EZ unemployment declines slightly to 7.8% from 7.9% EZ PMI in line but employment off UK PMI slips but well above 50 US Calendar busy with PCE and Personal spending Paulson speech to be watched carefully
Currency markets continued their quiet trade for the second day in a row as the dollar remained firm in Asian and European trading despite near universal pessimism from the analyst community about the prospects of another rate hike from the Fed at the August 8th FOMC meeting. We on the other hand believe the jury is still out on that issue and tend to agree with St Louis President William Poole that odds are 50-50 rather than the decidedly lower forecasts suggested by the Fed funds futures rates.
Yesterdays stronger than expected Chicago PMI numbers and the possibility of an upside surprise in todays ISM release may cast doubt on the conventional wisdom view that the Fed rate hike cycle is done, especially if both personal income and the PCE data report higher than expected results as well. The relatively buoyant consumer sentiment numbers last week were one of the surprising aspects of recent US economic data. If record US corporate profits are finally translating into meaningful wage increases for US workers, the resultant rise in personal income and spending may prove that the fears of a massive slowdown in US economic activity are a bit premature. In short the currency markets, much like the Fed remain data-dependent for a while longer.
In economic news, the Eurozone Manufacturing PMI reported essentially in line expectations. French data registering an improvement from the month prior while both Germany and Italy declined slightly. One sour note in all three releases was the decline in the employment component which slipped 0.8 from 53.1 to 52.3. The news suggests that EZ manufacturing recovery continues apace but the recent appreciation of the euro may be serving as a brake on future growth. Overall the data was certainly strong enough to believe that the ECB will hike rates by 25bp this Thursday, but it was not impressive enough to seriously contemplate the possibility of a second rate hike by the central bank at another ECB meeting at the end of the month.