Those traders setting up for volatility in the majors Tuesday morning were not disappointed after a number of market-worthy indicators lit a fire under the liquid pairs. However, the pick up in market action was not one-sided as soft inflation weighed on rate expectations and retail sales allowed for some level of interpretation.
For the most liquid greenback pair the EURUSD, the initial move was a 50 point rally to 1.2870; but market sentiment evolved into a sharp 80-point drop to 1.2790 support. The USDJPY was not marking as defined levels, but its own 60-point swing lower off of 117.25 support was drawing attention. Weak fundamentals from the UK had the GBPUSD already moving lower in the morning hours. From after-hour sessions resistance at 1.9050, the pairs swing higher fell short of a retest and continued lower for 125 points to 1.8925. Finally, the Swiss franc retested 1.2400 support in the initial dollar move, but the subsequent turn allowed for an 85-point rally for USDCHF.
Indicators were available in abundance this morning in the North American session, a dramatic change from last weeks quiet economic calendar. The greatest amount of event risk running into this session surrounded the producer price index. After the weaker than expected import price report released last Thursday, the market turned its attention to the factory-side report to clarify the inflation outlook. Over the month of October, the average cost of finished goods plunged 1.6 percent, the biggest drop on record; while the annual number dropped by the same percentage for its quickest deceleration in four years.
While economists and traders alike had prepared themselves for further declines in headline reads with energy prices easing through the past few months, the core measurements were more surprising. Excluding the effects of volatile energy and food prices, the monthly print still contracted 0.9 percent, the most since 1993. More influential in the Feds outlook and policy making, the annual pace of growth fell back to a 0.6 percent pace of expansion, a near three-year low. Looking at these numbers in a fundamental context, the easing will weigh on both rate hike expectations and domestic business revenues. For firms, the 1.6 percent drop in final goods prices compares to a lesser 1.1 percent contraction in intermediate prices, suggesting the inefficient pass through in prices to the consumer will weigh on profit margins. More importantly for the currency market, the drop in core prices attacks one of the last bastions of hawkishness among rate watchers. Should todays core PPI figures translate into softer core CPI numbers Thursday, the Feds repetitious warnings over a possible rebound could be dropped while concern for the economy may persist.
Even though the PPI indicator won the tug-o-war of the most immediate and influential market mover at 13:30 GMT, the retail sales report for October played a big hand in the initial move and subsequent rally for the dollar. A surface evaluation of the measurements was bearish as a second monthly contraction was made worse by a hefty downward revision to the previous months figures. The headline retail report fell a less than expected 0.2 percent; but the previous drop doubled to a 0.8 percent, the biggest in over a year. From the other regularly watched measurement of sales excluding autos, the 0.4 percent decline in October was backed by a five-year record, 1.5 percent plunge. On the other hand, a closer examination revealed much of the downward pressure was isolated to a few groups. Receipts at gas stations fell 6.0 percent, while those for furniture shrank 0.7 percent. Elsewhere, vehicle purchases rose 0.6 percent while food sales grew 1.0 percent. Even the indicators released later in the session were offering mixed sentiment. The IBD/TIPP survey of economic optimism reported growth in its economic, personal financial and federal policy outlook components for November. However, even the bullish effects of this report were dampened by a 2.0 percent drop from the total sales component of the September business inventory report. After all the action on todays data, the fundamental excitement will die down somewhat tomorrow before eager eyes fall on Thursdays CPI release.
Weaker price growth didnt overshadow the drop in sales for equity traders Tuesday morning. By 16:00 GMT, the Dow was pacing market-wide declines with a 0.29 percent drop to 12,096.66. The Nasdaq was close behind with a 0.28 percent drop of its own to 2,399.55 while the S&P 500 was quoted 0.24 percent lower at 1,381.04. Despite the economic data flow today, quarterly reports were also moving markets. Home Deport reported a 3 percent drop in third quarter profit, but the initial drop in shares rebounded into a 0.7 percent or $0.26 advance to $36.66. From the retailer sector, Wal-Mart Stores announced its own 11 percent jump in quarterly profit while also announcing a drop in its profit forecast for the year. Wal-Mart shares rose $1.12 for a 2.4 percent advance to $47.44 in response to the announcement.
The bearish leanings in todays data was enough to send treasuries higher. T-notes rose 10/32nds to 100-14 with yields off 4 basis points to 4.568 by 16:00 GMT. Similarly, longer-termed bonds rose 18/32nds to 97-10 as its own yield fell 4 basis points to 4.668.
