Difficult to Discern Signal in Today's Price Action

There are a number of conflicting forces that are obscuring whatever signal the market is generating today. The US dollar has firmed in the European afternoon/NY morning. This would seem to be consistent with the risk off following the poor US data that included the third consecutive sub-50 reading on the manufacturing ISM, something that has not taken place since May-July 2009. At the same time the US reported an unexpected and sharp decline in construction spending (-0.9% vs expectations of a 0.4% rise).

Yet if the poor data increases the risk of new asset purchases from the FOMC next week, it does not appear to be reflected in the Treasury market, where, if anything, yields are slightly firmer, which is all the more unusual given the slide in equity prices today.

Meanwhile the VIX gapped higher today and is at its highest level in a month, just below 19%. Yet, the higher VIX has not led to higher implied vol in the euro, despite the relatively strong correlation (0.91 correlation over the past 60 days on the level of each). Three-month implied euro vol is slipping below 10% for the first time in a week.

Sterling is holding it own against the greenback following the unexpected early release of the CIPS service PMI, which was due out tomorrow. As it turns out, it was well above expectations at 53.7, the highest since March after the 51.0 reading in July and expectations for only a small uptick. Recall that earlier today the construction PMI (admittedly covering a much smaller part of the economy) was below 50 for the second time in 3 months). Late yesterday, the BRC reported that like-for-like sales (year-over-year) fell 0.4%, suggesting little if any help from the spillover from the Olympics.

The BOE meeting this week is being overshadowed by the ECB meeting the same day and the US jobs figures the following day, which is seen as key to what the FOMC decides next week. Moreover, the current gilt purchases program has another two months to run so extending it is more a signaling of intent than substantive. A rate cut is a possibility, but as the on balance is not expected given the financing for lending scheme.

Comments from Draghi, leaked from his private presentation yesterday to the European Parliament, encourages participants to expect the ECB to buy 2-3 year bonds and this sent Italian and Spanish 2-year yields sharply lower (~25 and 45 bp respectively). The Italian 2-year yield is below 2.5% for the first time in six months. Spain's generic 2-year yield is near 3%, the lowest since the first half of April.

The Australian dollar recorded a marginal new session low in the North American morning, completely unwinding the gains scored in the wake of the RBA decision to keep rates steady and issue a relatively neutral statement.