Dollar, S&P Reaction To Empire Read Suggest Bigger Things On Traders’ Minds

How Did The Markets React? 

The sole market-moving indicator on the dollar docket threw fundamental traders for a loop Tuesday morning. With many investors minds on other pressing matters surrounding the US economy (like inflation and housing), little was expected to come from the regional Empire Manufacturing Survey. However, the lead, regional factory survey marked a discouraging pace for industrial health for the current month. Expected to slip a modest 3.8 points to a 19.3 read, the indicator instead printed a gut checking 9.1. While this is technically still in positive territory, it was nevertheless the lowest read since June of 2005. Furthermore, the number of components that make up the overall headline number suggested this month’s dip may be longer lasting than the contraction marked in some of the other regional reads back in November. Unlike those reports, the Empire survey revealed a drop in sales, orders and inventories. The shipments category hit a six-month low, while producers in the area reported the fewest new orders in 20 months. What’s more, inventories shrank at the fastest pace in over four years. Typically a drop in inventories would encourage new production to fill stores; but with the glut built up over the second half of 2006 offering a sizable cushion, the relationship may not hold. Altogether, this sour start to the regional factory reads holds serious implications for the nationwide ISM due the first of February. So why did the dollar, treasuries and benchmark equities indices show only a mild reaction to the foreshadowing of another contraction in manufacturing activity? Event risk. The economic calendar for the days ahead is stocked with top market movers like CPI, the University of Michigan Confidence Survey and the Fed Beige Book which could all define the broader direction of the economy.

Bonds – US Treasury Note Future

Treasuries, like the dollar and equities, produced only a modest reaction to today’s fundamental offerings. The unexpected drop in the Empire survey stoked speculation that the manufacturing sector may falter after all. In November, when the ISM report printed its first contraction since April 2003, the New York region survived relatively unscathed. Now that November’s anchor is giving way, the outlook for the entire nation is questionable at best. Should manufacturing start to detract from growth, revenues at firms will contract and capital will quickly find its way from equities to debt. However, until then, PPI and TICS due tomorrow are too important to overlook.





FX – Euro vs. US Dollar

The US dollar retraced some of its London session gains in the moments that followed the Empire Manufacturing report, but overall upward momentum left the greenback slightly stronger through the New York close. Though traders were surprised to see such a poor manufacturing print, few were willing to bid the EURUSD past the 1.2960 mark. Instead, daily charts will show that the Euro was completely unable to hold fresh weekly highs—with a sharp retrace leaving a very bearish candle pattern. Whether or not the EURUSD will continue to dip will largely depend on upcoming data, with key US inflation reports due tomorrow and Thursday. Notwithstanding today’s bearish economic data, a recent string of impressive US fundamentals suggests that risks remain to the upside for producer and consumer price pressures. If the key figures indeed surprise to the upside, bonds and Eurodollar futures could continue lower—leaving yields stronger and improving the US Dollar’s carry advantage against major counterparts.





Equities – S&P 500 Index Future

US equities saw themselves lower through the morning open, with a dour US Empire Manufacturing report hurting industrial shares. Earlier losses were subsequently cut, however, when sharply falling oil prices left domestic corporate stocks bid. Indeed, oil-sensitive issues greatly benefited from the lowest oil prices in nearly 19 months. The front month NYMEX crude oil contract lost over 3 percent through floor trading, as an announcement that Saudi Arabia would not support further OPEC oil production cuts sent shockwaves through energy pits. The energy-linked rally left the broader market slightly higher, with the Dow Industrials Average setting fresh record-highs, while the S&P 500 inched 0.1 percent higher to 1,431.90. Technology shares were not quite so fortunate, however, with soft earning reports leading to fears of poor profits from computer-related firms. Fears gained further traction through after-hours trade, as the heavily anticipated Intel Corporation Q4 earnings report failed to impress. Fierce competition left the semiconductor with meager profit margins through year-end 2006, and forecasts pointed to similarly poor results moving forward. This, along with the potential for an upward surprise to tomorrow’s inflation figures, may leave US stocks lower through the 14:30 GMT (09:30 EDT) open.