Historical week for everyone!

History in the making! So much hope is placed on one man’s shoulders, and hope is what the world wants to come and see this week. Collectively we have the strength to overcome, the belief to persevere and be apart of a new beginning. Either way it’s a momentous occasion.

The US$ is weaker in the O/N trading session. Currently it is lower against 12 of the 16 most actively traded currencies, in ‘whippy’ trading range.

A mixed bag of economic data was seen on Friday. This is hardly a surprise in this environment. US industrial production fell by twice as much, with US factories dropping their output last month at a rate that was double expectations. Production fell -2% last month over Nov. vs. a -1% consensus. It worth noting that the fraction of available production capacity that is being used fell by more than expected to 73.6%. Analysts expect that when the auto shutdowns get more significantly factored into the picture for this month, we can expect to test the Dec. 1982 low reading of 70.9%. Downward revisions for previous months were also significant. For instance, Oct. was revised from a -0.6% initial reading to -1.3% and Sept. was raised from an initial rise of +1.5% to +1.8%. Looking at the sub-categories, production weakness was widespread, with auto production (-7.2%) accounting for the majority of it, given the auto plant shutdowns. Significantly, Machinery fell -3.0% and was followed by computer and electronics, which also dropped -2.7%, resulting in a -2.1% decline in manufacturing ex-autos. Utilities production posted its first loss in three months (-0.1%) while mining production fell 1.6%.

Other data also revealed that the US is experiencing the weakest inflation rate since Sept. 1955. A +0.1% y/y rise in Dec.’s headline CPI is the weakest annual rate of CPI for 50-years. Core-CPI inflation (ex-food and energy) was in line with expectations at +1.8% y/y, and flat on the month compared to Nov. It’s worth noting that transportation accounted for most of the decline in the headline as gas prices plunged -17.2% m/m, while vehicle prices fell -0.4% m/m. Clothing fell -0.9%, along with commodities (-2.0%). Interestingly, house prices were unchanged from the previous month as growth in owners equivalent rent offset weaker fuels and utilities prices.

Finally, heading into the long historic weekend, the preliminary University of Michigan confidence indicator surprised to the upside for this month. It edged a tad higher for the 2nd-consecutive month, up to +61.9 from Dec.’s final reading of +60.1. But, the breakdown of the report was mixed. The economic conditions sub-index was slightly down in Jan (69.2 from 69.5 in Dec). Despite the decline, the sub-index is off the record lows registered in Nov. The economic outlook index was up +3.2 points for Jan. But, it is surprising to see that both the 1-year and 5-year inflation expectations posted a modest increase in Jan. The 1-year index was up to +2% from 1.7% last month. The 5-year index was up to +3% from +2.6% in Dec.

The US$ currently is higher against the EUR -0.43%, GBP -1.32%, CHF -0.37% and lower against JPY +0.32%. The commodity currencies are mixed this morning, CAD -0.32% and AUD +0.04%. Nothing technically or fundamentally has been providing support for the ailing loonie at the moment. Risk aversion strategies dominated last week as investors sought sanctuary in owning the USD, but after Friday’s action, the urge to own the greenback has somewhat abated! The currency has remained under intense pressure as commodity prices continue to suffer. After last weeks EIA report, do not expect the loonie to outperform any time soon. Last summer, unprecedented peaks in oil prices helped buoy Canada’s export market (50% of all exports are commodity based). This provided a cushion for the Canadian economy as its southern partner fell into a recession. However, since oil prices have plummeted -80% since the peak in July, Canada’s exports have been deteriorating at a rapid pace, adding to economic weakness in other areas of the economy, and causing the BOC to continue its easing campaign. Futures traders are pricing in a 75bp ease next week (1.50%). The currency remains guilty by its association and proximity to its largest trading partner, the US. Consensus has the loonie trading under pressure for the remainder of this quarter and backing up towards the 1.2800 level again.

Despite weaker economic data down-under this week, robust global equity markets has convinced investors to abandon some of their risk aversion strategies and invest in some higher yielding currencies like the AUD for now (0.6784).

Crude is lower O/N ($35.83 down -83c). Demand destruction remains the order of the day. But Friday action saw the front month futures rally as dealers were happy to purchase contracts in an attempt to profit from higher prices in future months. Investors booked well earned profits before the holiday weekend. The theme for last week saw that crude prices came under renewed pressure as OPEC said that demand for its black-stuff will decline -4.2% this year as the recession in the US, Europe and Japan curbs fuel consumption. It’s expected that consumption of OPEC’s oil will shrink -1.4m barrels a day to +29.5m barrels. Last week’s EIA report has ended up being more of a hindrance than an aid for crude prices. The data showed that crude stockpiles climbed to a 16-month high as fuel demand continues to deteriorate. Crude stocks increased +1.14m barrels to +326.6m last week, the highest since August 2007. Fuel demand has dropped 6% to an average +18.6m barrels a day, surprisingly the largest 1-week decline in 5-years. Gas inventories rose +2.07m barrels to +213.5m, higher than the anticipated +1.85m expected. On the other hand supplies of distillate fuels (includes heating oil and diesel) surged +6.35m barrels to +144.2m, the biggest gain again in 5-years. The geo-political issues in Gaza and the on-going Russian Ukraine natural gas crisis has been no match for demand destruction caused by weakening economies, even if they are capable to resolve their differences after this weekend’s brokered meetings. Analysts anticipate that we will once again test Dec. lows of around $32 on the back of the North American reports been so poor. Gold rallied the most in over a month on Friday as a weaker greenback boosted the demand for the yellow metal as an alternative investment ($841).

The Nikkei closed 8,256 up +26. The DAX index in Europe was at 4,435 up +69; the FTSE (UK) currently is 4,228 up +80. The early call for the open of key US indices is higher (holiday). The 10-year Treasury yields backed up 2bp n Friday and are little changed in the O/N session (2.32%). Treasuries pared some of last weeks gain after last Friday’s US economic data did not sway too far from market consensus. But, with global equities and specifically financial stocks remaining under pressure should provide better buying of the FI market on deeper pullbacks. With risk aversion strategies once again in vogue, this should encourage investors to seek the safety of government debt.

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