Another -73k job cuts yesterday (Caterpillar, ING, Home Depot) …and counting!!

The Job cuts keep on coming, the breath is staggering. Global policy maker’s number one priority is to ‘buy a job’ and give deeper breaks for the middle classes. Economies need people to spend, and spend sooner. We need people to adjust their psyche, despite the short term pain there will be a long term gain for everyone! Surprisingly this morning, the German business confidence indicator advanced for the first time in 8-months after the ECB lowered interest rates and the government doubled its economic stimulus package to fight the recession. Maybe, just maybe, with risk appetites beginning to heighten in Forex-land, we could be turning a corner….not sure which one, but, a corner!

The US$ is weaker in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

Finally US data surprised to the upside yesterday and beat the street’s expectations (+4.74m vs. +4.40m). Sales of previously owned homes in the US jumped from a record low; all of this can be attributed to the biggest slump in prices in over 50-years. The housing market remains weak despite sales advancing +6.5% from Nov. The trend remains bearish even with deeper discounts and record foreclosures adding some support to sales. However, Sales are down -3.5%, y/y, while re-sales averaged +4.91m in 2008, down -13% from a year earlier (the lowest print in 11-years). But, more optimistic was the number of previously owned un-sold homes on the market at the end of Dec. It now represented only +9.3-months’ worth (at current sales pace), down from +11.2-months’ in Nov. However, the window of optimism has given investors the green light to temporarily abandon risk aversion once again!

With the FOMC meeting this week, what are we to expect? Last month they slashed rates to ‘near zero’ and if it was still possible they would have continued along this vein, but, negative rates are hardly an option! Thus, the introduction of quantitative methods and during this meeting they will need to once again emphasize the importance of these methods. Up to now, interest rate changes have been their most ‘powerful and clear ‘message to capital markets. But, the growing list of ‘liquidity programs’ present a tougher task to sell to the public. Their primary objective should be to deliver a message that convinces the masses that they still have some innovative tools in their arsenal at their disposal to support a financial and economic recovery. Whatever they do or say they cannot afford to lose the confidence of the investor. So this week, one should expect Bernanke and Co. to emphasize specific areas of improvement in the financial markets being a direct result of ‘non-traditional’ Fed tools, if delivered correctly, they get to fight another day!

The US$ currently is lower against the EUR +0.63%, GBP +1.38%, CHF +0.07% and higher against JPY -0.67%. The commodity currencies are stronger this morning, CAD +0.46% and AUD +1.18%. USD dollar bulls remain backed in a corner which has lent support for the loonie and commodities of late. Last week, many speculators were caught flat footed with the CAD$ move. The recent strength for the commodity currency may be attributed to various variables, apart from the obvious, robust commodity prices (see below), whispers of M&A transactions with specific dealers pre-dealing the transaction probably took place. Fundamental data of late has been very disappointing, but the Governments announcement of their expected deficit numbers ahead of today’s budget, pales in comparison with so many economies, has made the currency much more attractive (government deficit of $30B next year). Despite recent slumping fundamental data, the loonie remains little changed ahead of the Governments announcements this afternoon. The unknown political layout, with Prime Minster Harper’s Government under constant threat of a coalition backlash may temporarily underpin the Canadian dollar move upwards. With Governor Carney cutting borrowing costs last week by 50bp as expected to 1%, traders continue to bet that the BOC will repeat their actions next month and then remain on hold for the remainder of the year.

The AUD dollar has risen in the O/N session for a number of reasons that has affected investors risk appetite. Firstly, the government contemplates a bigger stimulus package to kick start their economy. Recently a loss in global equity markets has convinced investors to shy away from higher yielding currencies, but, the improvement in US home sales and Barclays announcement that they will not need further capital increases has given the investor confidence to own higher yielding assets for now (0.6659).

Crude is higher O/N ($47.01 up +128c). Oil briefly printed a three week high this morning, but is expected to find it difficult to maintain its recent bullish momentum. Crude ended last week on a high note as investors speculated that global stockpiles would decline when OPEC fully implements its promised production cuts. Investors have aided crude whilst purchasing commodities as an alternative to equities and government debt. It is expected that OPEC will curb supplies by -5.4% this month to +26.15m barrels a day. Crude climbed +9.2% last week, which pushed prices up +4.2% for the year. But, it’s expected after these cuts that it will take a few months to rid this excess supply. All this despite last weeks anticipated EIA report. As anticipated it rose for the 15th time out of the last 17-weeks last week. Inventories rose +6.1m barrels to +332.7m, the highest level since Aug. 2007. Analysts had expected stocks to rise by +1.4m barrels. Refineries have reduced operating rates by a further -2% as fuel consumption erodes. Refineries operated at 83.3% of capacity, the lowest for the week in 18-years. The 4-week weekly averaged +19.4m barrels a day, down -4.7%, y/y. Gas stocks also increased significantly, they jumped +6.48m barrels to +220m vs. an expected rise of only +1.8m barrels. Demand destruction has thus far led to the -47% decline y/y. Last week OPEC said that demand for its black-stuff will decline -4.2% this year as the recession in the US, Europe and Japan curbs fuel consumption. It’s expected that consumption of OPEC’s oil will shrink -1.4m barrels a day to +29.5m barrels. Be weary of these lofty crude price heights, a deep global recession will continue to push ‘demand destruction’ to the fore! Once again Gold advanced aggressively yesterday and printed a 3-month high, as global investors seek a safer heaven asset class and purchase the yellow metal as a store of value. This morning speculators have taken some of last weeks profit off the table, the commodity remains better bid on pull backs ($894).

The Nikkei closed 8,061 up +378. The DAX index in Europe was at 4,346 up +19; the FTSE (UK) currently is 4,191 down -18. The early call for the open of key US indices is higher. The 10-year Treasury yields backed up 2bp yesterday (2.64%) and are little changed in the O/N session. The front end of the US yield curve is better bid, while the 2’s-10’s spread remains unchanged at 182bp. Unlike longer maturities, where a great deal of supply is expected this week, supply continues to weigh on longer debt product who managed to have the biggest weekly loss in over 20-years last week. Long bond yields rallied +43bp over the last 5-business days ahead of the new issued debt. New head of Treasury Geithner will oversee issuance of as much as $150b of notes and bonds over the next three weeks. Despite the record supply, it’s anticipated that the auction will be well received as investors seek a ‘flight to quality and a flight to liquidity’, because of Former Treasury Paulson inability to restore confidence in the financial system.

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