Away MPC Team score a victory for GBP

Capital Markets seem to be going through a three spin cycle, growth, inflation and event risk. Global growth is tentatively finding traction. Markets hear the Euro inflation rhetoric and dealers are applying Middle-East event risk. Over the coming weeks the Euro-region will be putting incredible demands upon Capital Markets. Center stage shall be Belgium and Portugal’s need for capital as their large debts need to be rolled over. They are not alone. Every member of the Euro-region has debts that need to be financed in the next five-months and most of them seem to be ‘front loaded’. Does the market have such a large Euro appetite? It was a 6-3 home win at the MPC minutes meeting this morning. As expected, Spencer Dale joined Sentance and Weale in asking for a hike in rates amid the growing inflationary environment in the UK. The away team is gathering support for GBP as many now expect the committee to begin a tightening bias as early as May.

The US$ is weaker in the O/N trading session. Currently, it is lower against 11 of the 16 most actively traded currencies in a ‘whippy’ O/N session.

US investors had some data to chew on yesterday, albeit, not as geopolitical sensitive as the inflation rhetoric out of Europe or the event risk scenario of the Middle-East and North Africa. US home sales and prices will hog the spotlight this week. Yesterday’s S&P/Case-Shiller 20-city price index, not surprisingly, fell -2.4% last year. Analysts note that prices had been rising in the earlier part of last year until the end of the federal tax credit incentive. Today we will bear witness to the NAR report on sales of existing homes. Analysts expect a headline print of +5.25m. Tomorrow, we have the FHFA index, similar to Case-Shiller report. It’s expected to confirm that sales prices are indeed slipping.

The CB said its index of consumer confidence jumped to 70.4 this month from a revised 64.8 in January. It’s worth noting that the CB revised all its indexes back to November to reflect a new methodology. The market is taking it on face value as a bullish report. However, investors should be weary and discount some of the headline print in the context of the mounting risks facing personal disposable incomes. Household continue to signal higher income expectations. This uncertain job market to deliver such expectations is not inevitable. The geopolitical risks that have created a spike to oil and gas prices is expected to weigh on household optimism, as will the fact that 30-year mortgage rates have climbed nearly +80bps from early November lows. These are major reasons to eventually eat away at households discretionary incomes. Digging deeper, the 6-month expectations index drove most of the headline gain, climbing to 95.1 from 87.3 (highest reading in four-years). Finally, expectations about labor markets were mixed, 64.8% of respondents expect no change in jobs in the next six-months. Job growth has been weak link so far in the recovery, last month only +36k new jobs were added.

The USD$ is lower against the EUR +0.44%, GBP +0.68%, CHF +0.07% and JPY +0.0%. The commodity currencies are stronger this morning, CAD +0.15% and AUD +0.40%. Yesterday’s Canadian data will have dealt a blow to next Monday’s GDP print. Headline sales fell -0.2% in December. The only positives that are lining up for the month are coming through net trade and wholesale trade. All other influences upon December GDP growth over the prior month are negative and that include real manufacturing shipments, housing starts, and hours worked. Are we setting ourselves up for a negative print for December GDP over November? Digging deeper into the sales report, of the 11-categories, five experienced declines, led by motor vehicle (-2.8%), while the biggest gain was recorded in gas station receipts (+7.6%), supported by higher energy prices. Total sales excluding motor vehicle and gas stations retreated to +0.6%. Governor Carney, over the weekend, admitted that it’s ‘possible’ the economy grew at a faster pace in the fourth quarter than the BOC projected last month (+2.3%). The ‘question is how much of that momentum carries over into 2011, which is not based on one report, but is based on a series of reports, analyses, industry meetings, surveys, that we do’. Risk aversion trading strategies is hurting growth sensitive currencies at the moment and this despite commodity prices rising. The implosion of commodity prices due to geopolitical pressures will eventually support and push the loonie higher against all its major trading partners. For the moment, investors continue to look for better levels to own the CAD (0.9892).

