Are bank’s profit hints at a warning in disguise?

A few ‘near’ nationalized financial institutions imply that they are making money and this is enough of an excuse for global equities to rally. Wow! With the amount of money being spent on them, I’d expect them to make money! Investors have been starved for some different rhetoric from the individuals who guided us into this mess in the first place. Near London this weekend, G20 Finance chiefs vowed to work together to clean up the toxic assets that helped trigger this financial crisis and led banks to rack up more than $1t in losses. They outlined guidelines on how governments should rid banks of distressed securities. Makes you wonder how profitable these banks are when they still need to ‘offload toxic assets’? It still does not seem to be part of their money making announcements!

The US$ is mixed in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies, in a ‘whippy’ trading range so far.

As anticipated, on Friday the US trade balance narrowed once again (-36b vs. -39.9b), but remains a ‘drag’ on US growth as it’s the ‘price effect’ that continues to improve the headline and not the ‘volume’ of net trade which is deteriorating. The nominal trade deficit has halved since July (-$62.8b) with lower oil prices being the biggest contributor. But, as analysts point out, the ‘real’ trade deficit has been deteriorating since Nov. which may suggest greater weakness with foreign economies like Europe, Asia, and Canada, who all seem to be experiencing rapid deterioration. Digging deeper one notices that exports fell by -5.7% in Jan. m/m, while imports fell at a faster -6.7% pace. Import prices fell by less than expected (-0.2% vs. -0.7%), but continue to put downward pressure upon broader US inflation. If the USD$ strength remains then this should keep import prices under pressure going forward.

The University of Michigan sentiment remains somewhat consistent and firmly rooted near its 30-year low (56.6 from 56.3 in Feb.). The fear of more record job losses and a deepening recession continues to weigh on consumer sentiment. The highest rate of unemployment in 25-years (8.1%) combined with the biggest drop in personal wealth due equities and house values plunging continue to distress the US consumer. However, on the optimistic front, the future consumer expectation (6-months), which more closely projects the direction of consumer spending, increased to 53 from 50.5!

The US$ currently is lower against the EUR +0.18%, GBP +0.66% and higher against CHF -0.01% and JPY -0.26%. The commodity currencies are little changed this morning, CAD +0.19% and AUD +0.16%. Friday’s data confirms that Canada is not immune to job deterioration numbers, the economy remains very much in-step with US losses. With Feb.’s loss of -82.6k jobs, Canada has now lost -295k positions since last Nov. This provides further proof that last months loss of -129k was not a statistical anomaly. More importantly, the income deterioration was greater than the body count, as full-time job losses continue to push hours worked lower. Full-time jobs were down -111k while part-time employment grew by +28k. Interestingly though, wages grew by +3.9% y/y in Feb. It’s expected that wages pressures will continue to lag the job numbers for the remainder of this year. A tad more depressing, despite the decline in employment pushing the unemployment rate up to +7.7%, this number is somewhat understated given that the labor force also rose by +23k. Canadian trade data on Friday did not hold back any punches either. Canadian economic activity faced further downside risks in Jan. as exports (35% of real-GDP) fell -9%. It was the 2nd largest decline on record, mainly due to weaker auto exports, thus putting further pressure on the nominal trade deficit (-$1b vs. -$0.7%).The loonie has depreciated -23% over the last 12 months on lower commodity prices. One should expect BOC governor Carney to once again revise their economic outlook targets and perhaps adopt sooner some extraordinary monetary policies to boost economic demand. Expect to see investors to be better sellers of the CAD$ on further USD$ pull backs.

Despite global equities gaining traction on the back of ‘certain’ banks expecting a healthier year and convincing investors to add riskier assets to their portfolios, the AUD$ has retreated from last weeks highs. Investors remain concerned that the countries deteriorating economy may convince the RBA to lower interest rates to new record lows (0.6592).

Crude is lower in the O/N session ($43.96 down -229c). The crude market is caught between concerns over the decline in demand, and production levels. On Friday, the IEA and OPEC cut their 2009 forecasts for oil demand for a 7th month and reduced supply estimates as the global economic slump saps consumption as well as investment in new fields. The former agency reduced its forecast to +84.4m barrels a day (decline of -1.25m y/y). OPEC’s estimates dropped to +84.6m barrels, a reduction of -1.01m barrels. This commodity has only one supporter and that’s OPEC (they pump 40% of the world’s oil). Since Sept. they have cut production 3-times to slow the slump in prices and prevent a glut on world markets. Yesterday, they decided to keep quotas unchanged, a prudent decision as they remain concerned that a further cut may risk damaging the ailing global economy. They aim to complete existing production cutbacks agreed to last year and meet again in May. Last weeks weekly EIA report was a surprise, crude stocks increased +0.7m w/w vs. a market expectation of +0.1m. That was the 20th increase in the last 24-weeks. Global economic data does not lend support to crude prices. China stated that oil purchases have dropped to +11.73m metric tons. Year-to-date their imports have fallen -13% to +24.55m tons, or +3.12m barrels a day. OPEC’s Secretary General said that they must remove another +800k barrels a day to reduce output by -4.2m since their objectives were established last Sept. Look for the this ‘black gold’ to be sold on rallies. Gold continues to resist any sustained decline and bounces back quickly on speculation that the recession will widen, thus boosting the appeal of the ‘yellow metal’ as a store of value ($930).

The Nikkei closed 7,704 up +134. The DAX index in Europe was at 4,042 up +89; the FTSE (UK) currently is 3,807 up +54. The early call for the open of key US indices is higher. The 10-year Treasury yields backed up 4bp on Friday (2.91%) and are little changed in the O/N session. Long bonds yields touched the highest in almost 4-months as the pace of debt sales by the government accelerated and global equities posted their biggest weekly gain in 4-months thus reducing the appeal of a safer heaven asset class. But the front end of the US yield curve remains better bid as the Fed delayed the start of a TALF program by a couple of days (its objective is to revive the market for securities backed by consumer loans).

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