Weak Data Drives US Assets Lower, Though Dollar Salvaged

How Did the Markets React?

Wednesday’s economic releases provided another bearish shade for the world’s biggest economy.  A number of indicators covering various sectors of the US economy weighed on investors sentiment across the various markets, but the reaction to the numbers was a little different in each.  At 15:00 GMT, simultaneously released indicators of construction spending, manufacturing activity and pending home sales provoked an immediate response in currencies, bonds and equities.  In treasuries, the reaction was undeniable.  A gap in ten-year notes’ face value was reciprocated with a drop in yields to its lowest level since October 4th.  For the EURUSD, an immediate spike higher to 1.2800, the loftiest level the pair has seen since August 28th, proved only temporary as the market was quick to move in and take profits.  Apprehension in reigning over the majors as the dollar index now sits on major support, which is translating into major levels in many pairs.  Furthermore, traders are erring on the side of caution as a lack of data tomorrow makes the event-risk in Friday’s nonfarm payrolls report even greater.  Finally, the equity response to today’s indicators was swift, though the slide was already underway making it tough to judge the lone effect.  




Bonds – 10 Year US Treasury Notes

Government debt provided the most clear and reliable reaction to today’s disappointing indicators.  In the moments following the release of the growth detracting numbers, the 10-year Treasury note immediately put in a 4/32nds gap.  In total, in the few minutes following the release, the benchmark asset was actually bid up to 102 15/32nds to tally up a total 7/32nds initial reaction.  However, like the currency market, debt traders cut the rally short rather quickly.  Though the figures were supporting weakness in housing and factory activity, market participants were already looking ahead to Friday’s nonfarm payrolls report.  On the other hand even though the initial reaction was moderated, the retracement didn’t spell the end of the negative sentiment for yields.  Aside from the headline manufacturing read hitting its lowest level since June 2003, the specific drop in the prices paid component provided support to rate watchers who are speculating on a cut in the first half of 2007. 




FX – EUR/USD

Though the dollar was quick to react to today’s economic offerings, there was no development to back up the initial move.  In the hours leading up to reports on tap, the EURUSD was once again relegated to a narrow trading band.  From the Asian hours’ 15-point congestion band, the addition of European liquidity did little more than given traders a little more room with a 30-point range with a low around 1.2742.  When the news hit the wires, spot was hovering near the middle of this range.  From the economic calendar, the market jumped to the often market-moving ISM manufacturing report for its face value feel on the day’s data.  The nationwide factory activity report proved to be cut from the same bearish clothe as most of the regional indicators that had been absorbed in the market before it.  Dropping to a more than three-year low 51.2, the outlook for capital investment and strengthening hiring trends in the months ahead seemed bleak.  In moments the initial face value wore off, but traders only found more bearish data to guide fundamental positioning.  Pending housing starts reinitiated its decline by falling a greater than expected 1.1 percent over September.  Furthermore, construction spending for the same month fell 0.3 percent.  This was a potent mix of disappointing data, but the dollar was able to hold up against the barrage, only allowing a 35-point run to 1.2800 for the EURUSD before big resistance kicked in.  The quick retracement that formed only minutes after the spike higher revealed the expectations held out for Friday’s employment numbers.




Equities – S&P 500     

Strong earnings reports reported in the early hours of Wednesday morning could hold back the tide of pessimism that overtook the equities markets only minutes after the open.  At the outset of the day, strong earnings reports from MasterCard and Burger King gave the S&P 500 a quick bump.  A 1.8 point gap in the index provided the momentum to drive the benchmark all the way to the session’s high 1,381.58 by 14:45 GMT.  From there however, the drop was consistent and picked up steam as time went along.  Though the turn happened just before the day’s economic releases, the pessimism aroused by the data points was undeniable.  Dropping almost non-stop through the session, the S&P 500 plunged 1.1 percent from its intra-day high to its low at 1,366.26.  Compared to the limited follow through in the dollar and bonds, equities already had the kindling needed to facilitate a strong sell off.  First of all, the index hit a new high only four session’s ago.  This has led many traders to see stocks as far oversold, while profit taking and trailing stops could easily act as the accelerant to the right spark.  A spark was what was realized in today’s dour economic data.  Nationwide factory health plunged for the month of October, now barely in expansionary territory.  This will no doubt weigh on revenues from the manufacturing related sectors, but will also have implications in weaker capital investment that pads the quarterly earnings of other firms providing machinery, technology and other support services.  The more troubling release however was the housing numbers.  Both pending home sales and construction spending slipped for their respective months, reinitiating the bearish sentiment for the housing market that was showing initial signs of stalling in reads for the month of August.  As this market accounts for the majority of American consumers’ wealth, the implications were significant for demand going into the holiday season.  By the end of regular trade, the S&P 500 closed 10.13 points from the open at 1,367.81, 0.7 percent off the open.