Bernanke and Paulson can breath easier this week, next week will be the backbreaker!

Happy Thanksgiving! So far this has been a week to celebrate for both equities and FI markets. We have witnessed the strongest 4-day gain in over 70-years. Utopia would have a sustainable trend, but these markets are shaping up to experience more job cuts, more global write-downs and with yields at current levels, deflation. We are currently experiencing a bull run in a bear market. ECB will start the ball rolling after next week’s interest rate cut.

The US$ is weaker in the O/N trading session. Currently it is lower against 12 of the 16 most actively traded currencies, in ‘subdued’ trading range.

Forex heatmap

Yesterday, the US Durable goods orders were the big surprise in another day of bearish fundamentals. It eased double expectations (-6.2% vs. -2.8%). But, consumer spending and jobless claims came close to analysts expectations. Clearly businesses have reduced durable goods orders significantly last month, and continue to rein in their investments. Digging deeper, while transportation accounted for a large portion of the weakness (-11.1%), even core-orders fell due to widespread weakness. There was also downward revisions to both headline and core durables for Sept. adjusting headline orders from a positive to a negative (+0.8% to -0.2%) and core orders fell by double that previously announced (-2.3% in Oct.). Shipments continued to decline, falling -2.4%, while inventories rose once again. Other data showed that a full -1% decline in consumer spending in one-month was as expected, but signals a tough start to the most important part of the year for retailers. It’s worth noting that this is the 4th straight monthly decline in the dollar value of sales, and the 5th consecutive decline in the volume of goods sold. But, a worrisome trend is the spike in personal savings (+2.4% vs. +1%, m/m). The US consumer is hunkering down and determined to boost their personal saving rate to compensate for wealth deterioration. They are shifting towards liquid savings. The entire stimulus in the credit markets may help stabilize credit, but, it will not help the economy in the absence of demand stimulus. We may see the $800b announced this week make its way back to the Fed indirectly via bank deposits and excess reserves as the preferred form of precautionary saving. Personal income grew by +0.3%, while disposable income was up a sharp +1%, which is the strongest income growth since this years rebates worked through. The Fed’s preferred measure of inflation is the personal consumption expenditures deflator (ex-food and energy), at a +2.1% y/y pace is down from a +2.4% peak in mid summer. Finally, while initial jobless claims came in a touch lower than expected, they still remained above the +500k for the 3rd consecutive week, pointing to a labor market that continues to weaken under financial and real economy strain. We should expect another spike in NFP and unemployment rates next week.

The US$ currently is lower against the EUR +0.10%, GBP +0.55%, CHF +0.49% and JPY +0.50%. The commodity currencies are mixed this morning, CAD +0.03% and AUD -0.18%. The loonie remained under pressure yesterday after accountants warned that the proposed $55b BCE takeover by Ontario Teachers in this environment and under the stated conditions may force the company to be insolvent. The transaction is ’unlikely to proceed’ if KPMG cannot deliver a favorable opinion by Dec. 11. In all intense purposes the deal is dead, wiping 35% off share values. Even with crude prices better bid, the CAD still found it difficult to find any traction. With this week’s positive sales data, the relief rally has been short lived. Investors continue to eye commodity prices for direction. The black stuffs prices continue to trade close to its 20-month low. Crude accounts for approximately 10% of all of Canada’s export revenues. Governor Carney last week said ‘that the risks to the country’s economy from a global credit crisis and recession have increased in the last month and will probably lead to a further reduction in interest rates’. Over the weekend PM Harper has already indicated that the government would run a ‘short term’ deficit to stimulate the economy. Traders have priced in another 50bp ease next month, this will push borrowing costs below the psychological 2% mark as further monetary stimulus will be required to achieve the banks 2% inflation target over the medium term (2.25%).

Despite the $800b Fed bail announced this week and Citigroup’s package, risk aversion strategies continue, as uncertainty and fear dominate. For now traders continue to be better sellers on rallies (0.6562).

Crude is lower O/N ($53.90 down-54c). China comes to the rescue; Crude got a lift yesterday after PBOC cut interest rates by the most in 11-years to boost economic growth. Combine this with the European economic stimulus package and capital markets ‘thumbs up’ for Obama’s choice of economic advisors has global equities better bid and by default commodities as well. Not surprising the weekly EIA report showed that crude supplies rose +7.28m barrels to 320.8m last week. It is the 9th straight increase (the longest stretch in 3-years). But, analysts expect crude demand to climb as refineries boost processing. Refineries have increased operating rates by +1.3% to 86.2% of capacity (the highest levels in 3-months). Gas inventories rose +1.84m barrels, or +0.9%, to 200.5m barrels. OPEC remains concerned that oil prices continue to flounder around the 20-month low. Reports show that OPEC members are adhering to quotas that were agreed on last month. The members will meet in Cairo this weekend; last month they set quotas to 30.98m barrels a day for this month compared with 32.2m a day in Oct. But, they remain worried by the direction of future prices. They are not sure if there is too much product on the market or that liquidity is drying up. According to Venezuela’s oil minister, Ramirez earlier this week, deterioration in global demand has left a surplus of about 1m barrels a day ‘over supply’ that needs to be removed by year end. It is very much a given that OPEC will cut output again, the announcement of the timing is the issue. Fear is destroying future demand at the moment. Speculation that the recession will further curb demand will push prices lower. Gold pared some of its recent gains as the greenback rallied and discouraged investors from using the yellow metal as an alternative investment ($817).

The Nikkei closed 8,373 +160. The DAX index in Europe was at 4,644 up +84; the FTSE (UK) currently is 4,213 up +61. The early call for the open of key US indices is lower. The 10-year Treasury yields eased 14bp yesterday (2.97%) and are little changed O/N. Weaker US economic data yesterday pushed US Treasury prices higher. The 10-year note managed to print a new record low, as US durable goods orders fell coupled with the consumer spending dropping the most in nearly a decade, convincing investors that the current recession is deepening. Can we shout deflation loud enough!

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell