Bernanke dials for support while State of the Union to address Obama’s Volcker Plan

With cap in hand, Bernanke has been accumulating senator’s support for his re-election. Desperate times call for ‘demeaning’ measures. Bernanke’s pleading for what should have been a slam-dunk will not be taken as appropriate actions for someone of his stature. Publicly holding him accountable for the US debacle cannot be seen as a vote of confidence for the Fed as the pillar of strength for free markets. Later today his policy makers will reiterate their objective of ‘low interest rates for an extended period of time’. That’s the easy part done. Now he will have to convince global capital markets that their actions are best for ‘one and all’. More importantly, Obama’s first State of the Union should give us further insight to ‘his’ Volcker Plan.

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in another ‘whippy’ trading range.

There were mixed results with yesterday’ US data. Firstly, we were treated to a better than expected consumer confidence number (55.9 vs. 53.6), followed by a disappointing Richmond Fed manufacturing index (-2 vs. 0). The confidence index was stronger than expected in Jan. on gains in both the present situation and expectations components. A positive Dec. revision also gave support to the final headline print. Digging deeper and on a positive note, individuals claiming that jobs were ‘plentiful’, increased to the highest level in 5-months, while those claiming that jobs were ‘hard to get’ fell to the lowest level in the same time period. This is proof that we should continue to see an up swing in the labor markets. Now that the fiscal stimulus is finally filtering down, capital markets should expect to witness signs of progress in the next NFP release. Business conditions were mixed as those claiming that conditions are ‘good’ moved higher. The present situation component increased to the highest level in 6-months. While the expectations component also gained on the month, the details were mixed as consumers expecting better business conditions over the next 6-months declined to 20.9% while those expecting worse conditions increased to 12.7%. However, employment expectations improved modestly as those expecting fewer jobs fell to 18.9% from 20.6% (the lowest level in 15-months). Manufacturing should be happy as consumers are planning to buy more cars, homes and major appliances. The initial reaction from the report gave equity indices a ‘warm and fuzzy feeling’, but it did not last that long.

For a fifth consecutive time the Richmond Fed Index managed to disappoint the masses (-2 vs. 0). Analysts had expected it to claw its way out of negative territory. Digging deeper, we witnessed improvements in the shipment numbers, however, unlike the confidence index, employment and average workweek deteriorated over the last 4-weeks, causing another negative headline print. We should not despair as new orders are showing signs of life and rebounded back into expansion territory. The prices paid and received component rallied this month, while inventory levels of both finished and raw material goods softened slightly. Future expectations look positive, with most components relatively unchanged.

The seasonally adjusted 20-city index in the Case-Shiller report posted its six consecutive gain in Nov (-5.3% vs. -7.3%). The increase was partially offset by a downward revision spread over the previous two months. Analyst’s initially believed that the summer bounce was due in part to seasonal forces and did not expect the headline print to be sustainable. The past couple of reports suggest that seasonal forces were only ‘part of the overall story’.

The USD$ is currently higher against the EUR -0.36%, GBP -0.14%, CHF -0.26% and lower against JPY +0.22%. The commodity currencies are weaker this morning, CAD -0.34% and AUD -0.92%. With global equity indices and commodity prices fluctuating yesterday happened to push the loonie to print a new 5-week low. After experience a -3% drop last week vs. its largest trading partner, mostly on the back of a vocalized Governor Carney expressing his concerns of a strong domestic currency’s role on future growth, had futures traders paring their bets on when interest rates hikes would occur. Similar to the Fed’s policy, rates will remain low for an extended period of time. Technically, the currency is underperforming in the crosses and this is directly pressurizing the loonie. The market seems to be caught long the CAD and is eager to pare some of these positions. Depending on equities and commodities, any CAD rally will have investors looking to sell some of their long positions. In the short term, analysts believe the CAD is still overvalued and are targeting 1.0750 near term.

The AUD rose from near a 1-month low after a government report last night revealed that consumer prices gained more than the market had expected (+0.5% vs. +0.4%), giving the RBA and Governor Stevens the green light to raise interest rates next week (3.75%). The IMF added weight to the argument by stating yesterday that the Australian economy will outpace other advanced economies and expand +2.5% this year and +3% next year. Analysts believe with such a robust and stellar economy there is no reason to keep rates as low as they are. With regional bourses accelerating their losses, has reduced the general demand for higher-yielding assets. Any hint of Chinese tightening will always be a negative on the Australian economy and commodities. However, stronger Australian fundamentals have traders increasing their bets to a +76% chance that the RBA will hike another +25bp on Feb. 2nd. It’s expected to be their fourth consecutive hike (0.8995). Despite this, commodities continue to trade under pressure and possibly drag the AUD with it.

Crude is little changed in the O/N session ($74.71 down -1c). Yesterday, crude managed to print a 5-week low ahead of this morning’s inventory report where w/w stocks are anticipated to rise again. Mind you, the big dollar showing symptoms of strength has investors shying away from the black-stuff as an alternative investment. The commodity has clawed its way back from its low despite last week’s EIA report revealing that refineries have slashed their operating rates as fuel demand declines. Yesterday with the dollar giving up its earlier gains has ‘tempered the commodity selling for now’. Last week, plants were running at +78.4% of capacity, the lowest run rate in 16-months. Not unlike last weeks inventory build up, analysts are forecasting a similar scenario with this morning’s EIA report. This will only add fuel to the ‘bear strategy’ for commodities. Fuel use over the past month fell -1.8% from a year ago. There are concerns amongst analysts that the ‘increasing demand in China and emerging markets will not be strong enough to offset declines in other countries’ and technically may push the commodity down to the $70 level. The market has sellers on upticks for now.

Witnessing the selling of bullion to cover losses in the equity markets is likely to increase over the coming weeks. Global bourses are finding it difficult to hold onto any significant gains. From this week’s lows, the metal has rebounded as traders speculate that a weaker dollar should boost the appeal of the precious metal as a temporary alternative investment. The market is expected to remain contained until we get more clarity on interest rates later today. To date, the commodity has been top heavy with ‘one direction lemming buying’ after last years 24% rally. During the same period, the dollar has only fallen -8.5%. After last week’s -3.5% trading loss, any liquidation of the metal with momentum will have nervous investors seeking an early exit. With the EUR remaining vulnerable and the dollar the ‘go-to’ currency, expect to see selling on upticks for the time being ($1,094).

The Nikkei closed at 10,252 down -73. The DAX index in Europe was at 5,622 down -47; the FTSE (UK) currently is 5,223 down -53. The early call for the open of key US indices is lower. The US 10-year note backed up 2bp yesterday (3.62%) and are little changed in the O/N session. It is only natural to cheapen up the curve to absorb product as treasury prices came under pressure ahead of the 2-year auction. The 2-year note yielded 0.88% vs. 0.872% trading ahead of the auction. The bid-to-cover ratio was 3.13 compared to 2.91 in Dec. and 3.61 in Nov. The average over the past 4-auctions was 3.23. We now only have a further $74b worth of product to contend with this week. Despite a plethora of product coming to the market, yields continue to trade on top of their 5-week lows. The Treasury Dept. will auction off $42b 5’s today and $32b of 7’s tomorrow. This afternoon we have the Fed rate announcement and the market ‘can’ only expect rates to remain on hold.

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