ItÃ¢â‚¬â„¢s the beginning of the silly season where liquidity concerns cramp your style and the obvious becomes irrational. Buyers and sellers beware. A strong Spanish auction this morning has been unable to provide that everlasting support for the EUR, instead temporarily capping the currencyÃ¢â‚¬â„¢s high as Capital Markets prefer to focus on the EU summit where the debt contagion funding debate is making EUR supporters more nervous. ItÃ¢â‚¬â„¢s difficult to believe that EU leaders will quickly agree on the potential for a possible extension to the EFSF considering the opposing views, especially GermanyÃ¢â‚¬â„¢s. Follow the US yield curve, it may provide us with dollar short term direction.
The US$ is weaker in the O/N trading session. Currently, it is lower against 12 of the 16 most actively traded currencies in a Ã¢â‚¬ËœsubduedÃ¢â‚¬â„¢ O/N session.
There were mixed blessings in the US data yesterday. The industrial production report was stronger than expected on several levels. The headline print for November beat analystÃ¢â‚¬â„¢s estimates (+0.4). Even the previous monthÃ¢â‚¬â„¢s upward revisions added three-tenths to the bottom line. Digging deeper, gains of more than 1% in non-transit business equipment and non-auto consumer durables produced an above trend +0.7% increase in the non-auto manufacturing. ItÃ¢â‚¬â„¢s worth noting that the volatile auto assembly component softened more than expected (+7.5m units vs. +8.2m m/m). On the whole, the report would suggest that there should be some surprises in store for the fourth quarter results.
The modest US CPI turned few heads yesterday. The total and core print was very much in line with analysts estimates of +0.1%.Ã‚Â The growth in the overall index eased two-tenths to +1.0%, y/y, while growth in the core rose two-tenths to +0.8%. The underlying data was mixed, split between what were mostly either modest gains or declines. The biggest decliners included new-vehicles (-0.4% m/m, weight of +6.4% in the index) and personal computers (-0.4% m/m, weight of +0.2%). Ex-food and energy, most other gainers registered lukewarm advances, providing little positives to the headline. The housing component (+42% of the index) managed to hold steady.
Finally, on a happier note, the Empire State Manufacturing Survey index (10.6) reversed most of last monthÃ¢â‚¬â„¢s surprising headline decline, with some of the details having ways to go to appease the markets. The unofficial ISM-weighted composite index advanced just +1.5pts to 48.4 after having fallen by-7pts the previous month. Orders and shipments both returned to positive territory, but inventories, delivery times and employment all were below their break-even.Ã‚Â On a brighter note, the expectations index remains healthy, suggesting that regional manufacturers are still reasonably optimistic about the future.
The USD$ is lower against the EUR +0.23%, GBP +0.38%, JPY +0.27% and CHF +0.01%. The commodity currencies are mixed this morning, CAD -0.07% and AUD +0.10%. Canadian manufactures yesterday posted a solid gain in both the headline (+1.7%) and details, supporting last weekÃ¢â‚¬â„¢s strong export numbers. Analysts note that most of the subcategory gains flow directly into GDP. Do not expect Governor Carney to be swayed by the release when it comes to tightening monetary policy. The sustainability of the gains will always be questioned as the appreciation of the currency tends to have a lagging effect. The Governor has already indicated, in the October MPR, that net trade is expected to be a mild positive contributor to growth next year. Canadian policy makers will remain weary of EuropeÃ¢â‚¬â„¢s funding challenges, US growth risks and with benign domestic inflation worries, Carney will not be pressurized any time soon. This month the loonie has gained +1.8% outright vs. its largest trading partner. Gains in commodities, stocks and Euro contagion fears have made the loonie more attractive. The currency has only witnessed modest strength compared to other growth sensitive currencies as Governor Carney highlights the dangers of a persistently strong domestic currency. The loonie continues to struggle within striking distance of parity because of the strong corporate interest to own dollars there. Better dollar buying remains on dips.
