The EUR/USD Consolidates in Oversold Territory

The EUR/USD moved lower but bounced of session lows, remaining in a downtrend that is poised to test lower levels. U.S. yields remain elevated, driving investors into the greenback, which is more attractive than its lower yielding counterparts.  Eurozone March construction output dropped, which reflects a weakening real estate environment.

Technicals

The EUR/USD rebounded making a higher low just below resistance which is an upward sloping trend line that comes in near 1.1835. Additional resistance is seen near the 10-day moving average at 1.1883. Support is seen near the December lows at 1.1773. Momentum is negative to neutral as the fast stochastic recently generated a crossover sell signal. The only caveat is that the fast stochastic is printing a reading of 9, below the oversold trigger level of 20, which foreshadows a correction.

Eurozone March construction output dropped

Eurozone March construction output dropped -0.3% month over month, after already falling -0.7% month over month in both February and January. A very bad quarter for construction, which was of course already reflected in the marked slowdown in overall GDP growth in Q1 and is partly due to the adverse weather conditions and the unusually high number of sick days over the first months of the year.

Italian bonds start to settle as debt write off demand is dropped from the policy plan. La Lega and Five Star said they have virtually completed a government program and the demand for a EUR 250 billion write-off of BTPs held by the ECB under the QE program has been dropped. It still pledges tax cuts, pension reform and a review of European Union treaties. The sections on the EU, deficit spending, a flat tax and immigration will be discussed this morning, alongside the question of who will take the premiership. Reports of the demand for a debt write off triggered a sell off in Italian and other peripheral debt yesterday but things are starting to stabilize Thursday.

UK government has approved plan to stay in EU’s customs union

UK government has approved plan to stay in EU’s customs union, according to a Telegraph report. Cabinet ministers apparently signed off on this on Tuesday in what is reported to be a last resort backstop plan to avoid the imposition of a hard Irish border, which has proved to be a politically monumental obstacle in the Brexit negotiation process. Market participants will be looking for more detail on this.

Initial claims bounced

Initial claims bounced 11k to a still-lean 222k in the BLS survey week from 211k in each of the prior two weeks and a 48-year low of 209k in the third week of April. Claims have tightened sharply into May despite today’s rise, after a bounce to a 242k recent peak in late-March that was attributed to seasonal adjustment difficulties with the moving Easter holiday. Claims are averaging just 217k thus far in May and we assume a 219k cycle-low final average, versus a prior cycle-low average in April of 221k, and 228k in March, and 224k in February. The 222k May BLS survey week reading lies mostly below recent survey week readings of 233k in April, 227k in March, and 218k in February. Continuing claims fell 87K to a remarkably tight 1,707k new cycle-low in the first week of May, just as the insured jobless rate dropped back to the 1.2% cycle-low from 1.3% last week but the same 1.2% in the prior week, as that measure is ratcheting below the narrow 1.3%-1.4% range since last March.

U.S. MBA mortgage market index sank

U.S. MBA mortgage market index sank 2.7% along with a a 2.1% decline in the purchase index and a 3.8% drop in the refinancing index for the week ended May 11. The average 30-year fixed mortgage rate sank 1 basis point to 4.77%, but remains elevated and will be up sharply by about 10 basis points for this week’s data. Refinancing applications hit the lowest level since August of 2008, as rates pushed the envelope to 4.5-year highs.

U.S. April industrial production increased

U.S. April industrial production increased 0.7% with capacity at 78.0%, somewhat better than expected. March production climbed 0.7%, with capacity utilization at 77.6%. Manufacturing production grew 0.5% after a revised flat reading in March, with vehicle production falling 1.3% after a 2.8% gain. Utilities grew 1.9% after bouncing a revised 6.1%, led by a 10.3% gain in natural gas. Mining grew 1.1% after a 0.8% gain in March.