The increasingly important S&P/Case Shiller report of home price indices tumbled 14.1% in Q1 2008 from Q1 2007, showing its biggest decline in the history of the index. The index in 20 metropolitan areas fell 2.2% in March following 2.6% increase in February.
The Conference Board’s consumer confidence index (10 a.m.) is expected to have fallen to a fresh five-year low of 60.1 in May from April’s 62.3. Also meriting close scrutiny is the “Perceptions of Availability of Jobs Index” showing the difference between those considering jobs to be “plentiful” and those considering them “hard to get”. The index fell to -11.3 in April, its worst level since 2004.
New home sales (10 a.m.) are expected to have risen by 0.1% to 527K in April, which would be in line with the increase in existing home sales. An increase is likely to prolong the dollar’s losses against AUD and NZD, while supporting it against JPY.
A not so often reported confidence index is the weekly ABC/Washington Post index due at 5p.m., which has been falling to fresh lows on a weekly basis, with the latest figure at -49.
What are stocks telling us?
Last week’s decline in U.S. stocks is expected to mark the beginning of a slowly evolving decline back towards the March lows following a robust 14% increase over the past nine weeks (S&P 500). The projected decline rests on fundamental as well as technical grounds.
Fundamentally, last week’s revisions in the Fed’s central tendency projections for lower GDP, higher unemployment and rising inflation suggest that the notion of a temporary pause in interest rates may not augur well for renewed macroeconomic weakness and renewed declines in U.S. equities. Put in a more straightforward way, it will be challenging for stocks to sustain their current levels without further Fed easing at a time of rising unemployment and further slowing in economic activity. The Fed downgraded its Q4 GDP growth projections to 0.3%-1.2% from earlier estimates of 1.3%-2.0%, while raising its Q4 2008 unemployment rate forecast to 5.5% to 5.7% from the earlier 5.3%.
Technically, the recent pullback in equities merits close attention as the major indices have conspicuously failed to clear above their respective 200-day moving average and have now broken below key two-month trendline support. The next key support lies at 1,347 in the S&P500 and 12,264 in the Dow.
Euro slips on weak GfK survey
Euro dropped in early European trade after the GfK forward looking consumer sentiment index showed German morale fell to 4.9 in June from a revised reading of 5.6 in May. The report dragged the euro from a 1-month high of $1.5818 to $1.5725. While the euro has rarely shown any durable losses on strong U.S. figures, a consistently strong showing in today’s U.S. figures may drag the pair towards the $1.5720s, but support is noted at $1.5680s. We reiterate that only effective way for extended euro declines is for unexpected weakness in the Euro zone and/or a change of tack in the ECB’s rhetoric.
USD/JPY capped at 104.50
USD/JPY showed earlier strengthening in the absence of event risk and thin post holiday trading. The above chart of U.S. equity indices suggests the medium term outlook for USD/JPY remains negative and sub 103 is the more likely outcome in the next two weeks. We’ll have to see a recovery past 104.75 in order for the bulls to sustain hopes for a protracted climb towards 105.50. Downtrend remains firmly carved, with the 102 objective deemed an inevitability, but a break of 102.70 is first required.
Cable’s top to trigger fresh declines
Sterling drops on the back of EUR losses in the aftermath of weaker than expected GfK survey. Last week’s GBP rally was intensified following the release of hawkish Bank of England minutes, a smaller than expected decrease in UK retail sales and accelerating price pressures in manufacturing and services industries. A closer assessment of these reports warrants no justification for further gains in the British pound beyond the $2.00 level as the demand side on both the consumer and corporate sector remains increasingly sluggish, while the financial market continues to pose risks for British banks as far as the rising cost of LIBOR is concerned. Recall BoE Governor Mervin King told parliament last week he saw the possibility for a growth contraction in 2008, while fellow MC member David Blanchflower, noted for his dovishness, warned of a recession in the event that no significant easing was delivered. Currencies strengthening largely at the expense of others’ weakness, such as GBP and USD, have proven they could not escape their “day of reckoning” when reality sets at the release of the next negative report. Unemployment has risen over the last three straight months, while manufacturing remains in a state of gloom.
$1.9880 proved it could not be broken, thus paving the way for 1.9740 and 1.9700. Upside remains capped at 1.9880, with 1.9920 standing as key obstacle.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
