No love between the Fed and the US consumer!

Green shoot economics? The Fed is relying heavily on the consumer to spend us out of this recession. Global economies cannot rely on government stimulus and incentive packages indefinitely. If the governments formulated a semi-exit strategy plan it could entice some positive public reaction, but alas, no! The US has a debt load that’s nearly unmanageable, and requires vast sums of ‘new’ monies to finance it. Some economies like Russia and Brazil are shying away from US debt, which will, of course, cause US borrowing costs to jump. It’s the consumer who is required to lead the charge, the individuals who’s lost $1.3t in wealth in the 1st Q, the same hoarding individuals whose saving rates have shot up to +5.7%, m/m. The employed individual, who’s neighbors have lost their jobs and are one of the +9.4% unemployed (+6.82m-soon to be 10%). That same individual who has spent some of their discretionary income on higher gas and deep discounted cars prices, actions that gave us a positive US Sales print headline, but, ex-auto and energy nothing is rosy. In the UK, there is over 1.2m households in negative territory, I would hate to think what the actual stat is this side of the Atlantic! Analysts squabble over the shape of the recovery graph, is it a ‘V’ ‘U’ ‘L’ or ‘W’. Who cares at this point in time, we have bigger things to chew on. Within this housing debacle (record foreclosures, falling prices etc), what about the next round of adjustable mortgage rates? How are higher rates going to help this economy? How will it effect financial institutions, I am sure these loans have not been written off and I am not concerned what letter of the alphabet they want to assign to specific distressed loans! Something has to give……

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Forex heatmap

Yesterday’s US data headline looked good, however, US Retail sales was driven by autos and gas prices and it was weak almost everywhere else. Stronger than expected prints on headline sales (+0.5% m/m) and core-sales ex-autos (+0.5% m/m vs. +0.2%) temporarily gave a boost to equities. But if one digs deeper, one notices that it not as rosy as we had hoped. It reveals a weakness beyond autos and gas. Core-sales (ex-autos and gas sales) rose by only +0.1%. Even worse, the core measure that excludes gas, autos and building materials was flat m/m. It does not paint a strong picture of consumers spending their way out of this recession if auto-sales and higher gas prices were much of the gain. With energy prices not abating in the short term, one must assume with the higher savings ratio (+5.7% in April) and fear of being unemployed, real consumer spending to once again be a drag on May’s GDP numbers. One can only conclude that that the consumer is reluctant to spend on anything beyond necessities (gas and food).

Initial jobless claims eased w/w, up -24k to +601k vs. +625k. This is the 3rd consecutive week that claims have fallen, but, they remain above the psychological +600k print which suggests that the US labor market has ways to go before we can truly say that a recovery is underway. It’s evident that companies continue to reduce staff, but at a decelerating pace while the global economy remains in this recession. Some analysts are calling for another 5-handled NFP for this month, assuming that the birth/death model does not have as large an influence on the numbers like last months (+224k). With continuing claims printing a new record high (+6.82m) the unemployment rate should hit 10% even earlier than expected.

The USD$ currently is higher against the EUR -0.29%, GBP -0.47%, CHF -0.28% and JPY -0.44%. The commodity currencies are weaker this morning, CAD -0.28% and AUD -0.85%. In Canada, yesterday’s Industrial Capacity Utilization fell to the lowest level on record for the 1st Q (69.3% vs. expectations of 71.5%). The manufacturing sector accounted for much of the weakness. It’s not that surprising given the amount of restructuring going on in the auto-sector! It’s worth noting that low capacity utilization will depress inflation, however rising commodities will have the opposite effect. If we continue to have higher commodity prices, aided by a weaker USD, headline CPI could surprise while core-CPI would remain weak. The loonie however remains range bound and its direction is been dictated by the greenback’s movements and not for fundamental reasons. Commodity prices continue to give the currency a lift on USD rallies at the moment. With global equities managing to keep their head above water, risk appetite favors the higher yielding commodity currencies. Look for better levels to sell the currency on USD pull backs.

US yields and global energy prices are starting to put pressure on the higher yielding asset classes. The AUD pared some of this week’s gains in the O/N session as traders speculated that the Fed will let yields climb rather than increase their buy-back program. Fundamental data this week had already pusher the currency to a 7-month high. Once commodity prices remain robust, look for better buying opportunities on pullbacks to own the AUD (0.8124).

Crude is lower in the O/N session ($72.07 down -61c). Crude oil, for a 3rd consecutive day, managed to rise to a new 8-month high yesterday (since then has pared some of its gains in the O/N session). All this was on the back of China’s net imports surging ahead and the API report earlier in the week, which showed that US stockpiles dropped, w/w (-6m barrels vs. +0.4k expected rise), as refiners ramped up production. The large drawdown is stronger evidence that weak demand is perhaps bottoming, couple this with the EIA raising its 2009 demand forecast for the 1st-time since Sept. has the market setting it sights on the $75 price that OPEC members wishfully predicted last month. Some analysts believe the market is perhaps getting ahead of itself and pricing in the fact that high levels of global inventories are going to fall pretty fast in the 3rd and 4th Q if OPEC can maintain their current output levels. They are currently complying with its Sept. production cuts, which are running at aprox. 77%. The weaker greenback is of course helping all commodities and there does not seem to be any reprieve for the currency in the short term. Wednesday’s EIA report supported the API’s earlier findings. Inventories of oil dropped -4.38m barrels to +361.6m, w/w. Gas stocks declined for a 7th consecutive week, another bearish report telling us that production levels are much lower than we originally perceived. OPEC next meet on Sept 9th and yesterday the Kuwaiti member indicated that they would not increase production until prices hit $100 a barrel. They produce 40% of the world’s oil. The ‘yellow metal’ has rebounded from its lowest level in 2-weeks as the underperforming USD has increased the appeal for the precious metal on pullbacks as an alternative investment strategy and a stronger hedge against inflation ($951).

The Nikkei closed 10,135 up +154. The DAX index in Europe was at 5,095 down -12; the FTSE (UK) currently is 4,459 down -2. The early call for the open of key US indices is higher. The 10-year Treasury’s eased 12bp yesterday (3.82%) and a further 3bp in the O/N session (3.79%). When dealers managed to push long-bond yields up to Nov.’s lofty heights ahead of the $11b 30-year auction on concerns of record Government spending and inflation, speculators believed that the market was ripe and had come too far and offered good value. In effect dealers had done a good job in cheapening up the curve!

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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