Ugly US data boosts the JPY – will market put QE trade back on?

With bad US data, Pavlov’s dogs are looking for QE and lapping up gold and selling the USD. Will the bad data give us a reprieve from the USD strength or is it another red herring?

The market was a mixed bag today, with equities, EURUSD and GBPUSD and USDCAD setting new extremes today for a time before pulling back a bit ahead of the US open, though GBPUSD lagged badly as the bounce in risk saw sterling punished against the Euro after EURGBP’s brutal run lower and as yesterday’s BoE quarterly inflation report failed to sustain the impression that the BoE might be moving toward a tighter monetary stance.

On the stress indicator front, Spanish bonds spreads were relatively orderly and slightly tighter, as were other major peripheral spreads. But the IBEX and other peripheral stock indices in Europe had only taken back a portion of the fairly steep losses on the day as of this writing (and were headed back lower again shortly after the US open for trading), as equities remain perhaps a better barometer of fear levels.

Chart: EURUSD
1.3000 was quite a support level for EURUSD, and its fall was critical in touching off the latest sell-off, but the next support levels – basically the whole zone from 1.2620 (previous low) to the 1.2500 (head and shoulders neckline) area, is extremely pivotal in the big picture if we look at the technical setup. It’s impossible to know if we will slice mercilessly lower without reprieve or chop downwards with lots of backfill, but the technicals are already ugly and will get uglier with a break of this area, setting up a possible decline to 1.12-1.15 eventually.

US Data
Just before posting, we get the news that the US weekly Bloomberg Consumer Comfort index is out at -43.6, completing a remarkable reversal from as high as -31.4 just four weeks ago. That is an ugly decline in confidence and the worst four-week drop since February of 2008.

We also have the US Philly Fed manufacturing survey in at a very disappointing -5.8 vs. +10 expected, a massive negative surprise and the first negative reading since last September. One of the key elements dragging the index lower were a meltdown in the Number of Employees sub-index (at -1.3 vs. +17.9 in Apr.). New Orders were at -1.2 vs. +2.7 in Apr. and interestingly, prices received were at -4.5 vs. +9.4 in Apr. The JPY strengthened the most off this data, as bonds rallied and risk sold off again.

Looking ahead
There’s not much on the calendar for the rest of the week, as we only have German producer prices, Italian industrial orders and Canadian consumer price index data populating the European and North American sessions tomorrow, but economic data is less on the market’s mind as systemic risk remains the focus.

Over the weekend, we have a G-8 meeting at Camp David in the US, a meeting at which the EU crisis will be squarely in the spotlight. It is quite clear that some kind of rhetoric will emerge from this meeting aimed at damage control, but will it control the damage or inspire any confidence? It would seem a first step would have been at least an attempt at said damage control from EU officialdom, but little to nothing has been forthcoming. The gold market is trying to bounce today, perhaps a first effort by some market players to place bets on imminent intervention, and after a bit of weakness intraday, was particularly strong after the very weak US data, as Fed QE probabilities are revisited.

A thought: The market has been so pushed around and dominated by official intervention over the last several years that there are likely many who are unwilling to put further skin in the game with this weekend’s G-8 approaching, or even on the fear of an official intervention in general. Such investors may have a view that whatever solution is arrived at, it will be insufficient, but they can at least wait for a market bounce before diving in. That may well be the case, but it will be painful for these under-committed individuals, not to mention those that are still long the overall macro theme of buy hard assets and high carry instruments vs. the money-printers, if the move simply persists without much more than weak dead and buried cat bounces from here. Just a thought on what investor thinking may be out there…

Please read Steen’s comments from earlier today on the risks of contagion from ongoing capital flight.

Economic Data Highlights

• Canada Mar. International Securities Transactions out at -2.08B vs. +8.0B expected and vs. +12.54B in Feb.
• Canada Mar. Wholesale Sales out at +0.4% MoM vs. +0.3% expected
• US Weekly Initial Jobless Claims out at 370k vs. 365k expected and vs. 370k last week
• US Weekly Continuing Claims out at 3265k vs. 3225k expected and 3247k last week
• US Weekly Bloomberg Consumer Comfort Index out at -43.6 vs. -38.0 expected and -40.4 last week
• US May Philadelphia Fed Manufacturing Survey out at -5.8 vs. +10 expected and +8.5 in Apr.
• US Apr. Leading Indicators out at -0.1% MoM vs. +0.1% expected

Upcoming Economic Data Highlights (all times GMT)

• US Fed’s Bullard to Speak (1635)
• China Apr. Property Prices (0130)
• China May Flash Business Sentiment Survey (0135)
• Japan Apr. Nationwide Department Store Sales (0530)