The latest U.S. economic reports are suggesting a risk

February 2, 2016

The latest U.S. economic reports are suggesting a risk that U.S. 4th quarter Gross Domestic Product (GDP) may drop to a negative level, after weakness in construction spending and weakness in personal income were reveled in the latest batch of U.S. data. The USD pulled back slightly with stock markets closing slightly lower following China’s lead, and as oil prices gave back some recent gains.

The ECB President Mario Draghi has kept the course that the ECB is prepared to use all available resources to keep the Eurozone on track, while he presented the ECB’s annual report yesterday. The markets seem to be testing the creditability of the ECB President as the EUR continues to hold ground.

The European calendar has German and Eurozone labour market data, Eurozone producer price inflation, the U.K. Construction PMI and Swiss retail sales on tab this morning.

The JPY is seeing some renewed strength as markets shift back into the risk-off mode, which is being led by oil price declines. Falling Oil prices, along with ongoing concerns about slowing economic activity in China, has weighed on most stock markets.

The commodity currencies are under some pressure again, as both the AUD and CAD, showing slight declines versus the USD.

The Reserve Bank of Australia (RBA) left interest rates unchanged at 2.00% during its policy review, but governor Stevens said that while policy will remain data and event driven, “continued low inflation may provide scope for easier policy.” This comment is seen adding to pressure on the AUD in earlier trade today.

The U.S. economic calendar is rather thin today. January auto sales are expected to continue on their solid, near record pace. Weekly chain store sales figures and the February IBD/TIPP economic optimism index are also due. The Fed hawk George will speak on the economy from Kansas City.

Main Macro Events Today

AUD Australian Interest Rate Decision: Reserve Bank of Australia held rates steady at 2.00%, as expected. Governor Stevens was largely constructive on domestic growth, saying that the expansion in the non-mining parts of the economy strengthened in 2015 while employment growth pick-up even while measured GDP was below average. Inflation is expected to remain low over the next year or two. Accommodative policy is appropriate, he said, given these conditions. Low rates are supporting demand, but regulatory measures are working to contain risks in the housing market, he assured. On the exchange rate, he said it “has continued its adjustment to the evolving economic outlook.” The board decided that prospects for continued economic growth were “reasonable,” with inflation close to target. Hence, monetary policy was held steady. Policy remains, not surprisingly, data and event driven as the bank will follow new information to see if the improvement in the job market is sustainable and if “recent financial turbulence portends weaker global and domestic demand.” Notably, Stevens said that “continued low inflation may provide scope for easier policy” should that be needed to support demand.

EUR German Unemployment Data: Confidence indicators may have come off highs, but remain in expansion territory and Markit said companies are sitting on a large amount of unfulfilled orders, which should keep production and employment growth going against global headwinds at least for now. The labor market is improving not just in Germany and the overall Eurozone Dec unemployment rate is expected to fall to 10.4% from 10.5%.

USD U.S. Auto Sales: U.S. light vehicle sales in January are expected to edge up 0.5% to 17.3 mln from 17.2 mln in December. Forecast risk: downward, as there is a chance of a correction after summer and fall strength. Market risk: downward, as weakness could impact the path of rate hikes.

U.S. equities will be in the spotlight today with the corporate earnings calendar reporting from ADT, AMG, Ally Financial, Archer Daniels Midland, Baxter Int’l, BP, Chipotle, CIT, Dow Chemical, Edwards Lifesciences, Emerson Electric, Exxon Mobil, Ferrari, Imperial Oil, Pentair, Pfizer, Sirius, UBS, UPS, and Yahoo!

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