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Research Note: Oct. 21 Beige Book Release
Brian Dolan, Chief Currency Strategist
Jacob Oubina, Currency Strategist
Summary Outlook: On Wednesday at 1400EDT/1800GMT, the Beige Book for the Nov. 4 FOMC meeting will be released. Overall, we don't think there has been enough of a material change in the US economy--some components have improved slightly, but overall conditions remain weak--since the last Fed meeting in late September to generate a significant market reaction. More likely, in our view, the market reaction will be a continuation of moves based on stock market direction, which will revolve around 3Q earnings reports. If stocks are embracing risk (gaining), we tend to think markets will interpret the Beige Book more optimistically and seize on whatever bright spots are evident in the report. If stocks are declining, an overall weak outlook in the Beige Book will likely dominate, potentially leading to further declines in risk assets.
Trading Strategy: In light of our mostly neutral outlook for the Beige Book reaction, we will focus on key technical levels to guide our directional views.
EUR/USD:
1.4980/1.5000 is prominent resistance; strength above may see gains initially to the 1.5070/80 area.
1.4850/75 is key channel support for the current move higher; below may signal a broader correction after failing below 1.5000, with initial targets at 1.4750, then 1.4680/700.
USD/JPY:
90.00/10 is both near-term trend line support and the 21-day sma (89.95); below may see to 88.80/89.00 for starters.
91.20/50 is key resistance and strength above may signal to 92.50/70 initially.
Economic Analysis: The current Beige Book will cover economic activity from early September through mid October and we expect most of the key economic components to show a "still weak, but improving" theme.
US consumer spending has improved since the latest go-around. The most recent retail sales report showed control retail sales (excludes gasoline, building materials and auto dealers) rose 0.5% in September after a robust 0.7% gain the prior month. These sequential gains in the beleaguered retail sector will likely show through in the anecdotes of the Beige Book. The concern going forward is whether many of these sales were at the expense of future holiday sales - as discounting remains at an extreme. Additionally, the current run-up in oil prices towards $80 suggests retail gasoline prices could track back towards the $3 mark just in time for the holidays. This surge in gasoline pump prices would mean a non-trivial -$50 billion hit (annualized) to consumer pocketbooks.
The employment situation is likely to be characterized as weak but the Fed will also give a nod to an improving trend in the pace of job losses. The four-week moving average in initial jobless claims has ratcheted down to 532K in mid October from the 573K print at the end of the last Beige Book period. That said, continuing claims remain stubbornly high and the number of folks collecting benefits from Federal and State programs is near a whopping 9 million still. This suggests it is extremely difficult to find a job once one is lost and with employers still slashing hours at a cycle-low -7% YoY, this backlog is only likely to get worse.
Housing data continued to improve, with home prices looking to carve out a bottom sooner rather than later now. Much of this has been due to the first-time homebuyer tax incentive and the fact that the Fed purchases of MBS securities have kept mortgage rates artificially low. The incentive is due to expire at the end of November and this has already caused a blip lower in the latest data. The NAHB (homebuilder sentiment) index showed buyer traffic plunging to 14 in October from 17 the prior month and this tends to lead home sales activity. Also, starts have leveled off as builders wait to see whether the government will extend the housing bailout into next year. The outlook for housing remains tenuous at best.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
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