‘An unambiguous sign of improvement’ Is it really?

The slowing pace of deterioration does not alter the fact that the US economy is weak. Construction remains weak, the auto and retail sectors are in deep distress, home foreclosures are growing. With more properties on the market, real estate prices will continue to fall adding to more losses and ‘uncertainties confronting’ US banks. But, with the unemployment rate at 9.4% its time to get giddy!

The US$ is stronger in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies in a ‘subdued’ trading range.

The deepest recession in the US in over 50-years seems to be abating. Friday’s headlines showed that they lost fewer jobs last month than originally anticipated (-345k vs. -525k). Even more of a pleasant surprise was the revision of the previous month’s number by +35k to -504k losses. As expected, the unemployment rate ticked up to +9.4% vs. +8.9%, the highest level in 26-years as more individuals joined the work force. Despite the job market continuing to be in contraction, on the face of it, it was not as bleak as the consensus. Digging deeper, the sub-categories showed a drop in hours worked and a slowdown in earnings. One may conclude that any medium term recovery will be muted. The twin evils of spending and savings remains strong as the US consumers continue to spend less and saving more as personal wealth destruction remains robust. A shorter work week and less hours worked will eventually catch up in the spending numbers for the 2nd Q.

The USD$ currently is higher against the EUR -0.62%, GBP -0.84%, CHF -0.76% and lower against JPY +0.31%. The commodity currencies are weaker this morning, CAD -0.39% and AUD -0.83%. Friday’s Canadian headline unemployment numbers were close to market expectations (-41.8k vs. -36.4k), however the underlying details point to a moderately worse than expected overall report due to the concentration on full-time job losses (-58.7k) and cooling of wages levels. Analysts expect the losses to put further downward pressure on future cash flows and disposable incomes. If there is no spending then there will be no growth! Digging deeper it’s noticeable that fewer hours worked will of course affect income. The unemployment rate increased by more than expected (+8.4% vs. +8.0%), all on the back of the labor force growing in May. Wages grew at their slowest pace in 2-years and are up only +3.4%. Not good for cash-flows, but good for immediate inflation concerns. Regionally most of the losses can be attributed to one province, Ontario who witnessed -60k fall. Last week Governor Carney at the BOC reiterated their intention to hold the current policy rate at 0.25% until the end of the 2nd Q 2010. In an unprecedented fashion he managed to comment on the state of the loonie by noting that ‘if the unprecedentedly rapid rise in the Loonie proves persistent, it could fully offset these positive factors’. The BOC is basically confirming that the appreciation is not linked to fundamentals. Expect the market to continue to sell CAD on USD pullbacks for now.

After last week’s advance, the AUD remains robust with RBA governor Stevens indicating that policy makers must be cautious about lowering borrowing costs too far. At last week’s monetary policy meeting they kept rates on hold (3.00%). Traders continue to look favorable on the currency because of its yield advantage and its association with commodities. In the short term look for better buying opportunities on pullbacks as the currency marches upwards (0.7866).

Crude is lower in the O/N session ($67.15 down -129c). On Friday, oil pared earlier gains on the back of a stronger greenback receiving support from a surprising NFP report. At one point the commodity was able to penetrate that $70 a barrel, but with the employment surprise convincing some investors that the worse of the US recession may be in sight pushed prices lower. Oil needs to break the support price of $64 to gather any true downward momentum. Fundamentals will tell you the opposite. We have had elevated prices because of a weakening USD. The world is awash with oil, demand destruction is intact and 19-year US record inventories remain. Even last weeks EIA report reveled that crude inventories climbed +2.9m barrels to +366m vs. an expected loss of -1.6m. Crude stocks gained as imports and refineries increased their operating rates to the highest level in 6-months. Refineries are operating at 86.3% of capacity, up +1.2%, w/w. The true fundamentals do not justify these elevated prices as the 4-week moving average for US consumption is +18.2m barrels a day, that’s down -7.7%, y/y. Even with both OPEC and Russia raising production last month (to capture some of their capital gains) does not support higher prices for too long. OPEC’s output climbed +1.5% to an average +28.15m barrels while Russia’s output advanced a 3rd straight month (+0.t9%). Many believe that oil has climbed too quickly as the rapid gain has been based on stronger equities and a weaker dollar. However, the frightening part is that if OPEC complied with its Sept. production cuts (currently only at 77%), this commodity would be much higher! The ‘yellow metal’ fell to its lowest level in over a week as the rallying greenback reduced the metal’s appeal as an alternative investment ($948).

The Nikkei closed 9,865 up +97. The DAX index in Europe was at 4,993 down -83; the FTSE (UK) currently is 4,384 down -53. The early call for the open of key US indices is lower. The 10-year Treasury’s backed up 10bp on Friday (3.85%) and is little changed in the O/N session. Speculation that the worst of the recession may be over in the US had caused treasury prices to fall aggressively on Friday. Traders drove yields to the highest level in 7-months after NFP reported that US employers cut the least amount of jobs in 8-months. With the Treasury announcement of another $65b of 3’s 10’s and long bonds to be issued this week also had dealer’s pre-selling the market. The market requires higher rates to attract investors to take down the supply.

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