Helicopter Ben Start Them Presses

The exit that was slightly ajar has been firmly shut again by Ben and Co. Policy makers are coming around to the ‘individual in the streets’ way of thinking, the so called economic recovery may be weaker than initially thought. It seems that the consumption and savings attitude by the masses put them ahead of the curve rather than Washington. The Fed’s actions yesterday have reversed their plans to exit from aggressive monetary stimulus. They have decided to keep its bond holdings to support an economic recovery it described as ‘weaker’ than anticipated. It is giving life back to the dollar bulls who have had a torrid two-months on the verge of ’chucking in’ their winning formulae that served them so well in the first 6-months of this year. The ‘safer heaven dollar label’ will get to finally question the stronger EUR support levels this morning. The market has a new attitude to run with, something we have lacked of late. Let the bulls run and see what happens!

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

Yesterday’s US productivity growth came in close to expectations (-0.9%, q/q) even after netting out the previous quarters revisions. The negative headline print reinforces the picture of a sharply deteriorating productivity growth stateside. Analysts note that Capital Markets are dwelling too long on the jobs scenario and missing the importance of productivity growth or lack of it. Digging deeper, 1st Q productivity growth was revised up to +3.9% from +2.8%, reflecting an upward revision to output as hours rose. Unit labor costs happened to record a sharper decline, falling to -3.7%, q/q. Compensation per hour also fell by -0.7% after being flat in the 1st Q. In real terms, compensation growth remains flat, an improvement from last quarter’s -1.5% retreat. But, hours worked expanded by +3.6% (the strongest pace so far in the recovery). Without material job or wage growth, consumption gains rely upon continued expansion in hours worked and upon reallocating high levels of household cash balances. Finally, the unit labor costs remain relatively flat, especially after falling for three consecutive quarters. On the face of it, one could argue that the prints are deflationary in nature and most likely temporarily. Slower growth will prompt companies to continue to focus on aggressive approaches to cost cutting and will heighten obstacles to a convincing labor-market recovery.

The Fed did what was expected of them and kept the Fed funds rate at +0.25%, but decided to reinvest the principal payments on mortgage holdings into longer-term Treasury securities. This is their first attempt in over two-years to once again boost economic growth to help keep the slowing US economy from relapsing into another recession. Their decision to start reinvesting the proceeds is acknowledged to be largely a symbolic gesture, designed to reassure the markets rather than boost the economy. Yesterday’s actions signals that risks of a downturn have increased enough for helicopter Ben to delay any exit from the ‘unprecedented stimuli. Again, they acknowledged that prices will remain subdued. Their decision to re-invest was made easy after last weeks weaker than expected NFP report. The weak job market has ‘inhibited growth in consumer spending, which accounts for about +70% of the economy’. With inflation under control they must now concentrate on promoting full time employment.

The USD$ is higher against the EUR -0.88%, GBP -0.29%, CHF -0.50% and lower against JPY +0.30%. The commodity currencies are weaker this morning, CAD -0.29% and AUD -0.89%. Yesterday’s Canadian housing starts data confirms that Canada is losing the housing sector as the primary engine of growth in the Canadian economy. After the revisions, the 1st and 2nd Q’s happened to record identical headline prints (+197.8k). Analysts note that the first month in the 3rd Q is continuing that trend (+189.2k), and with most of the declines in the higher valued single starts, the GDP implication is harsher than the ‘starts’ headline itself. What’s the BOC to do? The report should have no influence over Canadian policy makers. Governor Carney has been rather vocal of late in expecting housing to cool, and it being replaced by business investment in machinery and equipment. The loonie managed to record new weekly lows yesterday on the back of investors implementing risk aversion trading strategies as equities and commodities continued their retreat on the back of capital markets questioning the strength of sustainable global growth. Futures traders are pricing in a +60% chance of a Governor Carney +25bp hike next month before heading to the sidelines for the remainder of this year at least. Speculators continue to be better ‘loonie’ buyers on dollar rallies. Are they running out of ammo on the crosses?

