Short Note on Market Developments

The US dollar is broadly mixed in choppy turnover in the foreign exchange market.  There are four main considerations today.  First is the month-end flows and portfolio adjustments.  They are broadly thought to be negative for the Swedish krona and euro and dollar and sterling positive.  

Second, is the string of European data.  In the euro zone this included a small rise in the number of unemployed in Germany (+9k in September after +11k in August).  Yet at 6.8% unemployment, the German labor market still seems fairly robust, even if not as robust as a few months ago.

The euro zone data also included a disappointing money supply report.  M3 rose 2.9% year-over-year in August, down from a revised 3.6% (from 3.8%) in July.  More important than the quantity of money is what is being down with it.  And here the news is disappointing.  Loans to the private sector contracted by 0.6% on an annual basis.  This coupled with weak sentiment data, softer German inflation data and continued weakness in forward looking indicators means that an ECB rate cut is still a good possibility in Q4, even if not next week. 

Italy's bond auction was well received, as lower yields were generated.  The bid-cover slipped a bit, but  recall that yesterday the German bund sale was not covered.  Italian yields remain higher as do most of the periphery and the ECB reports deposits in Spain fell for the fifth month in August.  Greek deposits also fell.  Of note, French deposits eased, albeit from record highs.  Germany is still apparently the place to be.  

The UK reported Q2 GDP revisions.  The revised 0.4% contraction compares with 0.5% decline in the previous estimate and a 0.7% contraction initially.  The details are poor with nearly every sector contracting.   Household spending fell 0.2%, and exports slumped 1.1%.  Industrial output fell 0.7%, while construction nose-dived 3%.  

The current account deficit blew out in Q2 to GBP20.8 bln.  The consensus was for a GBP12.4 bln shortfall.  The deficit in Q1 was revised to GBP15.4 bln from GBP11.2 bln.  

Third, Spain is to unveil its 2013 budget today.  It is among the first euro zone countries to do so.  It follows on the heels of the early report that showed this year's deficit is likely to overshoot the revised target and last year's deficit, according to local press reports, will be revised up to nearly 10% of GDP from 8.9% as the funds used to nationalize three banks (~11 bln euros) has to be incorporated.  

Fourth, the US economic data may be of some interest, though perhaps not Q2 GDP revisions, which are expected to be minor, leaving the quarterly annualized pace at 1.7%.  The US will also report the annual benchmark revisions to US monthly payroll data and weekly initial jobless claims.  These are important for investors because of the importance the Fed is placing on the labor market, which it feels it can do given that inflation and inflation expectations remain modest.  The US also reports durable goods orders.  The headline may be weak, with the Bloomberg consensus looking for a 5% decline.  This is due primarily to the volatile transportation sector, which if excluded, durable goods may rise around 0.2%, recouping half of the decline posted in July.