Business-Insider

Analysis by NewstraderFX

A deeper look into the Personal Consumption Expenditures report reveals that consumer spending is slowing at an alarming rate as the housing debacle takes its toll. The spending numbers look even worse when you consider that even though the job market has been weakening, unemployment is still at relatively low levels.

The average monthly increase in spending for Q4 2007 was just 0.1% when adjusted for inflation. The first two months of 2008 (the latest data), shows the average monthly increase to be just 0.05%, a 50% decrease from Q4. However, in downturns such as this revisions to this series are frequently adjusted to the downside, as seen in the month's report which revised Dec. 2007 from 0.0% to -0.1%.

Spending aside, the overall picture of the consumer going forward looks to be very bleak. The savings rate has been negative for 24 straight months, an unsustainable situation that has now come to a head because the consumer's main asset, housing, has depreciated as the real estate market is easily in the worst shape since the Great Depression. The negative wealth effect from the housing bust has been estimated to be around $5 Trillion to this point, which has caused a rise in delinquencies in other forms of consumer credit such as auto loans, student loans, home equity loans and credit cards. So with falling asset values and high rates of debt consumers are not likely to spend, except on the necessities.

Aside from the housing depression, rising layoffs, soaring costs for food and energy and a severe credit crisis have already taken their toll not only on headline Consumer Confidence (as measured by the Conference Board) but in the Expectations Index which is now at a 35-year low (Dec. 1973, 45.2), levels not seen since the Oil Embargo and Watergate. Put this all together and you have the first consumer-led recession since the 1970's.

Don't expect to see J.C. Penney being the only retailer to report weaker sales. The S&P 500 and therefore GBP/JPY can potentially come under renewed pressure this week as most retailers report their March sales, which are not expected to look good to say the least. In January and February, monthly sales at stores open a year (same store sales are considered the most inportant sales indicator) fell at just about every major department store, including Penney, Macy’s, Kohl’s, Dillard’s and Nordstrom.

A forward look at the data for next week suggests the dollar is very vulnerable. Traders will have several opportunities to buy into the rumors of weakened ISM and NFP figures and should those numbers surprise to the downside, expect to see the Euro form a base above 1.60 as the Yen heads towards 95. Manufacturing ISM has the potential to be below consensus based on weakening exports, while the NFP could see job losses of 70,000 or worse, given the rising 4 week moving averages in new and continuing claims.

Technicals-S&P and GBP/JPY Are Still Attached At The Hip

As you can see on the first chart, the S&P made a continuation of the Feb 27 Double Stoch Overbought (DS OB) on Mar 25, which was followed by three days of selling as seen on the second chart (BTW, when the DS OB was given on Feb 27, GBP/JPY closed at 211). Given that the market has been in a huge downtrend and that we still have a DS OB indication, along with the potential to see some really weak-looking data, we would suggest that the market is still vulnerable to the downside. It'll be interesting to see if price eventually closes stoch oversold at a higher price then Mar 10. That would be a DS Oversold and signal an uptrend, but whether that happens or not remains to be seen.

You can see how well the Double Stochastic has indicated S&P (and therefore GBP/JPY) direction-Before the Fed 27 downtrend, the first wave of selling was indicated with a DS OB at the end of Oct. and a second DS OB was made towards the end of Dec. GBP/JPY was at 239.8 on the first DS OB and at 226.95 on the second. With any luck, a DS OS will eventually be given. Fingers crossed.

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