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Credit Market	Previous	Current	Change	% Change	Outlook *
DJ Credit Default Swaps	112.998	114.450	1.453	1.29%	Deteriorating
10 Year Junk-Bond Spread	660.09	651.31	-8.78	-1.33%	Improving
Credit Card Delinquencies	4.77	4.64	-0.13	-0.13%	Improving
Mortgage Delinquencies	10.06	9.85	-0.21	-0.21%	Improving
US 3 Month Libor Rate	0.308	0.296	-0.01187	-3.86%	Deteriorating
Total Money Market Funds	2797.93	2833.65	35.72	1.28%	Deteriorating

Stock Market	Last Week	Current	Change	% Change	Outlook
Dow Jones Industrial Average	10060.06	10250.4	190.34	1.89%	Improving
Dow Jones Real Estate Index	195.34	202.96	7.62	3.90%	Improving
Dow Jones Financial Index	311.74	316.05	4.31	1.38%	Improving
Dow Jones Retail Index	80.8	83.99	3.19	3.95%	Improving
S&P Volatility	26.7	24.31	-2.39	-2.39%	Improving
Put-Call Ratio	0.87	1.82	0.95	0.95%	Deteriorating
Market Breadth (Adv - Dec)	0.4183	0.5157	0.0974	9.74%	Improving

Economic Indicators	Previous	Current	Change	% Change	Outlook
GDP (Annualized)	2.8	1.6	1.6	1.60%	Improving
Mortgage Applications	4.9	2.7	2.7	2.70%	Improving
Initial Jobless Claims	468	473	5	1.07%	Deteriorating
Consumer Confidence (UMich)	74	67.8	-6.2	-8.38%	Deteriorating
ISM Manufacturing	55.5	56.3	0.8	1.44%	Deteriorating
ISM Services	53.8	54.3	0.5	0.93%	Deteriorating
ISM Services - Employment	49.7	50.9	1.2	2.41%	Deteriorating

An Improving outlook means the Federal Reserve could use this indicator

to support a rate hike. The opposite stands for a deteriorating outlook.

The Economy and the Credit Market

It is always good to step back from the day-to-day changes in the markets to put price action into context. While this past week has seen a number of instances of volatility expansion for the US dollar, the currency has actually strayed little from a general state of congestion. The same assessment can be applied to other capital markets; and from this unique correlation, it less of a stretch to suggest that the optimism that underlies the global financial markets is still responsible for the greenback’s future. That being said, US fundamentals developments have a leveraged influence on sentiment and even the dollar’s place on the risk spectrum. Of particular interest this past week were the revisions to the US 2Q GDP reading and the minutes of the Federal Reserve’s August monetary policy meeting. The deflation in the initial economic performance report bolstered the threat of a stalled recovery – so much so that there is a growing argument that the government is preparing a second stimulus initiative before the first round has been removed. The Fed’s statement similar fed speculative concerns over the future health of the economy with lowered second half growth projections; but there was also a long-term burden set upon the currency’s safe haven status as the central bank reflected on their decision to curb the withdrawal of monetary support and consider further expansion – a move that would devalue the dollar long term. Looking ahead, we are simply awaiting the next catalyst for risk appetite because that is the most volatile ingredient.

Dollar_Outlook_Stalled_by_Aimless_Risk_Trends_Feds_Concerns_body_Picture_1.png, Dollar Outlook Stalled by Aimless Risk Trends, Fed’s Concerns

A Closer Look at Financial and Consumer Conditions

Dollar_Outlook_Stalled_by_Aimless_Risk_Trends_Feds_Concerns_body_Picture_7.png, Dollar Outlook Stalled by Aimless Risk Trends, Fed’s Concerns

The Federal Reserve’s move to prop up the markets by purchasing Treasuries could be construed as a safety net that will stabilize the capital markets – and why not considering it worked the first time around. However, the extension of additional stimulus and the policy group’s hints that further expansion is a viable option is actually a sign that conditions are deteriorating and that such methods were ineffective the first time around. That being said, speculators will be comforted by what they will as long as capital returns are possible. As the market as a whole looks for a catalyst to define an undisputable trend of risk position building or unwinding, pricing will be kept on hold. A vigil should be kept on Europe, China and US financial health.

Dollar_Outlook_Stalled_by_Aimless_Risk_Trends_Feds_Concerns_body_Picture_10.png, Dollar Outlook Stalled by Aimless Risk Trends, Fed’s Concerns

It is difficult to argue that the economy is stabilizing or improving given last week’s data. First, the second quarter GDP revision brought a significant slowing in activity levels from the first three months of the year; and the breakdown of the details suggest there is little opportunity for a quick or meaningful reversal through the second half of the year. To ensure that this cannot be misinterpreted, the Fed explicitly stated its outlook for the second half of the year was lowered and that negative risks had increased substantially. Nonetheless, it seems the masses are placated by the fact that the GDP reading was better than its forecast, policy officials’ willingness to support the economy and even a standalone performance from manufacturing. We will see if reality dawns with Friday’s NFPs release.

The Financial and Capital Markets

Risk appetite has oscillated widely over the past week; and price action has responded in kind. However, this back and forth has actually prevented a clear development in price and speculative trend for one direction or the other. The scheduled data that was available for interpretation has been largely disappointing; which would leverage selling pressure if risk aversion were the dominant force in the market. Instead, the masses are hesitant to bite the bullet and unload their positions. Part of this ill-developed stability can be attributed to the existence of heavy event risk ahead. The US non-farm payroll report due on Friday carries enough of a threat for volatility that traders will avoid making major changes to their portfolio unless forced to. Another intervening force in this equation is the hope derived from the promise of a rising wave of stimulus. The Fed has joined the ECB, BoE and BoJ in extending the safety net underneath the market much like they did in 2008. The possibility of easy money is enticing when significant returns are hard to come by outside of capital gains. Will this leverage actually hold over investors’ confidence? Unlikely. But timing is just as important a factor in trading as direction.

Dollar_Outlook_Stalled_by_Aimless_Risk_Trends_Feds_Concerns_body_Picture_4.png, Dollar Outlook Stalled by Aimless Risk Trends, Fed’s Concerns

A Closer Look at Market Conditions

Dollar_Outlook_Stalled_by_Aimless_Risk_Trends_Feds_Concerns_body_Picture_16.png, Dollar Outlook Stalled by Aimless Risk Trends, Fed’s Concerns

The swings in the benchmarks of the capital market this week have been significant; but through it all, we have seen a general bear trend develop over the past month. However, our concern should not be direction – as it has been otherwise restrained to congestion – and instead focus on the intensified correlation between the different assets. We see here the step by step moves that equities and commodities make together. Such a significant relationship suggests there is a common concern within the speculative crowd. Furthermore, the intensity of the link is remarkable given the lack of overall trend. This in itself could be a sign of a forthcoming trend.

Dollar_Outlook_Stalled_by_Aimless_Risk_Trends_Feds_Concerns_body_Picture_13.png, Dollar Outlook Stalled by Aimless Risk Trends, Fed’s Concerns

Yet another week goes by where the traditional measures of risk are underpricing the level of uncertainty that exists for the future. We see that the increased frequency of swings in spot markets has increased volatility readings; but as sources of premium for uncertainty, these measures are proving themselves to be more definitively backwards looking (to a period where price action has not strained from a band – whether it be horizontal or come with a bias). However, from measures like Libor spreads, the Treasury yield curve, the TED spread (the difference between market and Treasury rates), default premiums, liquidity measures, stimulus expansion and other structural signs; it is clear that conditions are deteriorating.