably be yet again be spared an economic drop in production. The data is a convincing argument that the ‘core’ is losing steam, just as some of the peripheries fall deeper into recession.
German households, up to this point, have remained confident that their future income will remain relatively solid as their over all labor conditions remain strong. How much longer can their job market remain tight? German labor data this morning does not support a healthy job market for the European giant. Rising unemployment claims is beginning to signal that the labor market in Europe’s largest economy is beginning to lose momentum. Germany’s jobless rate increased this month to +6.8% from +6.6% after a fourth straight m/m rise in unemployment claims. The number of jobless claims increased by +7k. The market is doing its best to hold onto to the fundamental trend in the German labor market, despite the job market remaining somewhat positive overall in the month, there are signs of weaker development.
The collective euro job scene lost more jobs again last month. Just over a +100k managed to lose employment, pushing the regions unemployment total to a new record and putting further pressure on Draghi and company to be doing something more proactive this week. The exact number unemployed in the currency bloc increased by +123k to +17.8m. That equates to a rate of +11.2%, the joint highest on record. Rising unemployment figures is grim evidence now affecting the wider economy. The reality is that Government spending and tax rises aimed at stemming debt levels, alongside poor consumers and business confidence is supporting an economic slow down across the bloc. Germany cannot sustain its Hercules approach to the rest of Europe.
It’s difficult to watch paint dry, lets hope we can see a bit of action in North America from its data releases or it will be another "deja vu" of little price movement. With prices remaining in a tight trading rage its difficult to get ones hope up for an extended move. The market bias remains currently on the upside for a retest of 1.2395, and above this, the single currency should have momentum to extend further. With the daily momentum remaining positive, the market will have to play the percentages and buy on dips despite the dips become higher and the tops lower. Something has to give back, will it be both the Fed and ECB people?