NASDAQ: Currencies Consolidate, US Data Does Not Eliminate Risk of QE3
After a powerful day in the financial markets and a week of unusually high volatility, all of the major currency pairs are trading slightly lower this morning. Weaker economic data out of Europe and the U.S. along with a disappointing Italian bond auction halted the rally in currencies and equities as investors wonder if the European Rescue Plan is enough to eliminate all of the near term European centric risks in the financial markets. Unfortunately with rating agency Fitch saying that a 50 percent haircut on Greek bonds would constitute a default and MF Global imploding, the European sovereign debt crisis is still not behind us. Before jumping into euro shorts however, there is a lot going on next week that could provide additional support for the markets including the ECB, Fed and G20 meetings while month end rebalancing will require a sale of U.S. dollars.
This morning's U.S. economic reports left a lot to be desired. Personal incomes grew 0.1 percent in September, which was weaker than economists had expected while personal spending rose 0.6 percent. The fact that income growth is trailing behind spending growth indicates that Americans continue to practice the dangerous behavior of spending above their means. The PCE deflator also showed very little price growth last month. Although these numbers are disappointing for the Federal Reserve, they are not significant enough to make the central bank's decision next week any easier. Particularly since the University of Michigan Consumer Confidence report was revised higher. QE3 is still on the table and the comments from policymakers suggests that many members of the Fed are warming to the idea of more stimulus. However we have seen as much improvements as deterioration in U.S. data since the last monetary policy meeting and the recent risk rally should reduce the pressure within the central bank to increase stimulus. In other words, QE3 will be very close call and a tough choice for the Fed next week.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.
