Is this a Recession or Depression?

When does this recession become a depression? Is it when US GDP is greater than -10%? This slowdown commenced in Dec. 2007, 15-months and no let up as job losses intensify. Year-to-date nearly three million people have lost their jobs in US, pushing the unemployment rate to a 26-year high of 8.1%. We have become so blasé with expected dismal data, next month’s NFP will probably achieve that psychological -1m loss, at the moment just another record to be broken!

The US$ is stronger in the O/N trading session. Currently it is higher against 15 of the 16 most actively traded currencies, in a ‘whippy’ trading range.

The greenback has this morning got the thumbs up. NFP on Friday was in line with expectation and the USD$ still managed to sell off, this morning the market realizes that the worst is yet to come from other G7 members, which has given investors the green light to sell their own currencies. Ireland has been downgraded to negative watch by Fitch coupled with a very ‘dovish’ ECB President Trichet, who has not ruled out further rate cuts, and was studying additional non-standard measures will pressurize the EUR. With the UK government confirming its 75% stake in Lloyds does not help equity confidence, the house of cards more to follow mentality has spooked this morning’s markets. A couple of US Republican senators said yesterday that the US government should allow ‘big banks’ to go under if they are not performing up to standard. This news has added to the negative sentiment so far this morning.

The US$ currently is higher against the EUR -0.25%, GBP -0.85%, CHF -0.16% and JPY -0.33%. The commodity currencies are weaker this morning, CAD -0.23% and AUD -0.49%. Investors seek sanctuary in the safer heaven USD and JPY over riskier assets such as commodity currencies. This has pushed the loonie lower and in pole position to make a challenge at its yearly lows. It’s only a matter of time before we record new lows in this cycle for the currency. Already last week, the BOC slashed borrowing costs by 50bp to 0.5% and indicated further easing which has not helped the currency’s cause. In their communiqué the BOC sent a strong signal that it may well not be done cutting rates and that it is moving toward outright quantitative easing. This is a huge shift in tone from the last communiqué where they placed emphasis on how different Canada is compared to the problems being witnessed elsewhere in the world. Traders are looking for better levels to sell the CAD$ in the short term.

Economic data last week put the AUD$, a higher yielding currency on the back foot. Plunging global indices has investors strapping on risk aversion strategies and shying away from commodity currencies (0.6366). Weaker domestic data will once again put pressure on the RBA to resume interest-rate cuts. Last week in a surprise despite an unexpected soft GDP number, Governor Stevens kept O/N rates on hold at 3.25%. Traders continue to look to sell into rallies at the moment.

Crude is higher O/N ($45.75 up +27c). A weaker greenback aided the black-stuff on Friday. Crude managed to print a 5-week high as the USD weakened vs. EUR and by default supporting the appeal of commodities as an alternative investment. This was due to the weaker than expected revisions to the US NFP numbers last week. Some analysts do not expect this +4% increase to be sustainable despite the market anticipating that OPEC will cut production further at this weekend’s meeting. It’s widely believed that the greenback will find support once the expected weak data from Europe will begin again. If OPEC does decide to reduce production targets this month, the technical charts indicate that prices may rise to $55 a barrel. However, the world is awash with the black-stuff, it’s the storage problems that are causing concerns. This will lead to prices remaining under pressure in the longer term. Last week’s surprising EIA report showed an unexpected decline in US crude, the initial support cannot be sustainable as demand destruction remains. Crude oil supplies fell -757k barrels to +350.6m vs. an expected rise of +1m barrels. Refineries operated at 83.1% of capacity, up +1.8% from the last report. Meanwhile gas inventories rose +168k barrels to +215.5m vs. an expected decline of -800k. Stockpiles of distillate fuels (heating oil and diesel), climbed +1.66m barrels to +143.3m. Analysts had expected a +1m decline. It’s interesting to note that US gas consumption averaged +9m barrels a day over the past month, that’s an increase of +2.2%. To date, OPEC has cut output by -2.7% last month as producers try to stem price declines. Gold is breaking out of its negative price run by advancing as investors buy the ‘yellow metal’ as falling stock markets boost its demand ($938).

The Nikkei closed 7,086 down -87. The DAX index in Europe was at 3,624 down -42; the FTSE (UK) currently is 3,491 down -39. The early call for the open of key US indices is lower. The 10-year Treasury yields eased 14bp last week and settled on Friday at 2.88%. They are little changed in the O/N session. Treasuries have rallied aggressively, especially in the long end as investors speculated that the Fed may buy government securities after the BOE last week said it would buy sovereign and corporate debt. Despite a $63b funding announcement for 3’s, 10’s and 30’s for this week, equity markets are dragging prices higher as global indices fail to find that much needed traction. But, do not be surprised to see traders cheapen the curve heading into the auctions.

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