Are we getting ahead of ourselves? For sure, confidence levels are higher in Europe, even the Fed said we are Ã¢â‚¬Ëœleveling offÃ¢â‚¬â„¢, but yesterdayÃ¢â‚¬â„¢s US data tells us that we cannot rely on consumers to get us out of this situation any time soon! We earn less, we spend less and inflation is not an issue at the moment-so why are equities getting ahead of whatÃ¢â‚¬â„¢s occurring in the Ã¢â‚¬Ëœreal worldÃ¢â‚¬â„¢? They keep going up and individuals now Ã¢â‚¬ËœcelebratingÃ¢â‚¬â„¢ that the Ã¢â‚¬Ëœfree fallÃ¢â‚¬â„¢ has come to an end. There are global signs appearing again that has to dampen investors and Hedge funds enthusiasm. What about our savior? China! One could start to include India. Their bourses are retreating. How good are the US earningÃ¢â‚¬â„¢s with the consumer struggling? Living on cost cutting cannot sustain elevated equity prices. How well are economies really doing without all the Ã¢â‚¬ËœdopingÃ¢â‚¬â„¢ thatÃ¢â‚¬â„¢s get injected in the form of stimulus programs and endless liquidity? There is still too much leverage out there and temporary solutions are not permanent!
The US$ is stronger in the O/N trading session. Currently it is higher against 10 of the 16 most actively traded currencies in a Ã¢â‚¬ËœsubduedÃ¢â‚¬â„¢ trading range.
The market was expecting better, but, US retail sales disappointed. It was a poor report on headline and details that the market cannot forgive. Headline retail sales declined -0.1%, m/m, completely against consensus expectations of a rise of +0.8%, m/m. The gain in auto-sales was not enough to offset the broad-based weakness. Ex- autos, sales fell an even larger -0.6%, m/m, poorer than the consensus expectation of +0.1%, m/m, gain. Digging deeper, Ã¢â‚¬Ëœcash for clunkersÃ¢â‚¬â„¢ managed to lift autos, but broad based weakness in everything pushed the headline lower. In reality, the Ã¢â‚¬Ëœclunkers programÃ¢â‚¬â„¢ crowded out weak incomes and pushed discretionary spending even lower. Other sub-categories showed that personal income fell -1% in June (reversed the upward trend over the previous 2-months) as incentives coupled with further deterioration in income. Naturally, this led to a decline in disposable incomes which caused the increased demand for the Ã¢â‚¬ËœclunkersÃ¢â‚¬â„¢ to affect sales in other areas. Ex- autos, retail sales declined for the 1st time in 3-months in July. The declines were consistent across the board (except for autos).
Not to be outdone, weekly initial US jobless claims were moderately worse than expected (+558k vs. +545k) and begs the question of the improvements recorded in June, have we stalled again? Combine this with the above weak retail print and it results in a bearish scenario for assessing the health of the US consumer. A pleasant surprise was that continuing claims were better than expected (-42.9k, w/w).
The Fed can afford to keep rates low for extended period of time as inflation is a non-issue, at the moment itÃ¢â‚¬â„¢s on no-ones radar. That includes the fear of inflation in the trade sector as import prices declined last month (-0.7% vs. -0.3%). Majority of the weakness can be attributed to falling oil prices and we all know how volatile they can be! Ex-energy continued to decline for the 1st time in 5-months. Even when the US economy is Ã¢â‚¬ËœstabilizingÃ¢â‚¬â„¢, we continue to have no inflation, which should leads to red flags everywhere!
The USD$ currently is higher against the EUR -0.10%, GBP -0.29%, CHF -0.15% and lower against JPY +0.15%. The commodity currencies are mixed this morning, CAD +0.14% and AUD -0.01%. Yesterday, the loonie managed to briefly print new highs for the week as commodity and equity prices advanced on the back of renewed confidence by both the Fed and European investors. Already this week we saw that Canada’s nominal trade deficit narrow more than expected in June as exports rose for the 1st-time in 3-months (-$0.1b vs. -$0.6b). However, most of the gains can be attributed to the double-digit surge in crude exports (oil has advanced +20.0% in a month!). The loonie, like most of the other major currencies continues to advance vs. its southern partner (2nd time in 5-days) as fundamental data, advancing equities and higher oil prices make growth-linked currencies more attractive. Is the strength sustainable?
Governor Stevens at the RBA said that they will have to raise rates (3%) at some stage as the economy recovers. Combine this sometime with regional equities advancing and the FedÃ¢â‚¬â„¢s belief that the worldÃ¢â‚¬â„¢s largest economyÃ¢â‚¬â„¢s economic activity is beginning to Ã¢â‚¬ËœlevelÃ¢â‚¬â„¢, has kept the higher-yielding assets trading close to this weekÃ¢â‚¬â„¢s highs. The FedÃ¢â‚¬â„¢s mandate is to keep rates low for a considerable period of time and in turn would promote the Ã¢â‚¬Ëœcarry tradeÃ¢â‚¬â„¢. For now, investors look content to buy on pull backs (0.8414).
Crude is higher in the O/N session ($70.90 up +38c). Despite surprisingly weak US data yesterday, crude managed to advance on the back of upbeat confidence in the Euro-zone and on the FedÃ¢â‚¬â„¢s unique take of the US economy now in stabilizing mode. Mind you with the USD continuing to weaken against most of its major trading partners only enhances commodity prices. ItÃ¢â‚¬â„¢s worth noting that the strength of demand remains suspect. Already this week the IEA raised its oil demand outlook for this year and next on accelerating Chinese industrial activity, but, is it sustainable? This weeks EIA reported higher crude inventories which should limit gains in the short term. The data showed that crude stocks in the world’s largest energy consumer rose by +2.5m barrels last week, against expectations for just a +700k build. The latest data on industrial production for some of the larger countries remains negative and should provide support for further demand destruction. We have technically been subjected to elevated prices for too long. In reality, we may have seen the worst of this recession, but global growth will remain very subdued. This certainly does not bode well for any strong rebound in the coming months. Reality continues to tell us that inventories are high, demand is still really weak and the risk is increasing that we will see a bigger correction towards $60. Similar to most commodities, the Ã¢â‚¬Ëœyellow metalÃ¢â‚¬â„¢ remains bid escaping its 2-month lows as the USD weakened on concerns that bank earning in the 2nd half of this year will be an issue ($957).
The Nikkei closed at 10,597 up +80. The DAX index in Europe was at 5,427 up +27; the FTSE (UK) currently is 4,773 up +19. The early call for the open of key US indices is lower. The 10-year TreasuryÃ¢â‚¬â„¢s eased 11bp yesterday (3.60%) and is little changed in the O/N session. Treasuries prices advanced after disappointing jobs and retail sales numbers from the US yesterday morning, and all this despite the final long bond auction of the week ($15b 30-years). The fear of consumer spending dampening the recovery of the worst recession in 50-years has investors seeking shelter in the FI market at the moment. Day-to-day date is being trading like a commodity and not on a macro level. Swings in bonds prices are becoming more like currencies!
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