FX: What Spain Budget Delay and Ugly US Data Means

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Based on this morning’s U.S. economic reports, the Federal Reserve has their work cut out for them. The sharp decline in durable goods and downward revision to second quarter GDP were a complete surprise. While none of this data reflects the impact of QE3, they explain why the central bank could not wait any longer to ease this month. A decline in durable goods was expected but no one anticipated a double digit drop as large as the one reported today. Durable goods fell 13.2%, the steepest drop since January 2009. Orders for every single product covered by the report outside of electrical equipment fell last month, but the biggest decline was in orders for nondefense aircraft, vehicles and parts. The data shows that we are not seeing any eagerness to spend by businesses who are being overly conservative because of slower growth. Adding salt to the wound and pressure on the U.S. dollar was the downward revision to second quarter GDP. Since very few economists anticipated changes to the Commerce Department’s third and final release of Q2 GDP, everyone was shocked when they saw GDP growth revised down to 1.3% from 1.7%.

Lost in the shuffle was the improvement in jobless claims, which was actually the most important piece of U.S. economic data today as it provides clues on how the economy could perform going forward. Claims dropped to 359k from 385k in the week of September 15th which is very good news for the labor market. Had claims increased further instead of dropping to a 2 month low, we would be looking forward to a very ugly non-farm payrolls report next week. The drop in claims eases pressure on the labor market and suggests that companies are not as eager to fire or wary to hire as the prior data had suggested. However despite this improvement, the rise in claims this month still points to the strong possibility of even slower job growth in September.

The big story today is Spain who is delaying the release of its 2013 Budget this morning. We are still waiting and hoping that this delay does not mean that the government is trying to figure out how to contain the damage once the Budget is released. Considering that the details have been released for some time now, we are very surprised about what this delay could mean. Is the government doing more / less or planning for an immediate bailout request? The EUR/USD is treading water ahead of this announcement and 10 year Spanish bond yields are slightly lower. With Spanish Bank deposits dropping to its lowest level in more than 5 years, the government desperately needs to shore up investor confidence. Yet the recent protests and riots shows just how challenging this is as more reform will most certainly ignite greater social unrest. After Spain releases its Budget and reform measures, the main question will be whether a sovereign bailout will follow in the weeks or months to come but for now, we are still in wait and see mode.

Kathy Lien
Managing Director

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