To paraphrase Kevin Costner in Bull Durham, we’re dealing with a lot of stuff here. The U.S. economy did end up rebounding in the second quarter, with a 4 percent rate of growth that’s much better than anyone anticipated – and the first-quarter decline was revised to something less horrible, so investors worried about the economy are a bit less freaked out at this particular moment.
Of course, that still means that the economy only grew 0.9 percent in the first half of the year, and that’s not all that amazing, but the economy in the second quarter grew in areas that matter the most – business spending, consumer spending and to a lesser extent government, which was such a drag on GDP for a good long time that can’t be just ignored. In tandem with the GDP figure, the ADP report said 218,000 jobs were added for private payrolls for July, another strong month that portends a good showing out of the Labor Department figures on Friday. That’s all at a time when the housing indicators continue to weaken, which is still a concern, and some even believe that auto sales have probably hit their apex as well for this cycle, given so much of the buying was based on incentives, but we’ll get better clarity on that on Friday.
The good data overall has given the dollar a jolt, continuing a strong run for the U.S. currency that strategists believe will be maintained for some time now. The euro hit a low of $1.3369 overnight and is at levels not seen since November, and the dollar is at one-month highs against the yen.
The dollar in coming days and months clearly will hinge on data and how the Federal Reserve and bond yields react to it, particularly when you see the differential between U.S. and European rates. Spain’s 10-year note yield dropped through the U.S. rate as of yesterday, and Germany’s annual inflation slowed to a 0.8 percent rate of growth, which should keep the lid on the euro. Net short positions in the euro have been increasing, with nearly 89,000 in short positions among speculators as of last week, according to CFTC data, while dollar/yen short positions are slowly being liquidated, dropping to 53,000 last week from about 82,000 in mid-June.
That’s a notable shift, and similar things are happening in sterling; Marc Chandler of Brown Brothers Harriman said this morning that the dollar is “turning,” with the next technical breach on the euro coming around $1.3325, and he says it could fall to $1.3230. Again, the attractiveness of the U.S. dollar when weighed against super-low European yields should keep some funds coming into Treasuries, so the lower-for-longer argument persists, and money will keep rushing in as yields become more attractive – the two year note is now at 0.57 percent, highest since May 2011, and the CME Group’s Fed Watch puts odds on a rate increase by April at 42.7 percent today versus 38.8 percent yesterday.
Money is also rushing into Argentina’s bonds this morning as the talks continue to head off a default, although that’s a bit of a fuzzy situation. Simply not paying bondholders is the definition of a default, while ISDA’s determinations committee is the one that rings the bell on a default for those holding the $1 billion or so in insurance contracts for those who are holding those things. Talks went through all day on Tuesday, and Wednesday will be the day of more and more and more talks as people keep watching this situation with interest.
Investors who like playing some single-share volatility got their wish with Twitter earnings yesterday. The stock is up more than 20 percent following those results, a relief for those who saw the Netflix, Apple and Google releases all come out and fizzle in terms of big moves in individual shares.
Ryan Vlastelica pointed out in a story yesterday that it looks like investors are still expecting bigger moves in Expedia, Tesla Motors, 3D Systems and others, just because while harvesting, or selling, volatility is ok in a market as steady and dull as this one, when it comes to high-growth shares with much of their value wrapped up in their future growth, one never knows. Twitter ranks in Starmine’s bottom decile when it comes to its enterprise value-to-sales ratio and other ratios, so it’s a big bet on growth.