Michigan wins at +15% unemployment!

We are told it is all good! Unemployment topped +10% in 15-US states last month. However, Michigan wins the blue ribbon, it surpassed +15%!! It’s the 1st-time that any region has been able to do that in 25-years. Congratulations Auto industry. Remember, the worst of the recession is over!! It’s all about confidence, funds have been placing bets in equities and commodities, they have to put the cash somewhere, but it will be down to the hoarders and the consumer. Will we now let go of the purse strings and put to work whatever cash we have left now that maybe ‘confidence’ is turning positive?

The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in a ‘whippy and again illiquid’ O/N.

On Friday we were treated to a timely surprise and witnessed US housing starts returning to drive 2nd Q GDP. The figures for new home construction surprised the market and recorded a 2nd consecutive monthly gain last month (+582k vs. +562k), which has led to the 2nd Q being better than the 1st by +2.5%. Digging deeper, it’s worth noting that single-family home construction was up +18.2%, q/q, which offset the -30%, q/q, decline in multiples construction to net out to the +2.5% overall gain. Analysts will tell you that single construction has a stronger contribution to GDP than multiples. Despite all the positives, the ’volume’ of construction remains low, and the weight of housing contribution to GDP will be low, not affecting or offsetting other areas of weakness in the economy. A surge in single-family starts accounted for all of the strength in the June housing starts report (+14.4% m/m). Single starts have had 4-consecutive monthly gains. Multi-family starts, plunged -2.58%. Keep in mind that despite that despite single starts being positive for GDP, the question will be, is there enough increased demand to cover the new builds? If not, inventories will aggressively advance higher once again (the scourge of the housing recession) and could depress prices further!

The USD$ currently is lower against the EUR +0.79%, GBP +1.11%, CHF +0.57% and higher against JPY -0.33%. The commodity currencies are stronger this morning, CAD +0.91% and AUD +1.37%. Last week the CAD managed to end a 6-week losing streak and outperform all of the G10 currencies. This morning it has printed its highest levels in 2-months. Investors have raised their bets on higher-yielding assets on the back of the global recession may be easing. Because of the strength of commodities last week, the loonie managed to advance +4.5% vs. the greenback. An improvement in global optimism has encouraged increased risk taking. Despite May Canadian factory sales dropping -6% (double expectation) earlier last week, data south of the border has helped to continue to push the currency higher. Coupled with better than expected unemployment numbers, a more optimistic BOC business survey and a robust real estate sector have the Canadian ‘Bears’ contemplating throwing in the towel. Technically below 1.1144, the currency will once again be back in ‘Bull’ territory. The loonies’ appreciation has been violent and swift. Do not be surprised to see some sort of retracement and USD profit taking this morning, directional play comes from commodities.

The AUD managed to print its highest levels in 2-weeks against the JPY and the USD on the back of Asian stocks and commodities stellar prices. Once again this has boosted the demand for higher yielding assets and reduced the need for risk tolerance trading! Depending on how equities and commodities do in the North American session, some investors are seeing any pull backs as an opportunity to own the currency (0.8126).

Crude is higher in the O/N session ($64.67 up +111c). Last week we saw many variables giving oil prices a helping hand. On Friday, evidence that the worst of the recession may be behind us gave crude prices another boost. Reports showed that construction of single-family homes climbed +14% last June and the total housing starts rose to the highest print in 8-months, helped to push equities higher. Higher equities means higher oil prices. Higher risk tolerance means a weaker USD, equals higher oil prices. A fall in inventories translates into higher oil prices. The ‘black-stuff’ also got a helping hand from Roubini stating that the recession ‘could’ end this year. Both the weekly EIA and API reports showed a bigger than forecasted decline in inventories on the back of refineries increasing their operating rates. Stocks fell -2.81m barrels to +344.5m w/w, vs. an expected drop of -2.1m. Refineries operated at +87.9% of capacity, the most in 11-months. On the other hand, gas inventories climbed +1.44m barrels to +214.6m, the highest in 3-months vs. an expected increase of +0.875m. Oil has retreated 11% from this month’s high. Technically, prices had got ahead of fundamentals in a big way over the past few months, and recent movements seem to have filled in the gap. Of course recent strength is highly dependant on advancing equities. In the O/N session, gold has advanced on the back of higher oil prices boosting the ‘yellow metal’s’ appeal as an alternative investment and hedge against inflation ($946).

The Nikkei closed at 9,395 up +51. The DAX index in Europe was at 5,042 up +64; the FTSE (UK) currently is 4,438 +50. The early call for the open of key US indices is higher. The 10-year Treasury’s eased 9bp on Friday (3.64%) and a further 5bp in the O/N session. Last week was the 1st-time in 6-weeks that treasuries managed to post a losing week. Better than expected corporate earning’s has dragged equities higher and by default managed to reduce the demand for the relative safety of government issued bonds. All seems right with the world this morning!

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