The FOMC is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly. ‘Significantly’ is so subjective when you own a depreciating asset like a house, mortgaged to the hilt and are still unemployed. Let’s hope whatever Bernanke and Co. have up their sleeve will have more of an market impact that the BOJ’s foray in easing monetary policy over night. The BOJ bowed to government pressure and ‘expanded a special funding operation, supplying cheap fixed-rate loans to banks, saving more aggressive steps for when there is clearer evidence of an economic slowdown’. All these tentative approaches, next thing you know it, it will be too late.
The US$ is mixed in the O/N trading session. Currently it is higher against 10 of the 16 most actively traded currencies in a ‘subdued’ trading range.
Friday’s 2nd Q GDP revisions were very much in line with market expectations (+1.6% vs. +1.5%), but below the advance estimate of +2.4%. As expected, the downgrade was concentrated in inventories and net exports. Surprisingly, real-final sales were revised higher to +4.3% vs. +4.1%, as too was growth in real-consumption spending. The slowdown in GDP was driven by a -0.7% decline in the estimated output of goods. Digging deeper, analysts note that there was only a small adjustment to the quarterly PCE price indexes, and no changes to the previously reported year-over-year growth rates. Compensation and salary disbursements for the 1st Q were revised down by -$12b. Finally, corporate profits rose +4.6% on a quarterly basis and are up +39%, y/y.
The University of Michigan consumer sentiment index was revised slightly lower, to 68.9 from the preliminary level of 69.6. Digging deeper, the current conditions component was unrevised, but the outlook index was downgraded slightly. The print is still the second lowest for the year. The inflation expectations measures were little changed, with the short-term gauge standing at +2.7% and the long-term index at +2.8%.
Helicopter Ben offered nothing different in his ‘minimalist approach speech’ in Wyoming on Friday. As expected, he discussed recent economic events and sketched an outlook of sluggish growth and outlined the policy options for future actions. He did not talk or allude to any more aggressive options available to the FOMC. It gave us the ‘rara rendition’. He recognizes that the recovery is ‘incomplete’, and that unemployment is unacceptably high, while inflation is lower than policy makers would like to see in the longer term. Growth in real-GDP will depend more on ‘private demand’ as inventory and fiscal stimuli fade. He identifies the concerns of the consumer, a higher saving rate suggests caution on their part, but believes that conditions for a pickup in growth next year ‘remain in place’. If, and only if the committee feels further easing is required, the order that this will occur is, firstly, additional asset purchases and secondly changes in the commitment language, followed by a reduction in the interest rate on excess reserves and ending with lifting the Fed’s medium-term inflation goals. His overall tone was one of ‘watch and wait’, despite ongoing signs ‘that US economic activity has not only dropped below its potential growth rate but has a significant probability of weakening further’. Its back to data watch duty.
The USD$ is higher against the EUR -0.29%, CHF -0.01% and lower against GBP +0.24% and JPY +0.43%. The commodity currencies are mixed this morning, CAD +0.14% and AUD -0.02%. All last week the loonie has been feeling the pain and pressure that comes with being a growth, interest rate commodity sensitive currency. On Friday and again this morning, the currency happened to get a reprieve, rallying as risk appetite improved ever so slightly, dragging commodity and equity prices higher. Big picture, Canada is not immune to weaker data reported south of its borders. Over +70% of its trade is conducted there. This ‘faltering economic recovery means the chances for a further BOC interest-rate increases this year weakens day over day’. Finance Minister Flaherty indicated that he saw Canada’s real-GDP for this year at about +3% and expressed concerns over the weakness in US economic data citing Canada’s reliance on exports to US. It is only natural that growth and interest rate sensitive currencies would be dumped even more aggressively. Traders are happy to play the risk-aversion card with longer term CAD bulls looking to pick up cheaper loonies on dollar rallies.
The AUD fell against the yen on speculation that the BOJ decision to expand its loan program will fail to halt the currency’s appreciation and pared its advance vs. the dollar as the size of the CBanks step disappointed investors, causing Asian bourses to unwind some of their earlier advances. On the whole, concerns that global growth is slowing has damped investor appetite for higher-yielding assets. The currency has underperformed against all of its major trading partners and is expected to do so until there is a new Government formed. The commodity rich currency is not isolated, as other growth sensitive currencies are suffering the same fate. Government data has also happened to put a lid on the recent rally. Net result traders are adding to their bets that the RBA will leave interest rates unchanged for the next 12-months. Interest rate differentials play a big part of the currency’s attractiveness. Risk aversion will likely force the bull’s hand, capping rallies with better sellers on upticks (0.8875).
Crude is higher in the O/N session ($74.75 up +40c). Crude erased its earlier losses on Friday after equity prices rallied. However, the commodity continues to hover just above its recent lows on concerns that weaker economic data will push the US into a double-dip recession. A weaker dollar has also helped to give the commodity a leg up from its lows. The market should be wary that the underlying situation has not changed, the fundamentals remain very weak, demand does not look good and stockpiles of crude and products remain at a record high for a second consecutive week last week. The EIA report showed an unexpected increase for all energy products. US crude stockpiles rose by +4.1m barrels, surprising analysts who had expected a modest decline of -0.1m barrels. Gas inventories grew by +2.3m, while distillates (ex-heating oil and diesel fuel), saw inventories rise by +1.8m barrels. The market had expected gas stocks to fall by -500k and distillates to climb by +900k barrels. The data confirms that the current US supply glut continues unabated, even surpassing record levels reached this month. Analysts note that the ‘commercial supplies of oil and oil products are at the highest level in nearly 27-years, with gas stockpiles well above 5-year averages’. It’s no wonder that crude prices continue to gravitate towards the $70 psychological support level. The report re-confirms the IEA conclusion earlier this month that ‘oil demand could take a substantial hit should economic growth continue to falter’. Speculators remain better sellers on up-ticks in the short term as crude rallies somewhat in this oversold market.
Gold rose on Friday, capping the 4th-straight weekly gain, on speculation that the dollar will weaken, boosting the appeal of the precious metal as an alternative asset. All last week investors have sought sanctuary in the safer heaven asset classes on the back of weaker equity markets. Investors are trying to put there cash somewhere more solid on mounting evidence of a US economic slowdown. Speculators again are supporting the various safe heaven assets on pullbacks, avoiding risky assets due to uncertainties in the markets. With a genuine fear for global growth, by default, should boost the demand for the metal as a protector of wealth in the grand scheme of things. With treasury yields expected to remain close to their lows, could promote a quickening inflation rate, which would promote pushing commodity prices even higher. The opportunity costs of holding gold are low due to falling interest rates ($1,238 +40c).
The Nikkei closed at 9,158 up +158. The DAX index in Europe was at 5,963 up +13; the FTSE (UK) currently is 5,201 up +45. The early call for the open of key US indices is higher. The US 10-year backed up 12bp on Friday (2.62%) and is little changed in the O/N session. Treasury prices plummeted after Bernanke’s reassurances in Wyoming tempered speculation that the Fed will step up debt buying. It was the first time in 5-weeks that yields rose on the week. To some extent the market had been prepared for Bernanke to prepare dealers for further quantitative easing. The 2’s/10’s spread happened to widen 14 ticks to +210bp (the largest one day move in 19-months) after the curve had flattened to trigger analyst’s 2’s/10’s +200bp short term objective. The market was overbought, and now we are moving to levels where people feel more comfortable owning ‘fair value’ product.
