FED and BOJ Losing Investors Focus

Investors continue to test the Fed’s resolve. Is helicopter Ben overly optimistic on his economic outlook? And if so, what is he going to do about it? Yesterday’s equity and bonds reaction is telling us that there is little he can do if policy makers have got it wrong. The Fed, similar to the BOJ is entering ‘no-mans land’. Markets are turning their back on Shirakawa’s emergency lending facility expansion. Even direct yen intervention is futile without the ECB and Fed’s complimentary actions. This week focus on the details. Focus on the Fed’s minutes, focus on ADP report tomorrow and focus and strap yourself in for NFP this Friday. Already this week analysts have revised the private payroll down to zero job growth!

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

Yesterday’s US data revealed that consumer spending continues, but, with milder gains. Headline spending happened to beat market expectations (+0.4% vs. +0.3%), with half of gain due to price effects, as real-sales grew at a slower pace than that of nominal-sales. This is definitely stronger proof of a weaker pace of consumer spending. However, with spending representing 2/3rd of the US economy and any gains, be it mild, should alleviate fears of an imminent double-dip occurring. Digging deeper, spending continues to contribute to growth, albeit mildly. Inflation adjusted, it grew at +2% in the 2nd Q. Analysts note that if the rest of the 3rd Q is flat then quarterly consumption will be up +1.3%. The personal savings rate eased 3-ticks to +5.9% in June, while the Fed’s preferred measure of inflation, core-PCE, rose +0.1%, m/m, and is +1.4% higher y/y and is certainly not deflationary from policy makers perspective. Finally, total personal income was up +0.2%, while wages and salaries advanced +0.3%. The data points again to ‘very slow growth’, which is ‘a far cry from a double-dip’ at the moment at least!
 
The USD$ is weaker against the EUR +0.17%, CHF +0.70% and JPY +0.37% and higher against GBP -0.13%. The commodity currencies are mixed this morning, CAD +0.13% and AUD -0.13%. The loonie is trying to solidify its worst monthly performance in three (-2.4%) this month. After earlier printing new monthly highs yesterday, the currency did an about turn as surprisingly weaker economic data added to the evidence the country’s recovery has indeed slowed. The data released showed that Canadian factory product prices rose less than expected (+0.1% vs. +0.5%) and the current account balance widened more than forecasted (-11b vs. -10.2b). All last week the loonie had been feeling the pain and pressure that comes with being a growth, interest rate commodity sensitive currency. With global bourses and commodity prices its two biggest supports back peddling has happened to pressurize the weaker long CAD positions. Canada is not immune to weaker data reported south of its borders. This ‘faltering economic recovery means the chances for a further BOC interest-rate increases this year weakens day over day’. OIS have moved to a 60% chance that Governor Carney goes next week. 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 on dollar rallies.

In the O/N session Australia’s current-account deficit narrowed (-5.6b vs. -6.4b) to the least in 8-years, and retail sales (+0.7% vs. +0.4%) and building approvals rebounded (+2.3% vs. -0.6%), signaling the economy is strengthening even as recoveries in Japan and the US show signs of faltering.The AUD has traded under pressure vs. the yen on speculation that the BOJ decision to expand its loan program will fail to halt the currency’s appreciation and pared its advance vs. the dollar as the size of the CBanks step disappointed investors, causing Asian bourses to unwind some of their earlier advances. 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. Australia’s rate moves have helped to add a +6% gain to AUD vs. the dollar in the past year (the fourth-best performer among the world’s 16 most actively traded currencies). 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 up-ticks (0.8889).

Crude is lower in the O/N session ($73.51 down -119cc). Crude prices continue to soften as dealers believe that last week’s +2.5% gain from its lows was a tad over optimistic given the outlook for fuel demand in the US over recent weeks. The dollar climbing vs. the EUR has also helped to heap pressure on the commodity. The commodity continues to hover just above this months low on concerns that weaker economic data will push the US into a double-dip recession. The market should be wary that the underlying situation has not changed, the fundamentals remain very weak, demand does not look good and stockpiles of crude and products remain at a record high for a second consecutive week last week. The EIA report showed an unexpected increase for all energy products. US crude stockpiles rose by +4.1m barrels, 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 this month. 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. Speculators remain better sellers on up-ticks in the short term.

Gold prices have been fluctuating in and out of positive territory, to some extent tracking global equities, as investors contemplated boosting their demand for the commodity as a safe heaven. The fact that the dollar may weaken is also aiding the precious metal as an alternative asset. All last week investors had sought sanctuary in the safer heaven asset classes on the back of global bourses. Investors are trying to put there cash somewhere more solid on mounting evidence of a US 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. With treasury yields expected to remain close to their lows, 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 ($1,236 -90c).

The Nikkei closed at 8,824 down -324. The DAX index in Europe was at 5,869 down 43; the FTSE (UK) currently is 5,159 down 42. The early call for the open of key US indices is lower. The US 10-year eased 7bp yesterday (2.55%) and another 4bp in the O/N session (2.51%). The market has taken back all and more of the product that was offloaded on Friday after Bernanke’s reassurances in Wyoming temporarily tempered speculation that the Fed will step up debt buying. Helping treasuries to maintain their bid was the BOJ’s comments highlighting uncertainty about the US economy and various analysts cutting their US GDP forecasts. The 2’s/10 spread happened to narrow 5-ticks to +205bp, again flattening the US curve. The market had become oversold on Friday’s violent move. Product again is becoming expensive on the curve, but NFP uncertainty has debt better bid on pullbacks.

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