A light volume yawn day saw equities crawl over the finish line to finish marginally higher. The bigger winners were the semiconductor stocks (up 4%) on the back of the bullish news from Texas Instruments (TXN) Monday night. VIX (volatility) was down 5% which was odd given the tiny margin moves in the equity indices. Crude oil closed over $71 barrel (a high since Oct 2008) on seasonal demand and spec bets on the reflation trade. The Greenback was again looking soggy losing 1% though the three year Treasury Bond auction went well. Indeed fear of Fed rate hikes by the autumn appear way overdone.
Today’s Market Moving Stories
- Shares across Asia surged higher again this morning. Oil and metal stocks lead the way with the continued rally in prices, while Autos in the Nikkei were also higher despite weaker than expected machinery data. We’ll wait to see if the S&P 500 can climb above the dreaded-line-in-the-sand 945 barrier. Better than expected retail sales figures on Thursday could provide that boost.
- Japanese April machine orders were much weaker than expected, down 5.4% mom for a very heavy 32.8% drop yoy. In March orders were down 1.3% in the month and down 22.2% in the year. The market had been expecting -0.6% mom and -29.5% yoy. This data is important when considering the green shoots/inventory debate (see below). To feel like there’s any confidence returning to the economy, data like this needs to turn for the better.
- In China consumer prices fell 1.4% yoy in May, larger than the consensus forecast for a 1.3% decline but compared with a 1.5% fall in the year to April. The year-on-year decline was the fourth in a row. Official industrial production, scheduled to be released on Friday, is reported to have risen by 8.9% yoy in May by two independent sources. This would be a larger increase than is being expected.
- Morgan Stanley’s (MS) Asia chairman, the much respected and followed Stephen Roach, has just put out a note entitled Asian Relapse, in which he suggests that China is vulnerable to relapse in 2009 as the government stimulus fades and is not replaced by a US-led snapback in external demand.
- Note that the leaders of Brazil, Russia, India and China preparing to meet next week in the Russian city of Yekaterinburg to debate (amongst other matters) the USD’s dominant role. The newsflow from this soiree could be quite unfriendly for the friendless greenback.
- In the Korean Peninsula the Russian military has information about a planned ballistic missile launch by North Korea. A source in Russia’s General Staff tells Interfax: “We have certain information on the type and characteristics of the rocket. However there is no precise information on the timing of its launch”.
- Wonder what my house was worth in ‘89… Median home prices have dropped below 1989 levels in some parts of California. Properties in several areas are selling for less than they did 20 years ago, and that’s not including inflation. Some first-time buyers are nabbing houses for less than what their parents paid. So no more California dreaming.
It’s All About Inventories
The sustainability of the recent recovery depends upon one critical factor - have indicators turned for the better because of real underlying demand, or is it mere inventory rebuild?
To answer that question, it’s important to understand where world inventory is now relative to where it’s been and what’s actually required of it. The state of the shipping market provides a number of useful pointers, as it allows us to see that rebuild taking place and also enables a degree of regionalisation. On a headline basis the Baltic Dry Freight index has increased by a factor of four-and-a-half times since the beginning of the year. There have been two significant up shifts during that time, the beginning of February and end of May to start of June, both of which match very closely with the activity of the Chinese.
What about the jobs market? This is another important test for the real vs inventory story. Last Friday’s nonfarm payrolls wasn’t especially easy to read for the simple reason that the outright number of jobs lost was a lot less than expected and significantly less than recent readings, yet the unemployment rate soared. In light of the San Francisco Fed’s observations on the labour market, it perhaps makes more sense to look at the length of the average work week. The SF Fed noted that because of a shift in workers from permanent jobs down to temporary work, and then a lower proportion of temporary workers being laid off, the recovery is likely to be reminiscent of the 1992 jobless upturn.
But there’s actually a bigger issue at stake than that - dropping workers into the part-time environment also reduces the ability to pay off all that debt racked up through the boom years. Meanwhile, with real estate prices still dropping and credit conditions tight, that debt situation is getting more acute in many ways. Now look at personal spending, eight of the last ten months have been negative, but more importantly for this discussion, both March and April were negative within that. If consumers can’t or won’t borrow to sustain that spending, then governments may have to. Further supplementary budgets remain a possibility.
- European shares are on the up early doors this morning with mining stocks (BHP Billiton (BHP)) and oil producers (Total (TOT)) stocks leading the way.
- Bank of Ireland (IRE) is set to announce Pat Molloy as its new governor. Mr Molloy is a former chairman of Enterprise Ireland and CRH and will be one of four directors on the board of the bank representing the taxpayer as part of the recapitalisation scheme. Mr Molloy had previously served as CEO of BOI in the 1990’s and was suggested as an interim CEO by Dermot Desmond last March. The appointment will be taken very positively as Mr Molloy's previous tenure was said to be well regarded.
- Smurfit (OTCPK:SMFTF) announced yesterday that it is in talks with lenders to extend the maturity dates on its loan deals to allow further headroom in its banking covenants should a continued slump see a continued fall in profits. According to CFO Ian Curley, initial discussions with its banks have been positive. A deal would help allay investor fears about the group’s debt mountain and continue the group's recent out performance against its sector. Davy’s have a price target of 700 cent on the stock.
- Following a deal, Icon (ICLR) signed with Eli Lilly (LLY) in 2008 to manage its data management outside of the US, the group announced yesterday that it had been selected by Eli Lilly to manage the company’s clinical trial set up and monitoring in Europe.
The Day Ahead
Reverting to the here and now, attention today will be occupied by a steady stream of data. The European morning will be dominated by industrial production releases (France which has just come in much weaker than expectations, Italy and the UK). It will be interesting to see if the data in these nations follow the pattern of releases covering exports, orders and production in major surplus countries. The pattern for this latter group has been a recovery from a China related plunge followed by what appears to be a resumption of the primary downward trend (German orders and production, Japan machinery orders, Philippines exports etc all show the same pattern).
This afternoon brings US data with mortgage applications and trade in addition to two Fed speakers (Duke and Lacker) and the Beige Book. Clearly the mortgage applications data will be of interest in order to assess the damage done to housing demand by the bear steepening of the yield curve. We will be examining the monthly US trade data closely for the extent of the damage done from higher oil prices. The volume of US imports (even including oil) nevertheless continues to fall. Turning to the Fed I would expect USD positive commentary especially from Lacker – stressing the need to withdraw monetary accommodation in a timely way, albeit cushioned by the rider that we have not reached that point yet. The Beige Book is likely to give a cautious assessment on the viability of recent green shoots.
And Finally… Obama Gets Ding Dong Denny’d
Obama Drastically Scales Back Goals For America After Visiting Denny’s
Disclosures : None