For the first time since mid-September, 2008, the US weekly new jobless claims came in under 500,000 to a less-than-expected 466,000. In addition, the total number of people receiving unemployment benefits fell by 190,000 to 5.42 million people.
Associated Press
Consumer spending rose more than expected in October gaining 0.7 percent over September. Federal Reserve officials have cautioned that consumer spending could decline in the coming months however, as rising unemployment and difficulty in arranging consumer credit loans could see a reduction in demand for big-ticket items including autos, home, and appliances.
Associated Press
Consumer spending rose more than expected in October gaining 0.7 percent over September. Federal Reserve officials have cautioned that consumer spending could decline in the coming months however, as rising unemployment and difficulty in arranging consumer credit loans could see a reduction in demand for big-ticket items including autos, home, and appliances.
Associated Press
The US Commerce Department announced this morning that orders for durable goods unexpectedly fell by 0.6 percent in October after gaining 2 percent in September. Much of the decrease can be attributed to a reduction in Department of Defense spending, and if excluded, demand for durable goods would have increased 0.4 percent for the month.
Associated Press
The US Commerce Department announced this morning that orders for durable goods unexpectedly fell by 0.6 percent in October after gaining 2 percent in September. Much of the decrease can be attributed to a reduction in Department of Defense spending, and if excluded, demand for durable goods would have increased 0.4 percent for the month.
Associated Press
The Fed is sticking to its upbeat outlook as outlined in yesterday’s FOMC minutes. They heavily emphasized under the ‘forecast uncertainty and cautioning sub-sections’ that the recovery will be ‘milder than the historical norms’. The ‘official’ 10.2% who are unemployed will not get much comfort from that statement during this ‘thanksgiving period’. Reserve officials said record-low interest rates might fuel ‘excessive’ speculation in financial markets and possibly dislodge expectations for low inflation. Might fuel? The world has been using the so-called world reserve currency as a vehicle currency for the ‘carry trade’. The tsunami unwinding of this trade could take years and felt world wide. It’s a safe bet that excessive speculation has been here for sometime! Expect today to be the last ‘normal’ trading day in the holiday shortened trading week. Volatility and an illiquid market will be the order of the day until next week.
The US$ is weaker in the O/N trading session. Currently it is lower against 15 of the 16 most actively traded currencies in another ‘whippy and illiquid’ trading range.
We have a plethora of data to get through for the remainder of this shortened holiday trading week. Yesterday we witnessed US home prices rising for a fourth consecutive month. On a seasonally-adjusted basis, home prices rose a modest +0.3%, m/m, in Sept., and it was the smallest increase in that time period. However, non-seasonally adjusted prices have been up for five months. It’s worth noting that from April’s lows, prices have advanced +5.2%, but, from our peaks three years ago, we have plummeted -29%! The question is whether these price increases are sustainable? Most likely not, for two reasons, firstly, shadow inventories will most likely be released, resulting in contributing to inventory levels and secondly, reset of mortgages and next April’s expiration of housing incentives will naturally increase pressure on prices again.
Preliminary GDP data yesterday showed that the US economy expanded at +2.8% last quarter vs. government expectations of +2.9% and less than what the Obama administration reported last month (+3.5%). It also highlighted a smaller gain in consumer spending and a bigger trade deficit. Digging deeper, despite corporate profits advancing the most in 5-years, reduction in spending patters reinforces companies and consumer dependence on government incentive programs to drag the US economy out of this recession. More and more data continue to show the consumers unwillingness to spend, their propensity to hoard and desire to increase their saving ratio. The US economy will have to rely more on the corporate world’s willingness to open their coiffers as consumer spending, which accounts for about +70% of the economy, advanced at a +2.9% pace and opposed to the +3.2% rate expected by analysts.
The FDIC did not have too many nice things’ to say yesterday. Despite US banks posting $2.8b third quarter profits, there were 522 banks on their ‘problem’ list during that time period. That is the highest posted recording in 16-years. These ‘problem’ banks collectively had $345.9b in assets, but, the insurance fund had a negative balance of -$8.2b.
The USD$ is currently lower against the EUR +0.32%, GBP +0.83%, CHF +0.35% and JPY +0.41%. The commodity currencies are stronger this morning, CAD +0.40% and AUD +0.82%. Yesterday, the loonie declined vs. its largest trading partner and southern neighbor as crude, Canada’s largest export, and global equities fell, diminishing the appeal of any currency tied to growth. Risk aversion trading strategies remain in this holiday shortened illiquid trading week. Earlier this week, a surprisingly strong Canadian retail sale print managed to lift the loonie to this week’s high. Weaker US data yesterday and global concerns about financial balance sheets been adequately funded had investors seeking temporary shelter in the USD. However strong growth signals out of Asia has once again put the reserve currency on the back foot in this morning session. Technically, the loonie is lacking clear direction amongst the tight 3c trading range. Currently, within this range, intraday traders are been squeezed daily out of the core positions, whether it’s commodity prices pushing the loonie or risk aversion. Dealers continue to be better buyers of the CAD on USD rallies as the buck’s bear trend remains well established.
