US economic data is likely to send mixed signals once again on Friday, leaving the equity markets to continue their trek higher while allowing the greenback to drift even lower.
Personal Spending (AUG) (08:30 EST; 12:30 GMT)
Expected: 0.4%
Previous: -0.4%
Construction Spending (MoM) (AUG) (10:00 EST; 14:00 GMT)
Expected: -0.3%
Previous: 0.4%
How Will The Markets React?
US economic data is likely to send mixed signals once again on Friday, leaving the equity markets to continue their trek higher while allowing the greenback to drift even lower. First, personal spending is estimated to have risen 0.4 percent during the month of August in line with the advance retail sales report for the same period, suggesting that consumption remains healthy. However, given major downside risks such as a deepening housing recession, souring consumer confidence, and a deteriorating labor market, spending figures may not fare so well in coming months. Later on in the morning, construction spending is anticipated to ease back 0.3 percent during August, with the breakdown likely to show declines led by residential construction. With the supply of new and existing homes gradually accumulating amidst falling demand, it’s no wonder homebuilders are hesitant to break ground. In fact, applications for building permits tumbled an annualized 4.8 percent in August, indicating that construction growth will continue to die down. What will be important to gauge is how nonresidential construction fares, as growth in this index has slowed throughout the year and could start to fall into negative territory as well, increasing the risks of recession.
Bonds – 10-Year Treasury Note Futures
The intraday chart of 10-year Treasury Note Futures shows that the contract has broken above a descending trendline at 109-05, but stopped short of pushing above the 9/25 high of 109-12. As a result, Treasuries may not have the momentum to rally higher, but Friday’s economic data could spark a bid-tone for the contract as worse-than-expected personal spending or construction spending may lead to ramped up speculation of a rate cut by the Fed in October, with a break of 109-19 target 109-25.
FX – EUR/USD
The US Dollar remains remarkably weak and has pushed EUR/USD to reach record after the Federal Reserve unexpectedly cut the fed funds rate and discount rate by 50bps each last week. Disappointing economic data hasn’t helped the case for the currency either, as home sales, labor market, consumer confidence, and inflation reports all proved to be softer-than-expected. Event risk due out of the US on Friday could continue to weigh on the greenback, as construction spending is expected to decline. If the figure is worse than expected or if nonresidential construction starts to decline as well, this could prove to be especially gloomy for the US Dollar, as EUR/USD would target a break to fresh highs near 1.4210. However, if the release of personal spending proves to be surprisingly positive, traders may judge that the economy may be able to weather the stormy conditions of the housing recession, which could help send EUR/USD down to test 1.4030.
Another trigger to send EUR/USD plummeting that traders should keep in mind is if we see news of a US company in distress as a result of either subprime mortgage losses or credit troubles in general. Such news would take a large toll on US equity markets, and the return to risk aversion could send the greenback rocketing higher as investors flock towards safe-haven assets.
Equities – Dow Jones Industrial Average
The Federal Reserve’s unexpected 50bp cut to the fed funds and discount rates set the stage for massive rally in US equities last week, and with the Dow Jones Industrial Average above former resistance (now support) at 13,700, the index could be targeting the July highs of 14,021. However, it is worth questioning how realistic it is to expect the Fed’s policy actions last week to fix the credit crunch that the US is facing, especially as both supply and demand for credit wanes. As a result, traders may stop riding the wave of optimism that the Fed initiated last week and instead focus on the status of the economy. If personal spending or construction spending weakens more than expected, the Dow could returns its focus on a decline towards 13,700. On the other hand, if the data is actually somewhat optimistic or simply in line with expectations, the equity index could hold aloft and continue its trek towards 14,021.
Terri Belkas is a Currency Strategist at FXCM.