Yellen Louder!

US hawks continue to speak aloud, after Hoenig and Stern earlier in the week we had Janet Yellen focusing on inflation O/N. All policy makers agree somewhat that the US economy is likely to maintain slow growth the rest of this year and pick up next. Yellen commented on recent data which ‘suggest that her biggest fears on the downside have, so far, been avoided’. ‘The risks to inflation are likely not symmetric and they have definitely increased’ she said. ‘Policymakers cannot and will not allow a wage price spiral to develop’.

The USD$ is stronger in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies in a ‘subdued’ trading range ahead of an expected widening of the US Trade balance this morning.

Yesterday, US data reveled that a deteriorating job market threatens to hurt consumer spending even further as the number of Americans collecting UI jumped to its highest level in 5-years (+91k to 3.2m). Interestingly, first time jobless claims fell more than forecasted w/w (-58k to 346k vs. 404k). Historically, the first two weeks of July have been known for seasonal volatility in initial claims. This may suggests (don’t be surprised) that more claims could show up next week.

‘A man’s home is his castle is no longer’. The US housing debacle fallout continues to go deep. Yesterday’s data revealed that foreclosure filings jumped 53% in June from a year earlier and bank repossessions almost tripled. Plummeting property values and higher payments on mortgages has forced more people to give up their properties. Expect the foreclosed properties to be added to housing inventories and continue to weigh on house prices. This scenario will only prolong the housing slump. With the soft employment situation and an eroding disposable income, future data can only be worse. This has created a negative spiral effect that will be compounded by financial institutions tightening their lending policies even further.

Paulson and Bernanke were blunt and gave no ‘warm and fuzzy feeling’ yesterday when testifying to the housing committee. Foremost they did re-iterate that Freddie and Fannie were adequately capitalized (in the regulatory sense), while at the same time urging them to raise more capital. But, importantly they declined to comment if the GSE’s posed a ‘systemic’ risk to the financial markets. Bernanke called for ‘additional tools’ for the Fed to maintain financial stability as lawmakers consider overhauling regulators and asked for a procedure to liquidate failing investment banks (not falling in to the Bear Stearns trap bailout again). The consensuses want the Fed to take a more leadership role rather than specific regulators like the SEC to deal with ‘potential concerns’ that may occur with investment banks (a market stability regulator). Will this heighten ‘moral hazard risks’ by promoting a back-stop?

The US $ currently is higher against the EUR -0.03%, GBP -0.04%, JPY -0.11% and CHF -0.07%. The commodity currencies are weaker this morning, CAD -0.20% and AUD -0.02%. The loonie printed new monthly highs yesterday ahead of this morning’s employment report which is expected to forecast new job growth. With the market anticipating a ‘good’ number, can only provide impetus for the currency to break out of its tight 200pt range. By default, the market will then price in the possibility of interest rate hikes down the road (3.00%). Currently, futures prices has the BOC governor Carney keeping rates on hold on July 15th. Fundamentals and commodity prices are working in the loonies favor, but, global concerns over financial finances have investors questioning global recession. Any slowdown should have a negative impact on commodity prices and the CAD$. The unemployment rate is expected to remain unchanged at 6.1%. A softer number this morning and we should be heading back towards the weekly USD$ highs.

The AUD$ rose (0.9617) and traded near its 25-year high once again after stronger than expected employment data this week coupled with traders speculating that a deepening credit market crisis will prevent the Fed from hiking rates any time soon(2.00%). The AUD$ will be expect to maintain its yield advantage. Strengthening commodity prices will bring the AUD$ ‘parity’ question to the fore again.

Crude is higher O/N ($143.53 up +188c). Geo-political concerns and inventory levels boosted crude prices yesterday. Iran once again test fired more missiles in the Persian Gulf, despite growing global condemnation. This weeks EIA report showed a bigger-than-forecasted decline in inventories w/w. Stocks fell -5.84m barrels to 293.9m vs. an anticipated decline of -2.1m barrels. Earlier this week the news of Iran test-firing a long-range missile capable of reaching Israel heighted fears of Mideast supply issues. OPEC Secretary-General Abdalla El-Badri said he ‘hoped there would be no military conflict’; he indicated that it would be impossible to replace the production of Iran. The IEA also increased its forecast for demand in the first 6-months of this year, because of rising consumption in developing countries (+80k barrels a day, to 86.85m) and also forecasted the same pace of growth for next year (+1%). The G8 earlier this week lent their support for lower crude prices. They unanimously have ‘a strong concern about the spike in oil’ and collectively announced that ‘the world economy is now facing uncertainty, with downside risks persisting’. With the greenback remaining under constant pressure vs. the EUR, by default should lead to better buying on pullbacks, unless global growth fear ‘trumps’. Gold remains robust ($945) on concerns higher commodity prices and a weakening greenback will spur more demand for the ‘yellow metal’ as a hedge against inflation.

The Nikkei closed at 13,039 down -28. The DAX index in Europe was at 6,299 down -5; the FTSE (UK) currently is 5,437 up +31. The early call for the open of key US indices is lower. Yields of the US 10-year bond backed up 1bp yesterday (3.84%) and are little changed O/N. Treasuries gave up ground yesterday as equities advanced and the introduction of $8b worth of new Treasury Inflation Protected Securities (TIPS) drawing a higher yield than anticipated, encouraged investors to lighten up on their FI asset class component for now.

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