Intraday Market Thoughts:Growth Back in Focus, Aussie CPI Preview

Apprehension about US economic growth and the situation in Europe pull risk assets lower on Tuesday. USD/JPY and USD/CHF were the top performers while USD/NZD and USD/CAD lagged. Australias CPI is the major release of the upcoming session. Premium Trades to be issued at approx 22:30 GMT Previewing the Aussie CPI. Stay tuned.

The planned euro finance ministers summit on Wednesday was cancelled but the EU leaders summit is still expected to take place. The combination points to a likelihood that a bank capital deal is near completion but that no EFSF deal or Greek haircut deal will be reached this week. Germany is also campaigning for an end to ECB bond purchases in the secondary market.

Despite this news, EUR/USD was able to hold above 1.39. Two factors have been supporting this pair. 1) broad reports of European fund repatriation and a curb in USD lending ahead of the anticipated recapitalization announcement. 2) The dollar is growing less attractive as a safe haven because of recent Fed rumblings about QE3.

US economic data was disappointing on every front.

1) consumer confidence plunged to 39.8 from 46.4. A reading of 46.2 was expected.

2) the Richmond Fed was unchanged at -6, missing the +2 consensus.

3) US house prices, as measured by the S&P/Case-Shiller index fell 3.8% y/y compared to the -3.6% expected.

The most troubling number was consumer confidence as it fell to the lowest since March 2009. A reading above 90 has been historically needed to indicate the economy is healthy. There is now a deep divide between sentiment data and real economic performance that cannot continue. Sentiment data is generally a leading indicator and makes us extremely cautious about the US economic outlook at year end.

The S&P 500 fell 2.0% to 1229, ending the day near the lows and futures were quoted lower on earnings misses after the bell.

Asia-Pacific Preview

The highly anticipated Q3 Australian GDP report will be released at 0030 GMT. The market is pricing in a better than 70% chance of a rate cut at the November meeting. The consensus is a 3.5% y/y rise after a 3.6% increase in Q2. Stats Australia recently changed its inflation calculating methodology, putting downward pressure on the Q2 numbers. Normally, the y/y numbers are followed most closely but today it may be better to look at the q/q change. Expectations are for a 0.6% rise (2.4% annualized pace). A fall to +0.4% would cement market expectations for a rate cut and pull down AUD by at least 50 pips.

Other notable economic data included Japans corporate price goods index at 2350 GMT and New Zealand business confidence 10 minutes later.