Just when the FX market was ready to write off November inflation as a fundamental compass for the dollar, the producer price index brought the pricing component back to life. Though the reads were a surprise for inflation hawks, anti-dollar positions were adamant in their valuations and cut the greenbacks advances before momentum could stick.
Taking the lead, the EURUSD rallied nearly 100 points since the early European session hours to 1.3180. From there, the short-lived dollar move tallied a 50-point retracement before buying pushed the pair back its highs and then some. Almost identical in its execution, the pound rallied 175 points against the dollar to 1.9655, only to put in a 50 percent swing retracement and give it back. The Swiss francs advance was considerably more gradual as a 95-point drop to 1.2140 was made less with infrequent and strong bursts and more with continuous price action. Finally, USDJPY seems to have found a state of temporary equilibrium as a fourth intra-day touch on 118.35 sets up a congestion top and 117.80 pulls the floor higher for yet another session.
US data mavens are looking to few scheduled economic releases in this final week of full liquidity for the rest of the year; and todays simultaneous release of housing starts and producer inflation may prove to be the height of the flow. Going into the multiple releases, the Producer Price Index was expected to be the least market-moving indicator. However, after blowing through the markets predictions of a modest rebound in inflation, it proved to be a headline grabber. Through the month of November, headline inflation surged 2.0 percent, the most in 32 years; while the core read pulled ahead by 1.3 percent for its own 26-year high. While the latter calculation could rouse expectations of a strong turn in overall inflation pressures, the isolated gains suggest this is not the case. From the various levels of production (from crude to finished goods), price growth was consistently identified in energy groups. Crude energy prices surged 35.8 percent while consumer gasoline jumped 17.9 percent, the most in 6 years. Outside of energy and those groups indirectly related to fuel prices, the changes were mostly modest and consistent with historical changes. One exception was a 13.9 percent increase in the price of light trucks, which may have been more a reaction to the previous months 9.7 percent contraction than a true change in trend. While the PPI is known as a leading indicator in the inflation group, policy members are too firmly set in a wait-and-see mode to adjust policy through this preemptive read. Instead, they will likely defer any speculation and weigh any potential pass through picked up in the consumer-level read.
Initially put on the back burner, but perhaps more distorting to set, currency valuations was the housing data. In November, housing starts jumped 6.7 percent, more than expected, to an annual 1.588 million unit pace. The improvement was welcome to dollar bulls as the housing slump has been among the biggest drains on the US economy. Picking up off of a six-year low 1.488 million pace in the previous month, the improvement lends weight to the NARs forecasts that the housing market is near its bottom. The industry group has forecast a turn in existing home sales through the first quarter and an eventual pick up in new home sales in the final months of 2007. On the other hand, building permits, a leading indicator for starts, actually fell 3.0 percent over the same period to a near 9-year low. Taken together, these two indicators effectively cloud the projection on the second set of data for the day and have ultimately left the currency market to follow through with the mornings initial move. Looking ahead, there are few indicators in the line up until Fridays durable goods report.
Stock markets were soft through much of the morning after the jump in inflation stoked led many investors to put off projections of a near rate cut. The NASDAQ Composite was quoted 0.62 percent lower at 16:25 GMT at 2,420.39. Sticking closer to home, both the Down and S&P 500 were 0.17 percent off their open at 12,420.13 and 1,420.12 respectively. In the tech-heavy NASDAQ index, Oracle Corp. shares were leading the masses. Shares of Oracle slipped $0.76 on a 4.2 percent contraction to $17.15 as news of poor software licensing sales undercut a second quarter earnings report that was in line with expectations. Elsewhere, electronics retailers Circuit City reported a bigger than expected third quarter loss due to aggressive cost cutting. Shares responded by plunging 18.4 percent or $4.19 to $18.57.
Treasuries, like the dollar, were little effected by todays macro economic reads when the dust settled. T-notes were only 1/32nd lower at 100-09 with yields up a basis point at 4.587 by 16:25 GMT. Thirty-year bonds were 6/32nds off at 96-18 while its yield similarly rose a basis point to 4.718.
