This ‘Great Recession’ expected to lose millions of more jobs!

Are we about to have a co-coordinated global rate cut this week? Both the BOJ and Riksbank have moved up this months meeting and we have Trichet and King deciding their borrowing costs this Thursday. It would not be surprising to see the FED and BOC follow suit. It would definitely soften the expected dismal NFP report this Friday.

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

As expected yesterday, weaker data once again was reported out of the US. The US manufacturing sector contracted for the 4th consecutive month in Nov. Falling to 36.2, the index continues to move towards the record low of 29.4 achieved in 1980, as both domestic and foreign demand continues to dry up. Analysts believe this will increase the risk of a larger contraction in 4th Q’s real GDP than previously expected. Digging deeper, new orders fell to 27.9 (the lowest rate in nearly 30-years), this provides stronger evidence that ongoing production weakness remains ahead. Other sub-components remained weak, production, inventories, and the employment components. Even the imports number slid as US consumers and businesses continue to limit spending. It’s worth noting that foreign demand had supported the manufacturing sector for the 1st half of this year as the US economy slowed, but new export orders remained in contraction territory last month as almost all the G7 countries move into a ‘technical’ recession. Manufacturers paid less for all purchases as the prices paid index fell to 25.5 vs. 33, suggesting we may see further deceleration in consumer prices in the month ahead. Other data showed that construction spending also declined. Residential spending fell -3.5% in Oct. while non-residential was very much flat (-0.1%). But, risk aversion trading remains the order of the day, as investors covet both the greenback and JPY, liquidating out of their higher yielding asset classes.

Fed Chairman Bernanke yesterday opened the door to the possibility of ‘direct’ buying of US Treasuries. ‘The Fed could purchase longer-term Treasury or agency securities on the open market in substantial quantities’ (this pushed 10-year yields down 20bp yesterday-2.75%).The Fed is leaving the door ajar for further rate cuts (1.00%). ‘Although further reductions from the current federal funds rate are certainly feasible, but, at this point the scope for using conventional interest rate policies to support the economy is obviously limited’. This indicates that they will cut again, but by shifting their focus to the long-end of the yield curve will be more influential. Again the Fed is aware of the impact of longer term inflation risks, but they do not see it on the radar for a long time. ‘To avoid inflation in the long run and to allow short-term interest rates ultimately to return to normal levels, the Fed’s balance sheet will eventually have to be brought back to a more sustainable level. The FOMC will ensure that that is done in a timely way. However, that is an issue for the future; for now, the goal of policy must be to support financial markets and the economy’.

The US$ currently is higher against the EUR -0.14%, GBP -0.24%, CHF -0.18% and lower against JPY +0.40%. The commodity currencies are weaker this morning, CAD -0.30% and AUD -0.11%. Canadian data yesterday showed that the 3rd Q GDP grew faster than analysts had anticipated. GDP expanded at a +1.3% annualized rate, the fastest in a year. It’s expected that the economy will grow only +0.6% for this year, the slowest pace in 17-years as exports to its largest trading partner continue to slow and commodity prices weaken further. Despite yesterdays data the loonie whipped around in a large trading range fuelled by liquidity issues and closed little changed. With commodity prices continuing to take a beating, it’s only a matter of time before the loonie again comes under renewed pressure. Last month, the currency had managed to pare 2% vs. its southern neighbor. The sharp fall off in oil prices has managed to have a negative effect on the sentiment of the Canadian dollar. The black stuffs prices continue to trade close to its 20-month low. Crude accounts for approximately 10% of all of Canada’s export revenues. Governor Carney last week said ‘that the risks to the country’s economy from a global credit crisis and recession have increased in the last month and will probably lead to a further reduction in interest rates’. So far, futures traders have priced in another 50bp ease for the BOC Dec. 9th meeting, if not sooner. The newly formed Harper government is now under threat of collapsing, and being defeated by a coalition party. To think that the country had enough economic problems, the currency has now to deal with internal political problems.

The AUD experienced a brief rally after the RBA lowered interest rates by 1% to 4.25%, the 4th cut since Sept., they objective like any other Cbank is trying to avoid a recession. To date they have slashed rates 300bp and analysts expect another 75bp ease by Mar. of next year. Once again risk aversion trading coupled with weak commodity prices will have trader’s better sellers of the currency on rallies for the time being (0.6445).

Crude is lower O/N ($47.99 down-129c). Crude oil prices fell after OPEC’s decision last weekend to defer reducing production until its next meeting on Dec. 17th. They are stalling and will use the time to gage October’s -1.5m barrel cut in production. All analysts expect them to trim production again by month end. They currently have their backs against a wall. They want and need higher prices, ideal level being $75 per barrel. They believe that $75 is a ‘fair price needed to support investment in new fields’. They next meet on 17th of this month and remained concerned about demand deterioration, especially in the US. With weaker global fundamentals and an OPEC decision delay can only weigh on commodity prices in the short term, there is little good news that supports commodities at the moment. Even a stronger greenback continues to pose problems for this well supplied asset class. Last week crude got a lift after PBOC cut interest rates by the most in 11-years to boost economic growth. Combine this with the European economic stimulus package and capital markets ‘thumbs up’ for Obama’s choice of economic advisors had global equities better bid and by default commodities as well. But, all this is history as we patiently wait for weaker economic data to appear. Not surprisingly last weeks EIA report showed that crude supplies rose +7.28m barrels to 320.8m. It is the 9th straight increase (the longest stretch in 3-years). Refineries have increased operating rates by +1.3% to 86.2% of capacity (the highest levels in 3-months). Gas inventories rose +1.84m barrels, or +0.9%, to 200.5m barrels. Fear is destroying future demand at the moment. Gold is under pressure this morning as the greenback rallies and oil declines, diminishing the appeal of the ‘yellow metal’ as a hedge against the USD ($767).

The Nikkei closed 7,863 down -533. The DAX index in Europe was at 4,412 up +18; the FTSE (UK) currently is 4,029 down –36. The early call for the open of key US indices is higher. The 10-year Treasury yields eased 20bp yesterday (2.72%) and are little changed in the O/N market. Treasuries remain better bid, sending US yields to new record lows as fundamental data continues to show that the global recession is deepening. With global equities finding little traction on concerns for future earnings, investors continue to seek a safe heaven asset class. The global threat of deflation will continue to provide a strong bid for the FI asset class as Cbanks undertake to slash borrowing costs once again this month.

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