Bernanke to dig at Jackson

Those who can make sense of these markets go to the front of the line! It’s a stab in the dark to find compelling reasons why capital markets are acting this way. Yesterday’s US data was woeful and the demand for US 5-year debt was stronger than expected, yet treasuries fall and equities rally. Go figure! The moves make sense for one reason, assuming that with economic conditions so bad, helicopter Ben has to insist on more fiscal and monetary stimulus at Jackson Hole. Low interest rates alone ain’t cutting it. The housing sector is eroding personal wealth, the job situation remains dire and the savings ratio is higher. Cheaper capital has not been put to work as fear dominates, pushing us towards a double-dip recession. Policy makers can either fill the hole or bury the economy at the symposium.

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

US data is certainly not disappointing the ‘double-dip bears’. The durable good headline print disappointed all yesterday (+0.3% vs. +3.0%). The details showed a broad based retreat which happens to tarnish the one bright spot in the US economy, business investment. Using non-defense, ex-transport, as a proxy for business investment, it plummeted -8%, eroding all of last quarter’s gains. With retail sales being a threat to 3rd Q GDP, coupled with ‘the’ housing downturn and a weakening business investment has analysts believing that the possibility of negative real-GDP growth occurring is a real possibility. Perhaps the ‘double-dip’ scenario is within our grasp? Digging deeper, there maybe some positives in the report that have not been captured just yet. Analysts note non-defense orders climbed by only +29% compared to an over 2.5x fold rise in Boeing plane orders for the month (75% of the orders occurred at the end of the month). However, that being said, one should not expect revisions to the core, ex-transport print because of the weaker new-order regional surveys. Inventories happened to advance +0.6% for a seventh consecutive gain. The unfilled orders component was down -0.1%, marking the first month of retreat in four.
All signs of a cooling economy.

Records are to be broken, but, not necessarily in this fashion. US new home sales set another new record in July (+276k vs. +315k). The housing sector has the not so envious distinction of recording an -18% decline in registered volumes from the ‘depths of the 1980’s recession’. With new home sales dropping has pushed supply up to 9.1 months of inventory on hand. Adding this to the resale listings of 12.5 months and one can understand the enormity of the inventory overhang facing the US economy. Worst still, all this data excludes shadow inventories that are largely comprised of foreclosed resale homes held off market. There are little positives to draw from this week’s new and re-sale data. Lack of job growth and erosion of wealth is hardly going to be a positive contributor to the housing sector, in fact it will only add to further price pressure. The median (-6%) and mean price (-6%) declined last month, the median price back to the levels seen in 6-years ago.

The USD$ is lower against the EUR +0.55%, GBP +0.65%, CHF +0.09% and higher against JPY -0.02%. The commodity currencies are stronger this morning, CAD +0.46% and AUD +0.59%. The loonie has been feeling the pain and pressure that comes with being a growth, interest rate commodity sensitive currency. It kept intact its longest losing streak in 19-months yesterday as risk aversion drove bourses lower and tarnished the outlook for currencies tied to growth. In the O/N session, some of the currency losses were recouped as the market was believed to have been oversold. Canada is not immune to weaker data reported south of its borders. Over +70% of its trade is conducted there. This ‘faltering economic recovery means the chances for a further BOC interest-rate increases this year weakens day over day’ and diminishes further the appeal of the currency. Over the past two trading sessions, weaker CAD long positions have been squeezed out as fear of a double-dip occurring has investors seeking sanctuary in risk aversion trading strategies. It is only natural that growth and interest rate sensitive currencies would be dumped even more aggressively. Traders are happy to play the risk-aversion card with longer term CAD bulls looking to pick up cheaper loonies north of 1.0650.

The AUD has ended two downward days on speculation that Japanese policy makers may consider intervening in the markets and dampen the demand for JPY. Comments from Japanese officials have squeezed their currency lower across the board again in the in the O/N session. Global bourses under pressure have been capable of pushing the AUD to test its one month lows earlier this week. However, in the O/N session with Asian bourses finding its legs has given some life to the growth and interest rated sensitive AUD. On the whole, concerns that global growth is slowing has damped investor appetite for higher-yielding assets. The currency has underperformed against all of its major trading partners and is expected to do so until there is a new Government formed. The commodity rich currency is not isolated, as other growth sensitive currencies are suffering the same fate. Government data has also happened to put a lid on the recent rally. Net result traders are adding to their bets that the RBA will leave interest rates unchanged for the next 12-months. Interest rate differentials play a big part of the currency’s attractiveness. Risk aversion will likely force the bull’s hand, capping rallies with better sellers on upticks (0.8868).

Crude is higher in the O/N session ($73.11 up +60c). Yesterday, crude prices fell after the weekly EIA report showed an unexpected increase for all energy products. Not helping matters was US economic data giving little evidence of an upsurge in future demand to make an impression in this stock saga. US crude stockpiles rose by +4.1m barrels last week, surprising analysts who had expected a modest decline of -0.1m barrels. Gas inventories grew by +2.3m, while distillates (ex-heating oil and diesel fuel), saw inventories rise by +1.8m barrels. The market had expected gas stocks to fall by -500k and distillates to climb by +900k barrels. The data confirms that the current US supply glut continues unabated, even surpassing record levels reached last week. Analysts note that the ‘commercial supplies of oil and oil products are at the highest level in nearly 27-years, with gas stockpiles well above 5-year averages’. It’s no wonder that crude prices continue to gravitate towards the $70 psychological support level. The report re-confirms the IEA conclusion earlier this month that ‘oil demand could take a substantial hit should economic growth continue to falter’. Speculators remain better sellers on up-ticks in the short term as crude rallies somewhat in this oversold market.

Gold has climbed to a seven week high and continues to stay the course this morning as investors seek sanctuary in the safer heaven asset classes on the back of weaker equity markets. With global bourses under pressure, investors are trying to put there cash somewhere more solid on mounting evidence of an economic slowdown. Speculators again are supporting the various safe heaven assets on pullbacks, avoiding risky assets due to uncertainties in the markets. With a genuine fear for global growth, by default, should boost the demand for the metal as a protector of wealth in the grand scheme of things. Year-to-date the metal has risen +12.1%. With treasury yields expected to remain low, could promote a quickening inflation rate, which would promote pushing commodity prices even higher. The opportunity costs of holding gold are low due to falling interest rates ($1,243 +$2.50c).

The Nikkei closed at 8,906 up +61. The DAX index in Europe was at 5,910 up +11; the FTSE (UK) currently is 5,133 up +24. The early call for the open of key US indices is higher. The US 10-year eased 1bp yesterday (2.50%) and is little changed in the O/N session. At one point treasuries happened to advance, pushing the yield on the 10-year note to the lowest level in 19-months, as new home sales unexpectedly dropped last month to a record low and orders for durable goods rose less than economists forecasted. The curve flattened enough to trigger analyst’s 2’s/10’s +200bp short term objective. Treasuries 5-year note sale came in with a record low yield of 1.374%. The bid-to-cover ratio was 2.83, compared with a 4-auction average of 2.65. The indirect bid (foreign buyers) was 51% (v-strong), compared to the average of 41%. The direct bid was 9% vs. 12.7%. In total, the US plans to sell $102b of debt this week. Today we get the final allotment, 7-year notes (+$29b). This will be the smallest monthly offering of ‘the’ combination thus far. Longer term buyers continue to control the market, that being said, product does look rich on the curve.

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