It’s on again, it’s off again! Deputy Governor Battellino at the RBA said that the Australian economy has entered a ‘new upswing’, fueling speculation that policy makers will raise interest rates for a record third time this year (+3.50%). Analysts now expect the RBA to hike rates by another 25bps next week. Over the last 12-months, the AUD has managed to appreciate just above 50% vs. the greenback as the RBA became the first Cbank to hike rates twice this year. Earlier this month, the RBA minutes implied that three straight lending rate increases may not be on the cards had futures traders unwinding some of their bets that Governor Stevens would tighten monetary policy again in two-weeks. He said that the pace of further rate increases ‘remained an open question’. That question now seems to have been answered by his deputy, as once again futures traders lay their bets again. The currency remains well supported by commodity prices and expects dealers to be strong buyers on ‘deeper’ pullbacks (0.9280).
Crude is higher in the O/N session ($76.44 up +44c). What goes up must come down! Crude prices have no appetite to buck the trend. Yesterday, prices fell just under -2% because of the twin evils of a ‘larger’ inventory report expected later this morning (+1.5m barrels) and a weaker GDP growth headline print yesterday (see above). With volume and liquidity down this week due to the holidays, volatility and whip-lashed price actions will remain the order of the day. For now this asset class is firmly entrenched in its desired $7 trading range. Earlier in the week prices had been supported by heightened tensions between Iran and some Western nations, their subtle aggressive actions raised concerns of a potential supply risk. The war games have subsided somewhat and this has reduced the commodities ‘insurance premium’. Last week’s EIA and API report confirmed the weakness of the weekly inventories situation. With US crude stocks falling by more-than-expected, and the dollar trading under pressure, had the market temporarily penetrating that psychological $80 a barrel level. Repeatedly over the last few weeks the $80 handle remains a stubborn resistance point, again the market attempted and again it has failed despite US crude inventories falling by -900k barrels last week vs. market expectations of a +300k increase. Confirming their support for bullish prices, both gas and distillate stocks also fell, by -1.7m and -300k barrels respectively. However, demand destruction does not warrant elevated prices, perhaps the $80 a barrels will be the top for the remainder of this year. OPEC is expected to remain on hold in a couple of weeks because of their concerns about tipping global economies back into contraction.
No surprises, gold jumped to another in the O/N session as the greenback once again faltered against all its major trading partners. Thus far, the yellow metal has gained +34% this year as investors and central banks increased their holdings of the commodity to preserve wealth. Even the CBR (Central Bank of Russia) said it bought +19.5 metric tonnes last month, bringing their yearly total to +90 tonnes, and firmly establishing them as the world’s 8th largest holder of the commodity. They said that they want to hold 10% of their reserves in gold, that’s approximately 12-13 thousand tonnes or twice what they presently hold! Expect the bulls to continue to dominate all of the action and remain strong buyers on ‘any’ pull backs even if the USD finds support from risk aversion trading strategies ($1,181).
The Nikkei closed at 9,441 up +40. The DAX index in Europe was at 5,809 up +40; the FTSE (UK) currently is 5,359 up +35. The early call for the open of key US indices is higher. The US 10-year bonds ended up easing 4bp yesterday (3.32%) and are little changed in the O/N session. Yesterday’s $42b 5-year auction was once again well received and certainly had an added bid after weaker than expected fundamental US data. The bid-to-cover of 2.81 was the highest in more than two years and the yield of 2.175% was a couple of bps better than where the market was trading just prior to the auction. It is nonetheless very strong, especially given that yields are now near their lowest levels of the past year. Indirect bidders, the category that includes foreign Cbanks, took 60.9% of the auction. This is a large number. The last few auctions have been on the order of 45% – 55%, though there was a slightly stronger indirect number back in June (62.8%).US refunding numbers for this shortened holiday week (7’s $32b) will make supply the main for reason for any temporary downward movement. On deeper pull backs, the longer end of the US yield curve remains better bid as the ‘seasonal’s’ are calling for a flattening rally ahead of ‘month end index extension’.
The Standard & Poor’s / Case-Shiller home index – which measures house prices in 20 US cities – indicates that prices remained mostly flat in September, rising only 0.3 percent on a seasonally-adjusted basis. The index had increased in recent months, climbing 3.5 percent since May, giving rise to optimism that the market was rebounding but September’s results have analysts rethinking their position.
