Happy New Year from the Fed! Yesterday, Ã¢â‚¬ËœhelicopterÃ¢â‚¬â„¢ Ben and his fellow policy makers made it abundantly clear that they expect economic conditions to Ã¢â‚¬ËœWORSENÃ¢â‚¬â„¢ substantially this year with Ã¢â‚¬ËœNOÃ¢â‚¬â„¢ hint of recovery until 2010. The US economy now expects a deeper downturn than previously anticipated. They expect the US unemployment rate to rise Ã¢â‚¬ËœsignificantlyÃ¢â‚¬â„¢ well into 2010, to a rate even higher than it projected 8-weeks ago. CBankers have been at odds in how to deal with this global phenomenon that has swept through economies like the Ã¢â‚¬ËœplagueÃ¢â‚¬â„¢. The ripple effect continues to blindside the everyday consumer!
The US$ is weaker in the O/N trading session. Currently it is lower against 10 of the 16 most actively traded currencies, in another Ã¢â‚¬ËœwhippyÃ¢â‚¬â„¢ trading range ahead of some employment indicators out of the US this morning.
Yesterday once again we were presented with a mixed bag of US data. US Pending home sales was even weaker than most analysts expected and that included the impact of revisions (-4.0% vs. -0.9%). The Nov. decline on top of a -3.5% downward revision for the previous month. Analysts believe the decline appears to be a correction in the level of the index, bringing it back into line with the Ã¢â‚¬ËœweakerÃ¢â‚¬â„¢ existing home sales series. ItÃ¢â‚¬â„¢s expected that the Fed and Treasury efforts to strengthen the mortgage finance system could support the pending and existing home sales data in future months. But, thatÃ¢â‚¬â„¢s a big Ã¢â‚¬ËœifÃ¢â‚¬â„¢ in this current environment. The Ã¢â‚¬ËœfullÃ¢â‚¬â„¢ factory report for Nov. was weaker than expected. New-orders for non-defense capital goods ex-aircraft were revised down from the +4.7% gain reported in the advance durable goods release to an increase of only +3.9%. That has left the 3- month annualized growth rate for core-orders at -28.0%. Overall factory orders declined a greater-than-expected -4.6%, as non-durables dropped -7.4%. Close to 60% of the decline can be attributed to the plunge in oil prices. The ISM non-manufacturing headline index unexpectedly rose +3.3 points to +40.6 from last months record lows of +37.3. Digging deeper, the biggest contributor was the subjective business activity index which rose +6.6 points. Surprisingly new orders and employment sub-components also rose, but remain close to record lows. Analysts indicate that at +34.7, the employment gauge still appears consistent with a Dec. payroll loss on the same order of magnitude as Nov.Ã¢â‚¬â„¢s (-533k).
The US$ currently is lower against the EUR +0.56%, CHF +0.80%, JPY +0.75% and higher against GBP -0.69%. The commodity currencies are mixed this morning, CAD +0.00% and AUD -0.51%. The loonie has been on a tear this week, firstly aided by the EURÃ¢â‚¬â„¢s collapse and secondly by robust commodity prices, which have been elevated due to geo-political insurance premium issues. The CAD$ appreciated to its strongest level in nearly 2-months vs. its southern neighbor when crude briefly traded above $50 a barrel. Year-to-date the loonie has appreciated 3%, the best performer so far this year. Commodities account for 50% of total exports. Canadian data plummeted yesterday on the back of weaker oil prices. Canadian factories’ prices and the cost of raw materials posted record drops for Nov. The IPPI (industrial product price index) retreated -2.6%, the most in over 50-years, while RMPI (raw material price index) fell -13%, the most on record. Oil prices remain better bid while gold struggles as the greenback soars. Even negative headlines in the London Times this week cannot de-rail this commodity influenced currency. The article commented on CanadaÃ¢â‚¬â„¢s oil sand industry and how it is Ã¢â‚¬ËœcoolingÃ¢â‚¬â„¢ rapidly. Later this week the mighty North American employment reports could once again be a dampener on the currency, but for now, the currency is very much riding the EUR weakness and USD strength coattails.
The AUD$ remains better bid on pull backs and during yesterdayÃ¢â‚¬â„¢s trading session recorder a 3-month high as the rally in global equities has temporarily increased the risk appetite for higher yielding assets. The currency has pared some of its gains as profit taking occurs. Robust commodity prices of late have also lent support to currencies down under. Traders continue to speculate that further global interest-rate cuts this week will revive investorsÃ¢â‚¬â„¢ risk appetite even more (0.7214).
Crude is lower O/N ($47.96 down -62c). Crude oil temporarily pushed through the magic $50 mark yesterday and printed a 5-week high as both Kuwait and Qatar indicated they would implement supply cuts announced by OPEC last month. The ongoing dispute between Russia and Ukraine has led to a reduction in natural gas shipments to Europe (Russia has cut gas deliveries to less 1/3rd of original). Analysts believe that if a solution is not found soon, this could result in an incremental demand on fuel and heating oil to substitute for the missing natural gas. Confidence in ObamaÃ¢â‚¬â„¢s stimulus package and the Geo-political issues especially in the Middle East have Crude prices remaining better bid so far this week. Investors are speculating that the conflict may disrupt crude supplies from other regions in the Middle East. Crude has rallied 24% on the back of Middle East and European concerns. Last weeks weekly EIA report showed that inventories had gained less than anticipated allowing the non-holidaying dealers to push the illiquid market aggressively. US fuel consumption for 4-weeks on a y/y basis has fallen -3.7%. It was not fundamentals that push the black-stuff prices aggressively higher last week, but the lack of dealer participation. Both global equities and a heightened investor risk appetite lent much needed support to the commodity that pared 54% of its value last year. Analysts expect crude futures to remain better bid throughout this week as OPEC implements its record announced productions cuts. The Middle East tensions has provided support on deeper pull backs, as there remains concerns that supply from the worldÃ¢â‚¬â„¢s largest producing region may be disrupted. Gold prices remain under pressure as the greenback rallies vs. the EUR, thus eroding the appeal of the Ã¢â‚¬Ëœyellow metalÃ¢â‚¬â„¢ as an alternative investment ($864). But, dealers are seeing better buying on deeper pull backs.
The Nikkei closed 9,239 up +158. The DAX index in Europe was at 4,973 down -52; the FTSE (UK) currently is 4,576 down -62. The early call for the open of key US indices is lower. The 10-year Treasury yields backed up 1bp yesterday (2.46%) and are little changed in the O/N session. The long end of the US yield curve continues to loose traction as dealers cheapen up the curve ahead of the New Issues later this week. They had managed to push yields to their highest level in 3-weeks. FI prices are being weighed down by the sheer size of President-elect ObamaÃ¢â‚¬â„¢s stimulus plan. YesterdayÃ¢â‚¬â„¢s surprising ISM data rising from its record lows also weighed on the debt market. ObamaÃ¢â‚¬â„¢s vision of stimulating their economy by such vast amounts of money will continue to de-rail the one directional play of the FI market that we have witnessed during most of 2008, until FridayÃ¢â‚¬â„¢s employment data at least!
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