By Dean Popplewell
The EUR has held despite this week's theatrics. Greek restructuring is apparently off the table, for now at least. In translation, the ‘strong advice and preference of the ECB has prevailed’ over Euro politicians and their grandstanding. There are even some tentative signs in Greece that a compromise is attainable between the government and opposition. However, this does not mean there will be no restructuring later on.
Politicians and policy makers seem to be deluding themselves, systemic risk is real and may eventually be uncontrollable. For now, rather than painting over, they prefer whitewashing the problem.
In the short term, the dollar is expected to suffer from low yields and a dovish Fed, just see how the front end of the US curve is performing. In the background we have the debt ceiling fiasco. Yesterday, the House of Representatives voted down measures to raise the debt ceiling. This will be the main reason why the market will keep rates so depressed. The immediate concern will be this Friday’s NFP release. Analysts have already revised down their expectations and expect a weak monthly print, more evidence of slower growth out of the US.
The US$ is weaker in the O/N trading session. Currently, it is lower against 12 of the 16 most actively traded currencies in an ‘orderly’ session.
Disappointing US data yesterday has done little to support being a dollar bull. May’s Conference Board consumer confidence index surprised and fell to 60.8 from 66 in April. The details show that the present situation index, with a modest decline to 39.3 from 40.2 is consistent with its Michigan CSI counterpart, but, the expectation index plummeted to 75.2 from the prior month’s print of 83.2 contrasts with the improved data from soul sister index. Digging deeper its one year inflation expectations edged higher to +6.6% from +6.3%. Of note, the present situation shows a rise in the proportion seeing jobs as being plentiful (+5.6% from +5.1%). This is outweighed by a larger number seeing jobs as been hard to get (+43.9% versus +42.4%). This could be a heads up for Friday’s employment number.
Chicago PMI fell to a one and a half year low yesterday (56.6 versus 67.7) and ‘reinforces April’s picture of decelerating economic growth.’ It’s proof that the economy is slowing down due in part to increases in energy and commodity prices and provides more ammunition for the Fed to maintain its low interest policy for an ‘extended’ period.
The dollar is lower against the EUR +0.07%, CHF +0.66% and JPY +0.17% and higher against GBP -0.28%. The commodity currencies are mixed this morning, CAD -0.07% and AUD +0.51%.
Apart from the BoC watch yesterday, data showed that Canadian businesses have been curtailing the price pass through effect. Industrial prices continue to exhibit cooling, easing to +0.5%, m/m, from +0.8% in the prior month. It seems that the pass through of higher commodities through finished goods prices is diminishing. If it were not for the loonies rise during the month, industrial prices would have climbed +1%. The biggest gains were registered in energy products. In contrast, the RPMI price overshot market expectations, picking up +6.8% in April. The increase was evident in mineral fuels and crude prices, excluding mineral fuels, the RMPI advanced +0.6%, m/m.
As expected the BoC kept its key interest rate unchanged yesterday (+1%) and said it will raise it eventually as the economy recovers. Governor Carney stated that "if the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be eventually withdrawn." Of course the appropriate Central Bank disclaimers were applied, "such reduction would need to be carefully considered." Policy makers indicated that the recovery is ‘proceeding largely as expected’ and that any rate increases would be "consistent with achieving the +2% inflation target."
The market has interpreted Carney’s communiqué as being more hawkish than expected, particularly the language shift in the ending policy guidance. They have inserted the new word ‘some’ rate hikes. Inflation will move toward the BoC +2% targets by the middle of next year despite the growth of the current CPI exceed +3% ‘in the short term’, which has been driven by temporary factors such as higher taxes and food and energy costs.
The currency got a temporary lift from the BoC statement. However, the currency is again being subjected to the pull of either risk or risk aversion trading strategies until we get to see NFP data this Friday (0.9690).
The AUD was one of the leaders of the broad rally versus the dollar O/N, despite recording the worst slide in its GDP headline in twenty-years. The details were strong. Australian GDP fell -1.2%, q/q in first quarter, less than consensus for obvious flooding reasons. However, other details like the household savings rate jumped from +9.7% to +11.5% and income growth was very strong with compensation of employees up +3%, q/q, even strong was the terms of trade rising another +5.8%, q/q. Analyst’s expect the savings rate to begin moderating and consumption growth to begin rising later this year as the labor market tightens further, increasing household confidence. In theory this should put pressure on inflation and have the RBA on the back foot to hike rates further by year end.
The RBA had signaled recently in the Statement of Monetary Policy that an anticipated fall in the first quarter growth is likely to be temporary and forecasts a strong rebound to +4.25% in the fourth quarter. Traders have reduced some of their bets on the amount of interest-rate increases by the RBA over the next 12-months to 22 basis points from 25 last week.
Providing support for the currency is the belief that the local dollar is also gaining stature as a global reserve currency, similar in nature to that of the CAD. Aussie yields are still the highest in the G10 and always look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on these much deeper pullbacks for the time being (1.0730).
Crude is lower in the O/N session ($102.42 -0.25c). Oil finally found some traction yesterday and trimmed some of its biggest monthly drop in a year, on signals that the EU will approve further aid for Greece, supporting the EUR against the dollar. Big picture, investors expect the commodity to be supported on these pull backs as speculation that fuel demand will increase with the start of the US summer driving season.
Last week’s EIA report showed that supplies rose +616k barrels to +370.9m. Stockpiles were forecast to decrease by -1.5m barrels. A gentle surprise was gas inventories rising +3.79m barrels to +209.7m, above forecasts for a +300k build. The EIA data showed that gas demand fell over the last month by -2.1%, on average, versus the same period of last year. Distillate stocks fell -2.04m barrels to +141.1m barrels, well below projections for a +100k build. Refinery utilization rose +3.1% to 86.3%, much more than the +0.5% increase investors had expected.
Technically, the report could be seen as overall bullish because of the distillate number. However, the oil demand-supply situation is relaxed, and there’s no danger of any shortage. In theory, lower global interest rates should help the commodity which competes with yield-bearing assets for investors’ cash.
Gold prices are holding steady, supported by the ongoing debt crisis in the euro-zone boosting demand for the metal as an alternative asset. The weaker dollar sentiment is also creating a positive metal sentiment. Short term immediate pressure can be seen coming from the Shanghai bourse, which plans to temporarily increase margins on commodity futures to dampen a surge in volumes. Apart from that, investors continue to buy bullion to protect themselves against economic and currency uncertainties.
Strong buying recommendations from Goldman and Morgan Stanley have also been good enough reason to drag the commodity up from last week’s lows. The yellow metal is being used as a store-of-value and trades like a currency.
The metals bull-run is far from over with speculators continuing to look to buy gold on deeper pullbacks. Interestingly, the sale of gold coins this month remains on track for the best month in a year amid the worst commodities rout in three-years, which would suggest that bullion’s longest ‘bull market’ still has room to run ($1,531 -$5.40c).
The Nikkei closed at 9,719 up+26. The DAX index in Europe was at 7,279 down-14; the FTSE (UK) currently is 5,978 down-11. The early call for the open of key US indices is lower. The US 10-year eased 2bp yesterday (3.06%) and is little changed in the O/N session.
The FI asset class has been able to push yields to a new yearly record lows for this year, as softer home prices, reduced consumer confidence and a weaker industrial reading added to concerns that the US economy is slowing. It seems that global investors have turned increasingly bullish on US paper, as weakening economic data points to sluggish growth, tepid inflation and the likelihood monetary tightening is still a long way off. Until the market begins to get some bad news on inflation, investors should remain bulled up!