“This may be a bit of a transition period,” said Maureen Maitland, vice president for index services at Standard & Poor’s, suggesting that the housing recovery could be more of a “W”-shaped recovery as opposed to a more direct “V”-shape.
New York Times
The Bank of England said today that it had provided billions in “secret” loans to the Royal Bank of Scotland (RBS) and HBOS, a holding company for the Bank of Scotland. These loans were in addition to the publicly-announced loans extended at the height of the banking crisis. The loans totaled more than £60 billion ($102.7 billion) and were offered through the Emergency Liquidity Assistance program.
According to the Bank of England report, both banks provided collateral for the loans valued at more than £100 billion ($165.7 billion) and also paid fees. The report noted that it believed that it was necessary to provide the loans as the “lender of last resort” to prevent the collapse of the institutions and also decided to keep the actions secret to prevent a repeat of the “bank run” suffered by Northern Rock when its liquidity problems became known.
“In most cases, confidence can best be sustained if the Bank’s support is disclosed only when the conditions that gave rise to potentially systemic disturbance have improved to a point where the disclosure itself should not be a cause of such disturbance.”
- Bank of England Annual Report
During a speech last Wednesday, Federal Reserve Bank of St. Louis President James Bullard made a comment that the Federal Reserve may not raise interest rates until sometime in 2012. While not many are expecting an increase in lending rates in the short-term, maintaining the current rate for another two years or more, seems rather extreme and created a bit of a stir as the markets considered the impact this could have on the dollar.
Bullard cited past experience as the basis for his reasoning, stating that “if you look at the last two recessions, in each case the FOMC waited 2 ½ to 3 years” after the recession ended, before raising interest rates. Following this line of reasoning, the suggestion is that it will be mid-2011 before we can expect a rate increase, so does this mean the dollar will remain weak until then?
Not exactly. According to Callum Henderson, it will actually take another full year beyond that before the dollar will realize significant gains.
“History tells us the dollar shouldn’t start rising on a sustained basis until 12 months after the Fed starts to lift rates” says Henderson who serves as a currency analyst with the British-based investment bank Standard Chartered. Henderson also notes that the market is suffering from an “oversupply of dollars” because of global stimulus programs, and the dollar “will remain weak until the Fed’s rates rise above the competitors”.
Therefore, if you accept James Bullard’s suggestion that an increase in lending rates is at least two years away – and if you also believe currency expert Callum Henderson is on the mark with his assessment – it could well be that the dollar will not only struggle through 2010, but 2011, 2012, and 2013 are all shaping up to be challenging as well.
Of course, the dollar’s value is based on more than just interest rates as noted by Gernot Griebling of the Landesbank Baden-Wuerttemberg headquartered in Stuttgart. Griebling believes that “financial markets and equity markets have been too optimistic concerning economic growth next year”, and he is of the belief that the need for widespread risk aversion will have investors turning back to the dollar. Griebling even goes so far as predicting that the dollar will strengthen to $1.37 per euro by the end of September compared to the current rate of about $1.49 to the euro.
Griebling does give us something to think about. Over the past six months, commodities and financials have helped boost market returns, but in the back of my head I still hear a little voice saying “too much, too fast”. I can also hear Roubini warning us all about a recession “double dip” he maintains will be brought on by a sudden revaluation in the equity markets once investors realize that the fundamentals do not support current price levels. Should things play out in this manner, there will certainly be those that turn to the dollar for short-term safekeeping.
The potential for this “flight to safety” scenario notwithstanding, I still don’t see any reason to believe that the dollar will make significant gains over the other major currencies within the next 12 months. It would appear that many Central Banks are with me on this one as Russia, China, India, and now Sri Lanka, have all sold billions of dollars in order to buy gold for their foreign currency reserves. Consider also that the Central Banks have made these purchases even as gold seems to hit a new record high on a daily basis, suggesting that the Banks clearly believe holding gold right now has a greater upside potential than holding dollars.
Even if the pace of gold buying by the Banks subsides in 2010, I don’t believe they will reverse direction and start buying dollars any time soon. No, that ship has sailed and it will take a dramatic change in the outlook for the greenback before Central Banks abandon their diversification programs.
Line forms here for the dollar bears.
The Japanese Central Bank mentioned in their November report for Economic and Financial Developments that it expects prices to slow their fall at the end of the year. Even with all the stimulus programs from the goverment the Bank acknowledges that business conditions will remain weak. Japan is an exporting nation and the weakening of the USD resulted in an adverse apreciation of the JPY which in turn has made Japanese export less attractive to foreign consumers.
“The year-on-year pace of decline in consumer prices is expected to moderate toward the year-end as the effects of the prices of petroleum products abate,” the bank said. It failed to mention that last week the domestic demand deflator, a key measure of deflation, dropped by 2.6 percent, its highest fall in more than half a century.
via Xinhua
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