Expect Trichet and the ECB to confuse the day!

This morning’s monetary announcements from the BOE, the UK Treasury and the ECB will make today a confusing day for financial markets. The Treasury is set to publicly authorize the BOE to carry out quantitative easing. The rate announcements themselves and trying to decipher Trichet can be like learning ‘hieroglyphics for dummies’ in an afternoon! All this excitement a day before NFP, after yesterdays dismal private ADP reports (see below) we must surely brace ourselves for the worst.

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

Yesterday’s private ADP report continues to paint a bleak picture, the drop to -697k was larger than the market had anticipated (-620k). Even last months figure was revised down from -522k to -614k. Employers are cutting staff as demand plummets in the face of strained credit and battered housing and equity markets. This does not bode well for tomorrows NFP where the US economy is expected to shred another -700k plus positions. Remember this report does not take into account hiring by government agencies. However, it’s important to remember that ADP revised its methodology in Nov. ‘08 to limit the differences between its calculations and NFP payrolls numbers. It’s always about the revisions, watch the revisions. Other data released yesterday revealed that the ISM for non-manufacturing (90% of the US economy) fell to 41.6 from 42.9, m/m. This still signals a contracting services sector with no material sign of improvement. The composite ISM index (manufacturing + non-manufacturing readings) has now retreated m/m since Jan. which points toward a quickening pace of decline in the overall economic activity. Digging deeper into the non-manufacturing report new orders, employment and inventories are all still falling at a slightly more rapid pace than the previous month.

The Chinese Premier Wen earlier announced that they see their +8% growth target for this year within reach and at this time do not need to increase their $586b stimulus package. The market had expected that this stimulus package would be doubled! This has caused equity markets to retreat this morning. The next big issue for China will be ‘social unrest concerns’. Already 20m rural laborers, who were employed in cities, have now migrated back to the countryside where there are no jobs; combine this with +7M colleague graduates and one has a melting pot!

The US$ currently is higher against the EUR -0.39%, CHF -0.19%, JPY -0.32% and lower against GBP +0.24%. The commodity currencies are weaker this morning, CAD -0.25% and AUD -1.04%. Yesterday, positive global equities remained the loonies’ friend, for now at least. The CAD$ found some traction when investors increased their risk appetite for commodity-dependent economies and higher-yielding assets such as equities. With capital markets speculating that China would announce further stimulus packages, investors wanted the CAD$. With crude advancing just under 6%, the loonie was bound to see some profit taking despite the BOC slashing rates by 50bp to 0.5% on Tuesday. In their communiqué the BOC sent a strong signal that it may well not be done cutting rates and that it is moving toward outright quantitative easing. This is a huge shift in tone from the last communiqué where they placed emphasis on how different Canada is compared to the problems being witnessed elsewhere in the world. Traders are looking for better levels to sell the CAD$ in the short term.

Economic data last night has once again put the AUD$, a higher yielding currency on the back foot. Jan.’s building approvals feel for a 7th-consecutive month while exports fell the most in 3- years, signaling proof that their economy is in its 1st-recession in 18-years. Already this week, their GDP report showed that the economy unexpectedly shrank last quarter (-0.5% vs. +0.2%). This will put pressure on the RBA to resume interest-rate cuts again, where earlier in the week Governor Stevens in a surprise move at the RBA kept O/N lending rates on hold (3.25%). Expect the AUD to be sold on rallies in the short term (0.6428

Crude is lower O/N ($44.15 down -114c). Crude oil had nearly erased all of its early week losses in the last two trading sessions. Yesterday investors increased their demand for the black stuff on speculation that China will broaden efforts to boost economic growth and bolster fuel demand in the world’s 3rd -largest economy, but, that’s not to be. The Chinese Premier was expected to announce a new $585b stimulus plan. Last weeks surprising EIA report showed an unexpected decline in US crude stocks which also gave the commodity a lift. Crude oil supplies fell -757k barrels to +350.6m vs. an expected rise of +1m barrels. Also lending support to prices was stockpiles at Cushing, Oklahoma, (where WTI is delivered) declined -553k barrels to +34 m w/w. Refineries operated at 83.1% of capacity, up +1.8% from the last report. Meanwhile gas inventories rose +168k barrels to +215.5m vs. an expected decline of -800k. Stockpiles of distillate fuels (heating oil and diesel), climbed +1.66m barrels to +143.3m. Analysts had expected a +1m decline. It’s interesting to note that US gas consumption averaged +9m barrels a day over the past month, that’s an increase of +2.2%. Already this week we saw a report that showed OPEC had cut output by -2.7% last month as producers try to stem price declines. The market is now trying to anticipate the future outcome of the scheduled OPEC meeting on Mar. 15th. During this recession they cut production 3-times last year and already they cut output -3.8% to +25.3m barrels a day in Feb. The market wonders if they will make additional cuts at these levels. With the stronger ‘buck’ cuts may not be warranted. Gold prices above all are consistent, consistently weak. Another losing day yesterday extended its longest losing streak in 2-years. Rising equities and broader government’s efforts to revive their economies has reduced demand for ‘yellow metal’ as a safe heaven asset class ($903). But, with China not monetarily increasing their stimulus package at this time investors may want to own some of the metal.

The Nikkei closed 7,433 up +142. The DAX index in Europe was at 3,822 down -68; the FTSE (UK) currently is 3,591 down -54. The early call for the open of key US indices is lower. The 10-year Treasury yields backed up 4bp yesterday (3.01%) and are little changed in the O/N session. Treasuries remain under pressure as global equities gained and the US government’s plans to rescue financial institutions boost the economy and service a record budget deficit will require increased sales of new debt next week to the tune of $60b. Supply issues will remain the order of the day for the foreseeable future as foreign investors will not be able to absorb this kind of supply indefinitely.

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