The S&P/Case Shiller Home Price Index shows further declines after the August composite 20-index tracking 20-major cities fell 4.4% year over year, posting the biggest decrease since the series began six years ago, following a 3.8% decrease. The index has fallen for the past straight 13 months.
The 10 am release of the Conference Board’s consumer confidence is expected at 99 in October from 99.8. The present situation and expectations subindexes fell last month, reaching 121.7 and 85.2 in September from 130.1 and 89.2 in August. The jobs outlook (percentage of those reporting jobs to be “plentiful” minus percentage of those reporting jobs “hard to get” also weakened in September reaching 3.6%, from 7.8% and 11.3% in August and July.
Yesterday we laid out case for agreeing with market expectations of a 25-basis point rate cut in the Fed funds rate to 4.50%, along with a 50-bps in the discount rate to 4.75%. We did not address the possibility of keeping rates unchanged, whose chances are at zero. While the arguments for easing are well manifested in the broad deterioration in housing measures and emerging weakness in labor market (rising unemployment and net job losses in manufacturing, construction and retail), by default the case for keeping rates on hold is weak, considering the lingering credit threat and impending threat of faster housing erosion and prolonged layoffs beyond the housing and finance industries.
The argument that further rate cuts would endanger the inflationary repercussions of a weak dollar has not evidenced itself in the data, especially as U.S. trade partners have been reluctant in raising prices to an already weak U.S. import demand and a falling dollar. Thursday’s release of the annual core personal consumption expenditures (PCE) index is expected to show the figure below 2.0% for the fourth consecutive month. Due to these reasons and the risk of exacerbating fresh turmoil in capital markets, the Federal Reserve cannot afford to keep rates on hold.
EUR/USD to consolidate above $1.4350 EUR/USD continues to consolidate within the 1.4370-1.4420 zone as traders remain on the sidelines ahead of Wednesday’s FOMC announcement. Further weakness in the home price index is likely to keep the currency supported but the market is increasingly aware of the risks that a 25-basis point cut may end up weighing on EUR/USD in the event of accelerated losses in equities amid a sharp decline in risk appetite. Support is seen holding 1.4380, followed by trend line support at 1.4350, which is also held by the 38% retracement of the move from the 1.4220 low. Upside is capped at 1.4420, followed by 1.4450.
USD/JPY unable to break 115 as pattern repeated The USD/JPY repeated pattern of staging gains early in the US session followed by a retreat in Asia and a subsequent recovery in Europe may suggest that the pair will test the 115 figure in the short term.
Traders must heed the fact that despite yesterday’s gains in the S&P 500, the VIX index did end up modestly higher on Monday. More interestingly, the index recovered from an intraday low of 16.94 to a session high of 20.24 before closing at 19.87, a bullish sign for the bearish indicator.
We do warn renewed declines in USD/JPY and other yen crosses as well as unwinding of high yielders as Moody's heads off a new wave of credit downgrades of mortgage-backed securities. Recall the sharp declines in USD/JPY when Moody’s began downgrading over $50 billion in mortgage-backed securities three months ago. The credit rating agency is now expected to resume downgrading securities linked to those previous assets. The announcement from UBS warning of prolonged subprime losses after having already warned of losses in Q3 is also expected to weigh on risk appetite. Upside risks capped at 115.20, at which point will push the pair lower towards 114.60. Support starts at 114.40, followed by 114.00.
Sterling breaks $2.0650 despite weak housing data Sterling shrugs weak housing data, gaining across the board as risk appetite remains intact. UK house price growth continued to weaken when the Hometrack survey showed a 4.4% rise increase in the year ending in October following a 5.0% rise in September. It was the lowest rise in 13 months. The Hometrack survey showed the biggest price were in the hot property markets of London and nearby counties. Properties ready to be sold lasted an average 7.4 weeks on the market from 6.9 weeks in the September survey, the longest since February 2006.
We continue to recommend cautiousness with sterling as excessive risk appetite implies the threat of a sharp correction ahead, especially considering latest evidence of slowing housing and next week’s BoE inflation report. Support stands at 2.0620, followed by $2.0560. Upside capped at $2.07.
Ashraf Laidi Chief FX Analyst CMC Markets US a.laidi@cmcmarkets.com
