Ahead of the Fed ADP 038 ISM

Neutral to better than expected US data today increase the possibility of the Federal Reserve taking no action this week. Two straight monthly increases in the Chicago PMI and stabilization in US consumer confidence help to further boost equities and work on the side of the “no Fed action” equation.

The Fed is in a better position to “wait and see” than is the ECB. Recall, that the euro is up mainly on last week’s statements from the ECB and not from improving data.

While Wednesday’s FOMC decision is expected to produce no call for action from the Fed regarding QE3, the ECB may reiterate its readiness to restart the SMP, but not as soon as this week.

Spanish and Italian 10-year govt yields are 10-15% off their highs, while G10 equities are only 3-5% below their 2012 highs. Both of these factors reduced the possibility of the Fed announcing any new measures. This has been the modus operandi of the Fed these days. ECB pres Draghi is expected to meet with Bundesbank president Weidmann ahead of Thursday’s ECB meeting/decision. Will it be to discuss the possibility of restarting the securities markets programme to buy Spanish and Italian bonds, a program widely opposed by the Germans.

The worst case scenario would be for neither central bank to announce any new measures, followed by another Friday release of sub-100K reading in the US July nonfarm payrolls. Market jitters could re-emerge as early as Wednesday upon the release of the July ADP survey (private payrolls) expected at 120K from 176K. 90 mins later is the release of the July manufacturing ISM expected to regain the 50 level after 49.7 in June. As long as the ISM does not deteriorate and ADP does not decline below 100K, then markets can expect the Fed has a reason to wait before things “get ugly”.

The challenge then becomes if the ECB shows no sign of intending to deliver upon Friday’s Draghi remarks. The metrics of euro nervousness remain the following:

1. 7.00% in Spanish 10-yr yields, from Tuesday’s close of 6.75%. key support stands at 6.40%m, which is the trendline support extending from the March lows.

2. 6.35-45% in Italian 10-year yields, from Tuesday’s close of 6.08%. Yields are standing just above the 5.85% support, which is a confluence of the 55-WMA and the trendline support extending from the March low.

3. EURUSD still facing next barrier at 1.2380 (trendline resistance extending from late June). The more meaningful barrier follows at 1.2470, coinciding with the 55-day moving average– a technical level not broken since May. Weekly and monthly stochastics remain negative across the board, which suggests that any rallies are seen underpinned below 1.25. Foundation stands at 1.2180, a break of which paves the way for 1.2120.