Markets are discounting poor earnings. Watch for Citi!

Euro policy makers continue to debate should we or shouldn’t we slash below 1%. Weber believes anything below 1% will paralyze money markets. It seems the ECB is the only one suffering from paralysis! With UBS taking it on the chin and to-date-slashing 20% of its global workforce, the markets will have to entertain both JP Morgan and Citi earnings this week. What surprises lay in store for us? Creative accounting techniques are not new! However, restoring consumer confidence in the US financial system would require a transparent accounting and stress test system. Do you honestly believe we will get that? President Obama continues to temper optimism with realism. He believes the US economy is in recovery mode, the consumer can expect to experience further setbacks along the way. What is he preparing us for now?

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

US March Retail sales were weak across the board yesterday. The index registered a -1.1% m/m decline last month after the modest +0.3% upswing printed in Feb. (revised up from -0.1% m/m). Analysts note that the headline number failed to post the 3rd-straight increase which would have reduced the risks of a grim decline in 1st Q GDP. Core-Retail sales (ex-autos) fell by -0.9% m/m. Digging deeper, we had hoped that sales at gas stations were to provide uplift, as fuel prices have risen, however they fell by -1.6%, m/m, from +3.1% increase in Feb. Most of the other sub-categories were also weak. Clothing and electronics sales fell for the 1st- time in 3-months. On the flip side consumer confidence indicators edged a tad higher as expectations for the futures have brightened. The current conditions index remains exceptionally weak, with rising unemployment and tight credit conditions. This report highlights the strong evidence that the US consumer’s perceived resilience at the start of the year is disappearing. In concluding, it was a bad report and much worse than expected across-the-board.

Are deflation issues on the table again? Yesterday’s US PPI is signaling a weaker than expected pricing power amongst US businesses. Headline prices fell -1.2%, m/m, on a -13.1% m/m drop in gas prices, an overall -5.5% drop in energy prices, and a -0.7% decline in food prices. Y/Y the headline are -3.5% lower, this is the 4th-month of negative readings and a further acceleration of the negative trend. Core-prices were unchanged, on a year-ago levels, prices are +3.8% higher which continues the weakening trend from a +4.7% y/y peak in Oct. Digging deeper, everything fell except for prescription drug prices and tobacco prices. It’s worth noting that there is a solid decoupling between headline and core inflation figures. The latter remains stubbornly high, despite the deep recessionary economic outlook. On the other hand, headline inflation continues to fall at very rapid pace, reflecting positive base effects, we hope!

The USD$ currently is higher against the EUR -0.36%, GBP -0.29%, CHF -0.52% and lower against JPY +0.14%. The commodity currencies are weaker this morning, CAD -0.29% and AUD -0.67%. The loonie managed to print its highest levels in nearly 3-months yesterday, amid signs the global slowdown may be moderating. Also, option-related activity and the ability of the TSX to resist the downward pull of US equities contributed to the CAD spike. With Bernanke’s comments and GS profits, there seems to be cautious optimism that maybe the worst is over. Technical analysts believe that if the currency could penetrate the 1.2050 support level, it opens it up for a 1.1875 print. This may be a tad optimistic ahead of next week’s monetary policy meeting (21st April) and the expected quantitative announcement by BOC governor Carney on April 23rd. It is anticipated that the governor will want to ‘flood banks with cash to halt the hoarding of capital and expand lending’. A quantitative easing method has seen currencies depreciate significantly when their governments started the program (BOE, BOJ, and Fed). For now look to buy USD on pull backs.

The AUD continued its slide from its 6-month high’s for a 2nd-day on the back of weaker US fundamentals that has deflated somewhat the past 5-weeks of euphoria. Couple this with both Japanese and US equities declining and convincing investors to reduce their demand for higher yielding assets. For now, look for investors to sell on upticks (0.7202).

Crude is higher in the O/N session ($50.29 up +88c). The world’s biggest energy consumer weaker than expected retail sales put crude prices under pressure yesterday. Fundamental data and not supply issues (that comes this morning) is contributing to the black stuff’s less than stellar performance. Crude started the week under pressure after an IEA report for this year shows that total global demand may fall to its lowest level in 5-years. They expect consumption to fall -2.4m barrels a day to +83.4m, that’s a decline of +2.8% as worldwide GDP falls by -1.4%. The EIA report from last week showed a smaller inventory gain than the earlier API industry report. Inventories increased +1.65m barrels to +361.1m, while the API report said that stockpiles jumped +6.94m barrels (the highest in 20-years). The bullish report provided temporary market support but with inventories approaching record levels once again has investors thinking twice about investing. It was the 24th gain in 28-weeks. Until we see inventories decline substantially and sustainable demand destruction, there will not be a sustainable price gain. Again this morning we expect the EIA to report higher inventory levels for the week. Industrial reports continue to show that rising oil inventories and falling demand signal that the worst of the recession may not be over. Bernanke opens his mouth and gold falls. He said that there are signs that the ‘sharp decline’ in the economy may be easing, and thus eroding the appeal of the ‘yellow metal’ as an alternative asset ($891), how long can this optimism hold?

The Nikkei closed 8,742 down -99. The DAX index in Europe was at 4,554 down -2; the FTSE (UK) currently is 4,016 up +27. The 10-year Treasury’s eased 6bp yesterday (2.79%) and are little changed in the O/N session. Treasuries extended their gains yesterday as the Fed purchased $7.3b off-the-run US issues maturing between 4 and 7-years as part of its program to keep borrowing costs low (to date just under $52b buy-backs in 3-weeks). Weaker fundamental data combined with continuous buy-backs will in effect keep treasuries better bid on pull backs at the moment. Expect traders to make the government pay up for off-the-run issues tomorrow.

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