After rising to a fresh 5 year high intraday, the Dow Jones Industrial Average gave up all of its earlier gains to end in negative territory. This turn in risk appetite not only affected equities but also currencies as the U.S. dollar ended the day unchanged or higher against every major currency. A large part of the nervousness in the market today was caused by the Senate’s decision to reject a pair of proposals that would have helped avert the automatic spending cuts set to kick in March 1st. In doing so, $85 billion worth of spending cuts will now begin. While stocks have fallen and the dollar has risen, the mild decline suggests that investors are not terribly worried about the implications of sequester. We’ve been down this road before with the debt ceiling and survived. The numbers this time around aren’t enormous – only $50B worth of cuts are expected this year and not all of it will kick in at one time. Government agencies are mandated to give their workers at least 30 days notice and this means that if Obama issues his sequestration order tomorrow, Federal agencies will let their workers know Monday March 4th at the earliest and the cuts won’t take place until April 4th. This means that effectively the Obama Administration has another 30 days to come up with a deal to cancel and avoid the cuts. The more important deadline is March 27th, when the government runs out of money and will be forced to shutdown if no additional measures are taken. Of course, Republicans and Democrats want to avoid a government shutdown and House Republicans will be voting on a measure that would finance the government until the end of the year. Investors are clearly holding out hope that a last minute deal before the March 27th deadline will occur.
Meanwhile this morning’s mixed U.S. economic reports left very little impression on the FX market. Economists were looking for a major upward revision to Q4 growth but instead, GDP was revised up to only 0.1% from -0.1%. While this means that the U.S. economy grew instead of contracted at the end of last year, economists were hoping for 0.5% growth. The shortfall was in consumption and imports, which fell more aggressively than initially anticipated. Perhaps if the so-called experts did not anticipate such a large revision to GDP, investors may have reacted more positively to the decline in jobless claims. Last week, jobless claims dropped from 360K to 344K and this low level of claims is consistent with a continued recovery in the labor market. Manufacturing activity in the Chicago region also improved. Yet the dollar barely reacted to the data because they know it won’t change the Federal Reserve plans for monetary policy. Lower jobless claims may be encouraging but the Fed is primarily focused on job growth and therefore non-farm payrolls are far more important. Personal income, personal spending and the national ISM manufacturing index are scheduled for release on Friday
EUR: Still Crippled by Italian Election Concerns
The euro trickled lower against the U.S. dollar throughout the North American trading session. Concerns about the lack of a majority government in Italy continues to weigh on the market as investors wait to see whether Bersani will be able to form a coalition government or be forced into early elections. It won’t be an easy path for Italy and the outcome will most likely be a weak government that is unable to deliver meaningful reform or austerity. This morning’s Eurozone economic reports didn’t provide much help. While German unemployment declined in the moth of February, the unemployment rate held steady at 6.8%. Economists were hoping for an improvement to 6.8%. Consumer spending in France plunged, reminding us of the big gap between the performance of Germany and the rest of the Eurozone. Inflationary pressures on the other hand remained muted with Eurozone CPI dropping 1% in January. This trend appears to be abating however with German CPI rising 0.6% in February. German retail sales numbers are due for release tomorrow – based on the rise in consumer confidence, spending should have improved but according to Markit’s Retail PMI report, consumer spending contracted for the second time in 3 months. Final PMI manufacturing numbers are also due for the Eurozone but revisions are not expected. Meanwhile it is also worth noting that GDP growth in Switzerland beat expectations. Switzerland’s economy grew 0.2% in the fourth quarter but unfortunately the Franc ignored news partly because of the drop in consumer prices – which gives the Swiss National Bank continued flexibility to keep monetary policy easy.