Are US Treasuries to be Tax deductable?

Make US Treasuries tax deductable? A tax advantage might be a nice incentive to get the public involved and take up some of this record supply. This question was posed to Bill Gross from PIMCO yesterday. Was this an innovative thought? Was the interviewer being fed a question by a higher authority? What ever the reason it’s a unique idea never the less that solve the demand concerns!

Here are 5-quick reasons ‘not’ to own the USD this morning:

1. The BRIC countries will discuss the ‘dollar’s dominance’
2. PIMCO is vocal about US ratings again.
3. South Korea pension funds are looking to diversify away from it.
4. The strength of commodities.
5. ECB is openly concerned about the greenback. The demand for yesterday’s 7-year Treasury auction was less than impressive.

The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in a ‘whippy’ trading range.

April’s US durable goods numbers surprised to the upside yesterday. The +1.9% print was the largest headline reading since Dec. 2007. However, it followed a revised -2.1% drop for Mar., which was more than double the previous estimate (-0.8%). The gains can be attributed to a surge in both auto demand and defense spending which outpaced again any investment in business equipment (analysts believe that this variable will be the last area of the US economy to gain traction as companies with record spare capacity will shy away from investing in new equipment until sales improve). Ex-transportation, the print advanced to +0.8% vs. -0.4% m/m.

Are the biggest rounds of firings over in the US? Last week we witnessed fewer Americans filing for unemployment claims. It was down on the week by -13k to +623k vs. the previous revised headline of +636k. Perhaps with the slowing of job-losses this may encourage the US consumer to loosen their grip on the purse strings? It is probably the most important variable in the equation to US recovery happening during the Fed’s timeline. The catch-22 of course is that companies will be disinclined to hire workers and increase production until sales growth is sustainable. Pessimists will tell you be weary of the range bound headlines, they expect claims to head even higher over the coming weeks once auto sector troubles fully work their way into the reporting data!

Other US data showed that the purchases of new homes rose for the 2nd time in 3-months yesterday supported by both lower prices and cheaper financing. Month-over-month, sales increased +0.3% to +352k vs. +351k, but lower than initial analysts estimates of +363k. The median sales price has fallen -15%, y/y, and the number of units on the market fell to its lowest level in nearly a decade. Not such good news was that the MBA (Mortgage Bankers Association) reported that delinquencies (seasonally adjusted +9.12%) and foreclosures (+1.37%) rose to new records in the 1stQ because of mounting job losses. No pay, no mortgages!

The USD$ currently is lower against the EUR +0.40%, GBP +0.66%, CHF +0.34% and JPY +0.47%. The commodity currencies are stronger this morning, CAD +0.76% and AUD +0.61%. The loonie continued its strengthening bias in the O/N session as commodities, especially crude touching a 7-month high, enticed investors to invest in higher-yielding assets. With the USD struggling, parity talk is back on the table. Some are buying into the theory that with Canada being a small, open economy and sensitive to trade flows, if and when the global economy is doing better then Canada is expected to reap the benefits very quickly. There is no disputing this theory, it’s expected over time that the loonie will trade at a premium to its southern neighbor, but, at such an early stage in the game, the move has been too aggressive and too quick. The month of May has been good for the higher yielding commodity currencies (AUD, NZD and CAD), while the USD is the worst performing currency. There is nothing fundamentally supporting the currency, even the Canadian finance minister this week said that the proposed national deficit will balloon to $50b from the $34b announced in Jan. The longer term fundamentals certainly support a much stronger CAD, however investors have plenty of time to add to their positions at more favorable levels.

The AUD is heading for monthly record advance across the board (+9.4%) as investor confidence is boosting the purchases of higher-yielding assets. Commodities account for 50% of the country’s total exports and the weekly price rise is the biggest witnessed in 35-years. The country’s fundamentals remain strong and with commodities nudging forward, one should expect buying on pull backs ((0.7956).

Crude is higher in the O/N session ($65.58 up +50c). For the 2nd time this year OPEC members left production quotas unchanged yesterday in Vienna and will rely on demand to increase by year-end. They are responsible for 40% of the worlds supply and agreed to keep production quotas at the 24.8b level. OPEC treads a fine line, the world has ample supply at the moment and the organization does not want to send out the wrong signal to struggling economies. To date members have only completed 77% of the previous cut implemented last Sept. A struggling greenback has also lent support to commodity prices. A day late reporting due to the Memorial holiday the weekly EIA inventories declined -5.41m barrels to +363.1m last week. It was an eye popping drop and the biggest in 9-months (hurricane season). Analysts were expecting a weekly decline of only -150k barrels. Technical analysts say that with oil rising above its 200-day moving average for the 1st- time in 8-months is a signal that prices will rally even further. If OPEC ever fully completes the cut-backs then perhaps the black stuff will manage to achieve their desired target of $75 year end. Some analysts believe that with record 19-year high inventory levels combined with the contraction in activity in advanced economies, the market should expect some sort of pull back from these levels. Of course the ‘dismal dollar’ will not aid their theory. A spluttering USD has given new life to the yellow metal. One should expect speculators and investors to want to own the commodity as a hedge for the greenbacks slide ($973).

The Nikkei closed 9,522 up +71. The DAX index in Europe was at 4,996 up +63; the FTSE (UK) currently is 4,442 up +55. The early call for the open of key US indices is higher. The 10-year Treasury eased 4bp yesterday (3.66%) and another 7bp in the O/N session (3.59%). Be aware of strong month-end demand today, there is a hefty month end index extension expected, coupled with a new round of Fed buy-backs announced yesterday could give the FI curve more of a bid!

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