‘Every breath you make Ben Bernanke, we will be watching you’!

AIG CEO uses words like ‘expects’ and ‘hopeful’ warrants a +21% rise in the stock? Just goes to show who is short what! The shenanigans at Jackson’s hole will take center stage today and every breath Bernanke takes we will be watching him! FX traders are not narrow minded individuals. We continue to expand our horizons. We have now become both ‘Chinese Stock experts’ and ‘Caribbean Hurricane watchers’ at the same time. Multi-tasking is an art form. It’s making FX trading in these summer months less boring! The threat of the Chinese Government to implement tighter banking capital requirements will certainly put downward pressure on the +60% rally their equities have experienced. Why? The banks may need to sell shares to raise the required +12% minimum capital adequacy ratio. Now, just do not ask me today’s weather forecast…….

The US$ is weaker in the O/N trading session. Currently it is lower against 9 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Yesterday we witnessed first hand data that the recent US job market improvements have stalled. Expect consumers to remain on the defense for a considerable period of time because of the weak job market, the 2nd coming of mortgage resets and housing inventories that will push the monthly supply even higher. This week’s initial claims were weaker than market consensus (+576k vs. +550k). Initial claims have been stuck in the +500k range since July, a bitter pill to swallow and will hardly aid consumer recovery! On the other hand continuing claims came in close to expectations (6.239m vs. 6.241m), but it too, has stalled in their improvements. The slight improvement in the headline most likely reflects migration of individuals to other benefit programs. Extended and emergency benefit prints tend to lag initial and continuing headlines by 2-weeks. Analyst’s noted that emergency benefit recipients advanced +92.4k, w/w. On the other hand extended benefit recipients fell by -48k (we go from initial to continuing to emergency to extended). Thus, +576 initial, +6.24 continuing, +2.8m emergency and +400k extended equals a long recovery process!

Not all data was depressing yesterday. The Philly Fed manufacturing index advanced for the 1st-time in over a year (+4.2 vs. -7.5). Theoretically, it is a sign that the region is pulling out of the recession. Almost everyone believes that we are moving towards growth in the 3rd Q. It’s anticipated that manufacturing will contribute to the recovery in the latter half of this year as factories speed up assembly lines after cutting inventories, the scourge of this recession at a record pace. The US Government has brought back some harmony to the auto-industry with its ‘cash for clunkers’ program. Now, all we need is ‘green shoot economics’ to take root and filter throughout other industries!

Not so good news from the MBA yesterday. They reported that the share of loans in the US (mortgage delinquencies) with one or more overdue payments jumped to a seasonally adjusted +9.24% of all mortgages (a new record high from +9.12% in the 1st Q).

The USD$ currently is lower against the EUR +0.26%, CHF +0.33% and JPY +0.30% and higher against GBP -0.10%. The commodity currencies are mixed this morning, CAD +0.10% and AUD -0.21%. Yesterday’s Canadian June wholesale sales rose in June for the 1st-time in 9-months (+0.6% vs. +0.0%), led by autos and food products. This is strong evidence that the Canadian economy is truly emerging from ‘this’ recession. It was no wonder that Goldman put out a buy CAD recommendation yesterday that had everyone and their mother apply the lemming trade! I am sure the BOC will not be happy, last month they predicted 4th Q growth, but the value of the currency was going to affect the ‘pace’ of it. The bullish weekly crude reports have resuscitated the currency and encroaches in on the monthly highs. If commodities remain elevated we are going to have a nervous Governor Carney again!

In the O/N session the AUD fell vs. both the USD and JPY, heading for a 2nd-consecutive week of declines, as it’s expected that the Chinese government intends to tighten capital requirements for their banks, which in effect tarnish the shine for higher-yielding assets. In Europe the currency has managed to pare back some of its losses. Let’s see what commodities have in store for us today (0.8301).

Crude is lower in the O/N session ($72.64 down -27c). Crude prices were little changed yesterday after the disappointing weekly inventory reports. Hot on the heels of a bullish price API report on Tuesday, where inventories fell a shockingly large -6.1m barrels, the weekly EIA report was not going to be out-done. The government report showed that US inventories declined the most in more than a year as imports plummeted and refineries increased their operating rates. Refineries operated at 84% of capacity last week, up +0.5% from the prior week. Inventories declined -8.4m barrels, w/w. More eye-catching was that imports fell -15% to +8.53m barrels a day (the biggest drop and lowest rate in 11-months since the last hurricane season). Crude prices for the longest time have been trying to find their own conviction and investors have been looking for signs that the US would recover its energy appetite as the economy recovers. The commodity also gained as the USD declined vs. other currencies, increasing its appeal to investors looking for an inflation hedge. Even Kuwait’s oil minister declared this week that current prices are ‘not bad, not bad at all’. We are now officially over the hump of the US driving season and just about to enter historically a weak demand month of Sept. Despite probably seeing the worst of the recession, global growth will remain very subdued. This certainly does not bode well for any strong rebound for prices in the coming months. But, after all it’s the hurricane season! Gold prices eased yesterday as investors cautiously speculated that the USD may strengthen after an unexpected increase in US jobless claims. If so, this would curb the demand for the yellow metal as an alternative investment ($942).

The Nikkei closed at 10,238 down -145. The DAX index in Europe was at 5,321 up +11; the FTSE (UK) currently is 4,766 up +10. The early call for the open of key US indices is lower. The 10-year bonds backed up 1bp yesterday (3.46%) and eased 3bp (3.42%) in the O/N session. Despite the fact that US data indicates that the worst of the economic and financial crisis is behind us, treasuries trade close to their 5-week yield lows. Investors are probably concerned what the recovery will look like. No-one is rushing out to strap on risk while equities remain so fickle after China’s announcement to increase bank capital requirements. The Treasury announced a total of +$109b of 2’s (+42b), 5’s (+39b) and 7’s (+28b) for next weeks funding requirements. Expect dealers to want to cheapen bonds accordingly to take down supply!

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