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By Gaurav Kashyap, Head of DGCX Desk at Alpari ME DMCC
Bearing dovish undertones, Bernanke stated that the drastic drop in the unemployment rate will need to be supported by continued economic growth. He further described the job market as far from normal and that accommodation would be required to see those big gains in US jobs.
He maintained that it is unclear if the pace of current job growth can be sustained and the Fed must remain cautious and see how the economy develops. The speech immediately stoked speculation that more quantitative easing measures were on the way and this resulted in a US Dollar selling frenzy with the high beta currencies and Gold experiencing a nice wave of buying. Bernanke's comments are in stark contrast to his earlier stance on easing measures and Monday's comments hint that there may be a divide within the Fed on to QE or not to QE.
Markets positioned for more support measures from the Fed
Judging by the markets rather optimistic response to the speech, they could be positioning themselves for more measures from the Fed.
The EUR traded in a 200 point range this week against the Greenback, establishing a floor at 1.3000 with the ceiling holding strong at 1.3350 levels. The common currency fluctuated in this range; any gains as a result of Bernanke's speech on Monday were kept in check as fresh doubts regarding the capitalization of Italian lenders and unrest in Spain over the expected budget shook European bond markets.
Thursday's announcement that UniCredit (Italy's largest bank by assets) and Monte dei Paschi di Siena (Italy's third largest bank by assets) were expecting a weaker outlook for 2012 saw the yields on the Italian 10-year bond hit a one month high at 5.32%.
And as if a weakening capital base of Italian banks wasn't enough, Thursday's general strike in Madrid further weighed in on EUR longs. With the Spanish government expected to announce a new 2012 budget which includes up to €17bn of spending cuts and tax hikes, the resulting unrest saw the yield on the Spanish 10-year widen to as high as 5.54%, taking the EURUSD to a low of 1.3256. The recent news flow from two of Europe's most susceptible nations reminded markets that despite Greece's best efforts of additional funding, underlying structural issues still continue to weigh in on risk sentiment.
Germany positive on falling unemployment rate
On a bright note out of Europe, a well balanced round of economic data from Germany this week showed that the nation has steered itself through a rather soft patch of growth figures from the past few months. Unemployment data from this week showed that jobs growth continues to be on the rise in Germany; unemployment dropped by -18K (Exp -10K, previously 0K) taking the overall unemployment rate to 6.7%, the lowest since 1990.
In a stark contrast to Spain, jobs growth in Germany has been spurred by local domestic demand which has a positive effect on consumer spending in the nation. Earlier in the week, a slew of German economic surveys reinforced the outlook for German prospects; German IFO for business climate increased to 109.8 (Exp 109.6, prev revised up to 109.7), IFO for current assessment increased to 117.4 (Exp 117.0, prev revised down to 117.4) while IFO expectations came in at 102.7 (Exp 102.6, prev revised up to 102.4).
Also on the economic calendar, Eurozone consumer confidence worsened to -19.1, Exp 19.0, Prev -19, while economic and industrial confidence also worsened to 94.4 and -7.2 respectively. Year-on-year Eurozone consumer prices, a measure of inflation, came in at 2.6%, below last month's 2.7%. With the pricing of the non-core components slowing down, the drop was largely expected.
Across the Atlantic, a run of data from the US left markets rather uninspired. Weekly jobless claims came in a touch higher than expected 359K, Exp 350K, prev revised up to 364K while durable goods orders bounced back, but came in lower than expectations (2.2%, Exp 3.0%, prev 3.6%). Thursday's US GDP reading was unchanged at 3.00%. EURUSD managed to close the week on a bright note, after it was announced on Friday that Euro-zone finance ministers agree to boost the bailout lending facility to €700b. In the short term, the announcement had a calming effect on European bond markets and provided a nice boost to risk sentiment to see the week close in the green.
Staff