The AUD rose after RBA Governor Stevens said mining investment may increase by as much as +2% of gross domestic product in the next few years. ‘At the risk of sounding like a broken record, the rise in Australia’s terms of trade over the past five years is the biggest such event in a very long time’. Australia ‘should not assume that the recent pace of national income growth is a good estimate of the likely sustainable pace’, Stevens said. ‘We should allow a good deal of the income growth to flow into saving in the near term. We can always consume some of that income later if income stays high, but it is harder to cut back absorption that rises in anticipation of income gains that do not materialize’. On the data front, Australian wage growth accelerated in the 4th Q, adding to the risk of future inflation via a consumer that may throw ‘caution’ to the wind. His speech is supportive of higher yields and a higher currency. Despite geopolitical uncertainties, the demand for higher yielding growth currencies on pullbacks remains steadfast (1.0021).

Crude is higher in the O/N session ($96 +58c). Crude prices remain elevated on Middle-East geopolitical concerns. Fear that supply disruption is on the horizon continues to provide support on pullbacks. Even Brent prices have eclipsed their two-year high. The IEA’s chief economist said that ‘higher oil prices pose a danger for a global economic recovery and industrialized countries stand ready to release oil from stockpiles to meet Middle-East supply disruptions’. Last week’s EIA report showed a smaller than expected increase in weekly stocks. Inventories rose +900k barrels vs. a market expectation of a rise of +2.8m. Gas fared no better, inventories increased by +200m barrels. Analysts had been expecting an increase of +1.7m. The supplies of distillates (heating oil and diesel) happened to decrease by -3.1m barrels vs. an expected decline of -1.1m. On the face of it, the report was bullish. Concerns about the Middle-East and production problems in the North Sea are boosting Brent relative to WTI and pushing the spread to a record premium. Even the value of the Yuan is lending a helping hand, especially after reaching a 17-year high vs. the dollar, making it much cheaper for them to acquire ‘their’ coveted commodities. With supply the number one concern, the commodity will remain bid because of the contagion risk in the Middle-East.

Gold managed to retreat from its five-month high as the dollar itself shouldered some of the risk aversion weight that the metal had been bearing for the past six-trading sessions. Prices have risen nearly +5% this month, as protests in favor of democratic reform in North Africa turned bloody. Investors have grown increasingly uneasy that the crisis could spread. Even hawkish global rhetoric has managed to give the yellow metal a leg up in February. Consumer prices are also boosting the demand for the precious metal as a hedge against global inflation. Last week, the market witnessed Chinese’s inflation accelerating the most in six years, and UK consumer prices the most in two years. Even US data is showing that their inflation numbers are edging higher. The commodity that every investor hated last month is very much in demand and is being used as a store of value. The asset class is expected to remain better bid on speculation that currency volatility will boost demand for a safe heaven investment once the Euro contagion fears raise its ugly head again over the coming weeks during the Euro-periphery refunding season and Irish elections later this week ($1,401 +$0.00c).

The Nikkei closed at 10,579 down-86. The DAX index in Europe was at 7,289 down-28; the FTSE (UK) currently is 5,950 down-46. The early call for the open of key US indices is higher. The US 10-year eased 4bp yesterday (3.48%) and is little changed in the O/N session. Geopolitical pressures continue to support treasuries despite the uptick in US inflation numbers last week. The US Treasury auctioned $35b 2-year notes yesterday, a portion of the $99b of new product earmarked for this week (today-5’s and tomorrow-7-years). The 2-year issue stopped +0.25bp through the auction deadline quote of +0.745%. There was a 3.03 bid-to-cover ratio (the smallest in seven months), compared to a 3.54 six-auction average. Indirect took 31.3%, up from 27% last month. Direct bidders took 6.8%, the smallest takedown in 18-months. Despite the supply, risk aversion appetite dominates all asset classes. Expect dealers to provide some concession in the front of the curve for supply.

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