US double dip indicators to remain strong

This morning, US housing starts are expected to show a further fall-off in demand after the expiry of the homebuyer’s tax credit. Without the US government’s artificial support, the housing market is struggling to stand alone. The fall in the US housing index yesterday is further proof that demand for new homes has weakened further. Other releases should provide stronger evidence that the housing market is ‘now enduring a double-dip in activity and eventually prices too’. This is in stark contrast to China, who is expected to ramp up the pace of infrastructure spending and ‘tone down the severity of curbs on the property markets’ to concentrate on fueling their domestic consumer demand. Markets remain lackluster, waiting for Helicopter Ben’s HH tomorrow and the release of the EU stress tests this Friday.

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

The US housing sector is odd’s-on to enter another double dip. With the previous crash leaving activity at such low levels analysts believe that the sector is now much less important to the wider economy. Yesterday, we witnessed US home builder’s confidence falling again (14 vs. 16), not equaling record lows just yet, the worst of the housing numbers have yet to come. Digging deeper, the number of prospective home buyers touring again fell, further evidence of a likelihood of more declines. Each of the housing market index’s sub-components recorded declines this month. Current sales fell two points to 15, while future expectations (over the next 6-months) softened one point to 21. The underlying market conditions have not changed. Builders are seeing ‘cautious home buyers, tight consumer credit, and continuing competition from foreclosed and distressed properties that are priced below the cost of construction’. If one included the expiration of the homebuyer incentives and a weak job market, there is little or no reason to invest in a new dwelling just yet.

The USD$ is lower against the EUR +0.30%, GBP +0.30%, CHF +0.31% and JPY +0.02%. The commodity currencies are stronger this morning, CAD +0.41% and AUD +1.02%. It’s D-Day for Governor Carney at the BOC. It’s widely expected that Canadian policy makers will hike their key interest rates by another +25bp to +0.75% this morning. However, to some, it’s not a ‘slam-dunk’. Carney was very transparent last month in indicating that the ‘first rate hike should not be misinterpreted as a signal that a succession of rate hikes was now inevitable’. The statement issued in early June cautioned that ‘given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments’. Some will argue that with signs of a significant slowdown is underway in the US, thus it is possible that the BOC may be persuaded to move back to the sidelines. On this go-around, it’s a tough pill to swallow as the domestic economy is still expanding rapidly and employment growth has been extraordinarily strong. The market has priced in hike today and another +25bps in Sept. At +1%, Carney has the latitude to step back and assess global growth for the 3rd Q, which in fact could persuade policymakers to ‘skip a beat’ and pause, so that they do not get too far ahead of their southern neighbor. Longer term speculators continue to wager bets that the CAD will outperform other economies whose monetary policy is expected to experience a prolonged period of near-zero benchmark rates.

The AUD found favor in the O/N session, rallying as Chinese stocks climbed for a second day on speculation that the government will relax policy tightening measures. It’s expected that Chinese’s domestic consumption will expand at a ‘relatively fast pace and become the most important element of growth in the country’. China is Australia’s largest trading partner. Also aiding the currency was the market fear that the BOJ would intervene and sell JPY. Minutes of the RBA’s July meeting showed that policy makers plan to use the results of EU bank stress tests and local inflation figures to decide whether to resume the most aggressive round of interest-rate increases. Governor Steven’s also indicated that the election would not impact the Aug. 3 interest-rate decision and that the medium-term picture for Australia is ‘fairly positive’. Policy makers are ‘reinstating their view that domestic growth will be about trend’ and are ‘not alarmed by the global demand backdrop’. In retrospect, policy makers remain ‘very upbeat’. Because of equities actions, the market is a cautious buyer on pullbacks, wary that the recent strong rally technically may be overdone (0.8780).

Crude is little changed in the O/N session ($76.85 up +31c). For the first time in four trading session, the commodity advanced on the back of a weaker dollar after builders in the US turned more pessimistic than forecasted. With the dollar continuing its problems vs. the EUR is boosting speculator demand for energy futures as an alternative investment. All last week the market was hung up on the growth concerns of the world’s two biggest consumers as China’s economic growth eased and the Fed said that the ‘US outlook had softened’. Bigger picture, the market is concerned about the fuel demand tapering off. Last week’s EIA report fell -5.06m barrels, or -1.4%, to +353.1m (the most in 10-months) vs. an expected decline of only -1.5m barrels. This has left crude supplies +7% above the five-year average for the period. The headline print certainly looks bullish, but, with +350m barrels, supplies are not that tight. Digging deeper, gas supplies climbed +1.6m barrels to +221m, w/w, and not unlike the stocks of distillate fuel (heating oil and diesel), increasing +2.94m barrels to +162.6m, almost three times the size of the gain forecasted. Analysts believe that crude will again soften after government reports again this week will signal that the US economic recovery is stalling, which in effect will stain fuel demand. Technically, the gas markets numbers show ‘lackluster demand and will put pressure on the entire energy complex’. We continue to remain range bound with the price action, as the market is looking for stronger evidence to tackle its resistance levels.

The safe-haven interest that happened to push gold to record prices last month failed to materialize again yesterday, as investors liquidated their holdings of precious metal amid uncertain markets. The rebound in the EUR reduced, somewhat, the demand for the ‘yellow metal’ as a haven against European-debt concerns. Technically, the commodity is within striking distance of major support levels that may convince the bull’s to pare their investment stake in a rally that has been floundering for the past week. A number of factors had been supporting the ‘yellow metal’, however, the reason are beginning to fall by the way-side. Firstly, a positive equity market, bullied by the seasonal earning’s reports initially helped the commodity. Now, equities are having trouble of their own. With Moody’s downgrading Ireland and Portugal was expected to highlight the fragility of the sovereign debt issues, but, that has not materialized. On a bigger picture, technically, the bullish sentiment had been on hiatus with profit taking testing the medium term support levels. Fundamentally, in the short term the metal will find it difficult to rally aggressively, as historically, this is the ‘slowest’ season for physical demand. Despite this, longer term view, market concerns over global economic growth should support the ‘yellow’ metal prices on much deeper pull backs. However, that been said, weaker longs firstly need to be taken out of the market. Year-to-date, the commodity has gained +9% and is in danger of giving up more ($1,183 +$1.10).

The Nikkei closed at 9,300 down -107. The DAX index in Europe was at 6,021 up +13; the FTSE (UK) currently is 5,161 up +13. The early call for the open of key US indices is higher. The US 10-year eased 1bp on yesterday (2.94%) and is little changed in the O/N session. Treasuries prices remain better bid on the back of a softer US home builder’s confidence falling again. With the economic data continuing to come in softer has investor’s grabbing yield as the market prices in an increase to the ‘extended period of low interest rates’ promised by the Fed. Weaker US manufacturing and sales reports last week is raising market concerns that the economic recovery is faltering. Current market sentiment has dealers wanting to be better buyers on pull backs, as the market foresees a flatter yield curve heading into Bernanke’s HH testimony on Wed.

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