The Fed came, saw, and delivered yesterday, no surprises. LetÃ¢â‚¬â„¢s move on to Ã¢â‚¬ËœSteel CityÃ¢â‚¬â„¢, (adeptly named for this conference!) where G20 members will pay homage to themselves in their Pittsburgh ball caps. Amongst this eclectic crowd, it will be very difficult to find the common denominators. We have 20 people with 20 interests and the only commonality is that their countries are poorer than this time last year! The unfortunate thing about this recession is that the crises also seem just a distant memory, meaning that there is no pressure for drastic decisions. Domestically on the political front many heads of state are being distracted by their own survival issues. The market should expect some vague plans about Ã¢â‚¬Ëœmaking sure that such a crisis will not happen againÃ¢â‚¬â„¢, some ideas about Ã¢â‚¬Ëœstrengthen regulationÃ¢â‚¬â„¢ and Ã¢â‚¬Ëœimprove capital ratiosÃ¢â‚¬â„¢. All this rhetoric will result in no clear or concrete outcome! That being said, it would be nice to be surprised!
The US$ is weaker in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies in another Ã¢â‚¬ËœwhippyÃ¢â‚¬â„¢ trading range.
Yesterday the Fed failed to boost confidence that the US economy has begun to strengthen, pressurizing both equities and commodities and giving the USD temporary relief. Is this the nail in the coffin that signposts that equities are overvalued? Most of what Capital Markets expected from Bernanke was given to them. The only caveat of indifference was on Ã¢â‚¬ËœsustainabilityÃ¢â‚¬â„¢ and the longer run inflation expectation theme. There were two new elements introduced in the text that was not in the Aug. copy, however, we were aware of them. The term Ã¢â‚¬Ëœsustainable economic growthÃ¢â‚¬â„¢ was deleted in the communiquÃƒÂ© and the Fed now flags longer-term inflation expectations as being stable. That will disappoint the Hawks! Basically, the Fed seems to be more upbeat on near-term growth, very much different to Aug.Ã¢â‚¬â„¢s viewpoint. This can be backed by their nod towards increased housing market activity. On inflation, they expect Ã¢â‚¬Ëœinflation will remain subdued for some timeÃ¢â‚¬â„¢ and that growth will occur Ã¢â‚¬Ëœin a context of price stabilityÃ¢â‚¬â„¢ especially with longer-term inflation expectations stable at this point. Finally, as expected they extended the expiration of its MBS and agency debt purchases until the end of 1st Q of 2010, but at a slower pace of purchases Ã¢â‚¬Ëœ….in order to promote a smooth transition in markets…Ã¢â‚¬â„¢. Is this an exit strategy? Or as a killjoy could imply, perhaps the Fed has recognized that the large share of the market has already been purchased and they would never want to be exposed if they needed more cash if we experience a second dip!
The USD$ is currently lower against the EUR +0.13%, CHF +0.21%, JPY +0.76% and higher against GBP -0.69%. The commodity currencies are mixed this morning, CAD -0.03% and AUD +0.37%. Oh Canada! This weekÃ¢â‚¬â„¢s retail sales data took all analysts by surprise. Not one of them where in the same ball-park when the headline print was reveled (-0.6% vs. +0.8%). The plummeting sales print for July was broad-based weakness, with only pharmacies and building supplies posting gains for the month. Ex-autos, sales were down a larger -0.8%, m/m. However, there is a ray of sunshine, if we exclude the most volatile components of gas, food and autos, then retail sales grew +0.3%, m/m. How does one interpret the data? Basically consumer spending is recovering slowly as the jobless rate rises and households continue to cut back following the uplift in data in May and June. Yesterday, the BOC deputy-governor David Longworth indicated that the rampant loonie poses a threat to Canadian economic recovery. It was a weak attempt of verbal intervention and at solidifying both Governor Carney and Finance Minister FlahertyÃ¢â‚¬â„¢s recent comments. Year to-date the loonie has appreciated +15% vs. its southern trading partner, last year it depreciated -18%! Dealers continue to play the range and will take their cue from commodities and equities. They will also want to analyze in depth what Bernanke delivered yesterday.
The AUD got another unlikely boost in the O/N session which has succeeded in pushing it again towards its 13-month high. The RBA stated that the nationÃ¢â‚¬â„¢s largest 4-banks are Ã¢â‚¬Ëœweathering the global recession and adding to signs the financial industry is recoveringÃ¢â‚¬â„¢. Already this week, higher yielding currencyÃ¢â‚¬â„¢s got a lift on two fronts. Firstly, ChineseÃ¢â‚¬â„¢s import data showed a large commodity demand, which of course can only be bullish for commodity-bloc currencies. Secondly, the Asian Development Bank (ADB) said that Asia (ex-Japan), will grow +3.9% this year, much improved from MarchÃ¢â‚¬â„¢s estimate of +3.4% and that growth may strengthen next year to +6.4%! The AUD is looking to break that yearly high (0.8737).
Crude is lower in the O/N session ($68.32 down -68c). Weekly inventory prints pushed Crude prices significantly lower yesterday. The EIA report revealed an unexpected increase in stockpiles at some refineries idled for seasonal maintenance while demand destruction remains healthy. Inventories climbed +2.86m barrels to +335.6m last week vs. the bullish expectation of a decline of -1.4m barrels. Will the bearish print force commodity prices to trade outside of this monotonous $65-$75 range? If nothing else we should be revisiting the 3-month lows again. The fundamental gain in inventories was the largest in nearly 2-months and pushed stockpiles +9.1% above the 5-year average for the week. Refineries are operating at +85.6% of capacity, w/w, and are down -1.4% from the previous week. Ongoing proof of demand destruction is seen in the USÃ¢â‚¬â„¢s fuel consumption numbers which have dropped -3.3% to +18.5m barrels a day (the lowest in 3-months). Even more of an eye opener was gas stocks whose inventories rose +5.41m barrels to +213.1m (the biggest increase in 9-months and has left stocks +6.5% above the 5-year average). The market was anticipating only a +500k gain! We could not leave the inventory for distillates out, they rose +2.96m barrels to +170.8m, and the highest level in 26-years!This report is the strongest evidence to date revealing how demand destruction will make it rather costly for the bulls!
Gold was little changed yesterday and in doing so ended a 3-day decline as the greenback continues to remain under pressure against all its major trading partners, thus boosting the appeal of the yellow metal as al alternative investment ($1,012).
The Nikkei closed at 10,312 down -81. The DAX index in Europe was at 5,655 down -47; the FTSE (UK) currently is 5,112 down -26. The early call for the open of key US indices is lower. The 10-year bonds eased 4bp yesterday (3.41%) and are little changed in the O/N session. Treasury prices caught a bid yesterday after the Fed said they will slow purchases of MBSÃ¢â‚¬â„¢s, thus ending the $1.45t program 3-months later than scheduled. Expect dealers to cheapen the curve temporarily for todayÃ¢â‚¬â„¢s $29b 7-years issuance.
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