eur fundamentals

US Dollar: Next Week's ISM Manufacturing, ISM Services, and NFP Releases Likely to Reiterate US Recession Risk

Friday, 31 October 2008 23:20:35 GMT  |  Terri Belkas, Currency Strategist

US economic data may have been broadly disappointing, but that didn’t prevent the US dollar from gaining across the majors as relative fundamentals continue to benefit the greenback.

Indeed, the bulk of the dollar’s gains came during the European trading session, as the New York trading data proved to be fairly boring compared to the significant volatility we’ve seen in recent weeks. Looking at the indicators on hand, US personal spending tumbled 0.3 percent in September – matching the sharpest drop in four years – and followed two consecutive months of stagnation, which only highlights how poor consumption growth in the US currently is. In fact, we saw clear evidence of this in the advance reading of Q3 GDP, as personal consumption plummeted 3.1 percent, marking the first contraction since 1991 and the worst decline since 1980.

Meanwhile, JPMorgan Chase is taking steps to try to stop the housing market collapse as they announced that they would not begin foreclosure proceedings for at least 90 days while the firm modifies $110 billion of troubled mortgages. Bank of America took similar steps this year as they reportedly helped more than 117,000 homeowners avoid foreclosure between January through June. It will be interesting to see if these efforts have a real impact, or if the deterioration in the labor markets and impending recession will prove to provide even greater pressures on the housing sector, preventing a recovery.

Overall, the Federal Reserve remains likely to cut rates down to record lows before year-end, as indicated by fed fund futures which are fully pricing in a 25bp cut on December 16 and a 55 percent chance of a 50bp cut. Data due to be released next week may exacerbate this sentiment, as the ISM manufacturing and services indexes are forecasted to reflect a contraction in business activity during October. Furthermore, US non-farm payrolls (NFPs), are anticipated to contract for the 10th consecutive month, by 180K, while the unemployment rate is expected to jump to a more than 5-year high of 6.3 percent from 6.1 percent. Nevertheless, if economic data from other regions like the UK and Euro-zone prove to be more fundamentally bearish or if risk aversion strikes again, the US dollar could gain on safe-haven flow.

Check out Daily Fundamentals in its entirety for analysis and outlooks on the US dollar, euro, British pound, Japanese yen, and the commodity dollars.

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