Stalling at Key Levels

It may have been a mixed day for the U.S. dollar yesterday, but there is no question the rally in the financial market is beginning to run out of steam. Currencies and equities have stalled at key technical levels and without a fresh dose of good news, we could see gains turn into losses.   Investors are running out of patience and unfortunately Greece has yet to reach a deal with its creditors and according to the Guardian, the Prime Minister is calling for a crisis meeting, in a sign that the talks may have hit a brick wall.  

The U.S. reported a barrage of weaker economic data yesterday, validating the Federal Reserve’s concerns and raising the odds of QE3. Manufacturing activity growth in the Chicago region slowed in the month of January, bucking the trend of improvements reported in the NY and Philadelphia regions.  The PMI index slipped to 60.2 from 62.2 due in large part to a decline in labor market conditions. The employment component of the Chicago PMI report fell to its lowest level since August.  Although it is encouraging to see manufacturing activity expanding in Chicago, the slower pace of growth dashes hope that the manufacturing sector will lead the U.S. recovery.  The ISM manufacturing index is schedule for release on Wednesday and the pullback in the Chicago PMI index suggest that we may only see a very small rise.   Consumer confidence is also shaky with the Conference Board's consumer confidence index falling to 61.1 from 64.8 in January. 

The problem in the U.S. is that we are seeing a tremendous amount of conflicting reports.  The University of Michigan for example reported the highest level of consumer confidence in nearly a year but today's report from the Conference Board shows Americans growing less optimistic.  While economic data provides little clarity on the outlook for the U.S. economy, there is no ambiguity when it comes to the Federal Reserve's plans for monetary policy.  They intend to keep rates on hold for the next 3 years and are looking for reasons to add more stimulus.  These economic reports may not be enough for the Fed to pull the trigger on QE3 but they certainly validate their decision to adopt a more dovish stance in January.  The Fed does not want investors to be misled by any improvements in economic data because they believe it will be temporary especially given the amount of significant downside risks.  The persistent decline in USD/JPY show that investors have very little appetite for U.S. dollars even though the greenback has risen against the euro.