Currencies and stocks are starting the New Year with a bang. On the heels of solid manufacturing data from China and an optimistic outlook for the New Decade, higher yielding currencies appreciated throughout the European trading and into the U.S. trading session. The broad sell-off in the U.S. dollar this morning indicates that risk appetite is driving price action in the foreign exchange markets. The Dow and Nasdaq climbed to a fresh 15 month highs as soon as the U.S. equity markets opened for trading and this momentum is reinforced by the strong U.S. ISM data.
U.S. Manufacturing Sector Chugging Along
In the month of December the ISM manufacturing index climbed to the highest level in more than 3.5 years. The details of the report were mostly encouraging with the new orders and employment components increasing. The increase in manufacturing activity should help to ease job losses in the sector. Despite the strength of the dollar last month, the manufacturing sector continues to chug along. The decline in new export orders suggests that the increase in demand could be domestic, which would be a nice change of pace. Also, the widening of the new orders-inventory gap points further increases in activity. The significant rise in the prices paid component indicates that inflationary pressures are beginning to return. Although construction spending declined for the seventh month in a row, the pace of contraction is not as significant as the average decline over the past year.
The big question this week is whether the U.S. Payrolls will rise for the first time in 2 years. Many economists are optimistic and believe that job growth has returned. Although we are skeptical, we recognize that the price action in the dollar reflects this same sentiment. We will reserve our judgment on payrolls until Wednesday's ADP, Challenger and service sector ISM reports after which we will publish our outlook for NFPs.
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