US$ little changed ahead of CPI!

US equities continue to take it on the chin, led once again by the financial sector. Certain financial institutions believe the ‘contagion’ from the sub-prime fall out is a long way from be over. So far we have seen only one variable from the problem equation giving the US economy relief and that’s been commodity prices. Perhaps we will be able to see how much relief in this mornings US CPI number.

The US$ is mixed in the O/N trading session. Currently it is lower against 9 of the 16 most actively traded currencies in another ‘whippy’ trading range ahead of this morning’s inflation report.

Yesterday’s US retail sales came in as expected, falling -0.1% m/m on the back of a large decline in motor vehicles sales (to be expected). Core-Retail sales (ex-autos) gained +0.4%, m/m, (pushing the y/y gain to +7.8%). It’s worth noting that while the numbers look very strong they are also deceptive somewhat. The US consumer continues to face high gas prices (despite the monthly pull back), a depressed housing market, tight credit conditions, high food prices and a weakening labor market, analysts believe most of the gains in core-sales was likely the result of the tax rebates early in the summer. Thus, it’s probably prudent in concluding that we will not see much strength in sales going forward as the tax rebate cheques filter through the economy. Other data revealed that US Import prices moderated as petroleum prices declined over the past month. They posted a +1.7%, m/m gain vs. expectations of +1.0%. A vast improvement on the last few months, perhaps this morning we will experience a small pull back in the CPI headline (which would please Bernanke and Co.). Petroleum only gained +4.0%, m/m, vs. +8.9% in June.

This morning, no surprise to the market, European GDP fell in the 2nd Q (-0.2% vs. +0.7%). Analysts point out that this is the first contraction experienced since the EUR debuted (10-years ago). Lower sales figures have undermined company investments, while higher overall costs (energy, food etc.) continue to put pressure on the end consumer purchasing power. The y/y growth slowed to +1.5% while inflation surprisingly held steady at 4% m/m. The strength of the EUR and slower global growth will continue to pressurize Euro-land exports. At the domestic level, rapid inflation will erode the domestic purchasing power (UK, Spain), expect the situation can only worsen in the short term.

The US$ currently is lower against the EUR -0.10%%, CHF-0.13%, JPY -0.07% and higher against GBP +0.13%. The commodity currencies are stronger this morning, CAD +0.08% and AUD +0.26%. The loonie is experiencing a three day winning streak. This is the longest positive run for the CAD$ in over a month. All this can be attributed to commodity prices. Economic data of late remains soft and the lack of economic guidance has investors relying solely on the positive effect of crude prices. Today we will get to see the BOC summary review. One can expect the BOC not to deviate too much from last quarters, it is anticipated that Governor Carney will whistle a similar tune to that of the BOE and ECB of late. Since oil peaked at its record highs, the loonie has managed to shave nearly 6% of its value vs. its largest trading partner south of its border (50% of total exports are commodity based). The drop in commodity prices has put Canada’s domestic economic vulnerabilities back onto the radar screen. Last weeks employment report showed that the country lost -55.2k jobs and has heightened speculation that the BOC may cut borrowing costs (3.00%) by year end. After gaining 17% last year vs. the greenback, the loonie has quietly given up nearly 50% of that so far this year. Its proximity and association to the US continues to have a negative impact on its current economic data. Depending on commodity prices, traders are looking for better places to own the loonie in the short term.

O/N, the AUD$ pared some of its previous weeks decline, on the back of the commodities rally. The significant advance of prices in the last trading session has convinced traders that ‘fire sale’ of some commodity currencies was a tad ‘over done’ (0.8764). Traders are looking for better levels to sell the currency.

Crude is higher O/N ($116.88 up +88c). Crude prices have found a temporary bottom. But, it has had to rely on the weekly EIA reports for a helping hand. Yesterday, black gold managed to advance more than $3 a barrel on the back of a bigger than forecasted decline in gas inventories, as refiners shut units and imports fell. Stocks dropped -6.39m barrels to 202.8m w/w (the biggest decline since Oct. 2002). With refineries not making money on the crack spread, has led to units been shut. Consumer demand is having a negative impact on imports and refinery runs. Despite prices retreating for 22 consecutive days at the US gas pumps, the end user has radically changed their consumption patter which has had a negative impact on oil prices over the last three months. Refineries are operating at +85.9% of capacity, down -1.1% w/w. Petroleum product imports fell -17%, to +2.6m barrels a day (the lowest in three years). Even more interesting, imports of crude oil declined -5.3% to 9.66m barrels a day (the lowest in 6 months). Higher prices have dramatically changed company and consumer consumption patterns. Gas stocks were not the only ones affected; crude inventories also surprised the markets and fell -316k barrels to 296.5m (anticipated to climb by the same amount). Concern that the Russia/Georgia conflict may disrupt crude supplies from the Caspian Sea has added support for the black stuff. Further clashes in Georgia are expected to threaten the alternative export routes from Azerbaijan (its worth noting that Georgia is a key link in a US-backed southern energy corridor). Currently crude prices are been dictated by geo-political issues competing against global growth concerns. Over the past few months, growth has won the battle, but the bulls continue to seek some technical temporary support from insurgent upheaval. Oil analysts are concerned about a physical disruption to European supplies, if this occurs it will filter throughout the whole market and send the ‘black gold’ much higher. Gold remained better bid throughout yesterday’s trading session and has continued it throughout London trading. The greenback has come under renewed pressure, paring some of its recent gains. Oversold technical indicators have also provided some temporary relief ($842).

The Nikkei closed at 12,956 down -66. The DAX index in Europe was at 6,459 up +37; the FTSE (UK) currently is 5,518 up +70. The early call for the open of key US indices is higher. Yields of the US 10-year notes backed up 5bp yesterday (3.94%) and are little changed O/N. Despite global equities retreating, treasuries prices fell ahead of this morning’s inflation reports. Traders anticipate that the reports will show that consumer prices have increased m/m.

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