Demand for AUD remains limited on speculation that divisions amongst EU members will impede agreement on a plan to limit future debt shocks ahead of the Euro-two day summit this morning. The currency trades under pressure outright as US Treasury yields climb, narrowing the yield advantage of assets down-under. This week, the currency has fallen against all its major trading partners on fear that China will act in answer to slow inflation, thus reducing the demand for growth sensitive and higher-yielding assets. Year-to-date, the currency has climbed +9.1% this year (second biggest winner after JPY), on prospects for commodity-driven economic growth and the yield advantage of the nationÃ¢â‚¬â„¢s debt compared with other developed markets. Domestic data remains strong, this months employment data blew all analysts expectations out of the water and supports the currency on pullbacks. Not aiding the currency is the concerns for long dated interest rates in the US. Analysts are beginning to agree that the tight labor market will bring the RBA back into the picture, but believe that Governor Stevens is not behind the curve just yet and will not be required to hike rates in February. With consumers boosting their savings significantly in an environment of rising job and wage growth, suggests that the RBA is still ahead of that curve. Governor Stevens has also mentioned that rates are Ã¢â‚¬ËœappropriateÃ¢â‚¬â„¢ for the economic outlook. Investors remain better buyers on dips, planning an assault on parity again (0.9880). Sellers remain topside with parity again providing strong resistance.
Crude is lower in the O/N session ($88.25 -30c). Crude prices rose yesterday after the weekly EIA report showed supplies plunging the most in eight years as imports tumbled and refineries bolstered fuel output. Stocks plunged -9.85m barrels to +346m last week vs. an expected decrease of -2.5m barrels. Also aiding prices was imports falling-15% to +7.69m barrels, the lowest level in two years, and refineries operating at +88% of capacity, the most in three months. ItÃ¢â‚¬â„¢s worth noting that inventories along the Gulf Coast (where 50% of US refiners are located) fell -9.02m to +173.4m as the region levies taxes on year end supplies. The large draw down is mostly due to end of year inventory management at refineries or in other words cooking someoneÃ¢â‚¬â„¢s books. The black-stuff has also garnered support from reports over last weekend revealing that ChinaÃ¢â‚¬â„¢s refiners increased their processing rate last month. The worldÃ¢â‚¬â„¢s biggest energy consumer boosted their net imports of the black stuff by +26%, m/m, and increased their processing rates to ease a diesel shortage. Coupled with OPEC announcement to maintain their production quotas and the PBOC refraining from tightening monetary policy is supporting the market, probably to the year end at least. OPEC believes that supply and demand are Ã¢â‚¬Ëœin balance,Ã¢â‚¬â„¢ and expect demand growth will slow as the global economy struggles to recover, amid ample supplies. Technically, expect the market to meet resistance again at the $90 high printed earlier this month.
Gold fell yesterday, the most in a week, on speculation that the dollar will extend its rally, eroding demand for the precious metal as an alternative asset. The stronger US economic data points to a recovering economy with a low inflation rate. It was only natural to see some profit taking after gold surged to a new record last week. The commodity remains supported on deeper pull backs by the persistent concern over Euro debt levels. Year to date, debt contagion has driven investors into the third Ã¢â‚¬ËœreservableÃ¢â‚¬â„¢ currency as they seek a store of value. Despite the fear that China will tighten their monetary policy, most likely in the New-year, a move to curb speculation and dampen inflation, global demand remains robust. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against currency debasement and long-term inflation. The Euro-zone backdrop is trying to put a floor on metal prices on demand for a haven. Year-to-date, the metal is up + 27.1% and is poised to record its 10th consecutive annual gain ($1,385 -0.30c). Technical analysts believe that gold will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.
The Nikkei closed at 10,311 up+2. The DAX index in Europe was at 7,024 up+8; the FTSE (UK) currently is 5,900 up+18. The early call for the open of key US indices is lower. The US 10-year backed up 5bp yesterday (3.47%) and is little changed in the O/N session. Treasury prices plunged, pushing yields up to June levels on the back of stronger US data this week, the Senate passing the tax-bill and on foreign investors beginning to cut their holdings of US debt as risk appetite improves and investors seek better returns elsewhere. With no Government supply coming down the pipe for a couple of weeks, one would expect some support for yields at these levels.
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