Market Drivers for October 1 2014

AU Retail Sales disappoint

EZ GE and UK PMI all miss forecasts

USD/JPY takes out 110.00 but retreats

Nikkei -0.56% Europe 0.01%

Oil $91/bbl

Gold $1206/oz.

Europe and Asia:

AUD AU Retail Sales 0.1% vs. 0.4%
EUR GE Final PMI 49.9 vs. 50.3
GBP UK PMI Manufacturing 51.6 vs.52.6

North America:

USD ADP 8:15

USD ISM Manufacturing 10:00

The dollar extended its gains in Asian and early European trade today as a series of disappointing economic releases from across the G-20 universe highlighted growth differentials between US and the rest of the world.

In Australia the Retail Sales Report printed at 0.1% versus 0.4% eyed. There was a slight pick up in spending in food retailing and cafe and restaurants but it was offset by the declines in department store shopping. Overall the data shows only very modest demand from AU consumers with today recording the weakest reading in three months. Nevertheless consumer spending continues to expand albeit at a glacial pace and today report marks 15 out of the past 16 months that Retail Sales have risen in Australia.

The release initially pummeled the Aussie with the pair sliding to test support at 8660, but it slowly rebounded throughout the night as bargain hunters swooped in. The pair remains in strong downtrend as the shift out of the carry trade continues, but it has now become grossly oversold and with its 2.5% yield unlikely to be reduced any further, the Aussie is slowly starting to attract some income investors. The economic situation in Australia remains moribund as demand from China has clearly slowed, but the over economy is not contracting and that dynamic is likely to keep the RBA in a neutral policy stance for quite some time.

In Europe the news was also dour as Final German Manufacturing PMI showed that the manufacturing sector in the region’s largest economy slipped into a recession. The data printed at 49.9 versus the initial flash reading of 50.3 as slowdown in Europe and continued tensions with Russia weighed on demand.

Finally PMI Manufacturing in UK also declined more than expected, falling to 51.6 versus 52.7 eyed. This was a 17 month low as new orders dropped to 50.5 versus 52.4. UK Manufacturing remains in an expansion mode, but just so and it has clearly slowed since the peak at the start of this year, casting doubt on whether the BOE will hike rates in Q1 if 2015. On Friday the market will get a glimpse at the much more important UK PMI Services report which ay provide more insight into the state of the UK economy.

In the meantime, all eyes will turn to today’s ADP report which is due at 12:15 GMT.. The market anticipates a 207K reading which if true could help the greenback extend its rally as it will confirm the strength of the US economy. USD/JPY has already popped above the 110.00 level in afternoon Asian session trade, but the pair has retreated from that level as traders await the US jobs estimate. A number above 200K could unleash a second wave of buying in the pair that could push it conclusively higher above the 110.00 figure.

However a miss in ADP could quickly reverse the overnight moves. The currency market is very long dollars with sentiment now almost universally bullish towards the buck. A weaker print in the ADP would suggest that US growth may not be as robust as the market thinks and that could trigger a profit taking rally as traders begin to rethink the Fed tightening hypothesis. With majors now so heavily oversold against the dollar the chance of a short covering squeeze has risen markedly.

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