The euro saw its most substantial recovery in more than a month as London and New York traders took profits on the united currency's five week long decline ahead of the weekend and summer vacations.
The euro jumped higher on short covering at the London open breeching the Tokyo top of 1.3365 with ease and rising to 1.3408 within 30 minutes with the final 20 point run taking just two minutes. The subsequent drop went no further that 1.3376 and shortly reversed back to 1.3398. Through to the U.S. open at 8:30 and then on until 10:00 am the euro kept to a restricted 20 point range 1.3383 to 1.3403.
American statistics began at 8:30 am with second quarter non-farm productivity and unit labor costs, both were better than expected but elicited no market response.
Wholesale inventories and trade sales at 10:00 am were a different story. Inventory build in June, the final month of the second quarter, was 0.3 percent, less than half the forecast of 0.7 percent, and the prior month was revised 0.2 percent lower to 0.3 percent. Inventory build in two of the three months of the second quarter is now less than half the original estimates of economists in the Bloomberg survey.
Inventory accumulation has been an important part of GDP for several quarters. If fewer goods were actually produced than had been estimated for the initial GDP calculation of 4.0 percent, then a negative revision to GDP becomes increasing likely unless some other component of GDP expanded more than estimates. Look for analysts to reduce their predictions for the first GDP revision due out on August 28th.
Wholesale trade sales were also considerably weaker than predictions, coming in at 0.2 percent in June, less than half the 0.7 percent forecast.
Taken together weakness on the wholesale side could foreshadow weaker consumption and retail sales for the economy as a whole. If the poor performance in these business categories does predict a wider slippage in the economy, then the Federal Reserve can be expected to extend its zero rate policy past the mid-year 2014.
The euro responded with its second surge vaulting 1.3400 and peaking at 1.3433, 35 minutes after wholesale statistics at 10:00 am. Following action quickly dwindled to a tight range around 1.3415 (1.3407-20) for all of the afternoon.
The Treasury market took its cues from the continent today. The yield on the generic German 10 year bond fell 8.5 points to 1.05 percent, the all-time low for this instrument. The American equivalent fell 5.75 basis points yesterday to close at 2.4114 percent.
While it was up 1 point today to 2.4203 percent, 10 year yields have returned to levels not seen in more than a year. For 13 months the Fed’s quantitative easing program of asset and treasuries held the yield on the 10-year bond at a historical low average of 1.75 percent.
Chief Market Strategist
WorldWideMarkets Online Trading