Not to be the only growth currency left standing, the AUD fell on the release of the Fed’s statement. Falling the most in two week’s as signs that the global economic recovery is slowing damped demand for higher-yielding assets. Data out of China did not help the currency’s position. China’s industrial reports last month grew the least in 11-months, further proof of a slowdown in Australia’s largest trading partner. In reality with the outlook for both the US and Chinese economies becoming uncertain, growth-sensitive currencies like the AUD, CAD and KIWI, are unlikely to draw strong buying interest from speculators. In the present environment, there are only two scenarios that would give the AUD a lift. Firstly, without a sharp ‘further dip in US yields’ and secondly, a market belief that RBA rate hikes are imminent can only drive the currency higher in the short term. We all know that global yields are dropping like hot-cakes, as investors grab yield. Because of the equity actions, the market is a cautious buyer on pullbacks, wary that the recent strong rally technically may be overdone (0.9030). This evening we get the always entertaining Australian employment reports.

Crude is lower in the O/N session ($79.61 down -61c). The black-stuff is struggling. At one point yesterday it happened to fall the most in five weeks after the US labor productivity stats revealed that productivity amongst US workers fell in the 2nd Q. This is strong evidence that the US economy continues to struggle. It’s just another tidbit of economic evidence that points to an elongated recession and not a short one. Not helping the commodity prices from a technical standpoint was data released in China yesterday, showing that their crude imports fell -15% to +18.8m metric tons last month from a record +22.1m in June. The commodity is struggling to trade north of that $80 psychological level, even with prices softening after a disappointing NFP report last week. Not helping matters was the bearish EIA report last week showing that the underlying stock sub-categories were rising. The market again is anticipating another bearish inventory report today. The steep drop in last weeks ‘headline’ oil stockpiles has thus far prevented much deeper losses. The report showed that oil inventories fell -2.8m barrels, more than the -1.6m the market had been expecting. On the flipside, gas stocks again advanced by +700k barrels, compared with expectations of an -800k decline. Not to be out done, distillate inventories (heating oil and diesel) also advanced by +2.2m, doubling the expected gain. Digging deeper, the report also revealed that demand, y/y, was little changed and also too low to consume the fuel produced by refiners operating at +91.2% of capacity (highest level in 3-years). Demand is only up +0.2% from the same period last year. The recent macro-data flow indicates that the US activity has slowed down and the market should expect further price pull back as the ‘one directional upward move’ may be overdone. US fundamentals continue to show a market that is still overstocked, particularly on the product side. Speculators remain better sellers on up-ticks in the short term.

With the dollar rallying ahead of the Fed announcement yesterday, happened to push gold prices temporarily lower for a second consecutive day. Following Bernanke’s re-investment announcement, the commodity prices aggressively rallied on inflation fears before finally paring some of the gains by day’s end. If the dollar index remains in demand, by default, commodities will find it difficult to hold these gains. Last week, after another disappointing employment report, speculators sought sanctuary in the safer heaven asset class. The commodity also found traction on speculation that prices near its recent lows would fuel demand for the physical asset as China’s plans to relax various trading commodity rules. For most of this year, we have witnessed gold rally on the back of a weaker EUR with investors buying the asset class as a safe heaven investment. Until recently, a weaker dollar had been the biggest factor in supporting commodity prices. Since the record highs witnessed on June 21st ($1,266), the commodity has fallen -4.7%. Historically and fundamentally, this is the ‘slowest’ season for physical demand and now with China potentially changing the ground rules should temporarily drag the metal higher. Year-to-date, the commodity has gained +7.6% ($1,201 +$3.20c).

The Nikkei closed at 9,292 down -258. The DAX index in Europe was at 6,214 down -71; the FTSE (UK) currently is 5,309 down -69. The early call for the open of key US indices is lower. The US 10-year eased 11bp yesterday (2.74%) and is little changed in the O/N session. The 2’s/10 spread narrowed (+224) as the 10’s yield touched the lowest on a closing basis in more than a year. Yesterday’s $34b 3-year note came in at a record low yield of +0.8444% compared with +0.85%. The bid-to-cover ratio was 3.31, compared with an average of 3.2 from the past four auctions. The indirect bid (proxy for foreign demand) was +41% or the past four auctions. The direct bid was +16% compared to an average of +14.5%. With the Fed announcement that it would reinvest the principal payments on its mortgage holdings into longer-term treasuries has provided a bid to the curve and a flattening bias. Even with the 10’s and longs to be auctioned this week the market will be content in owning product on pull backs.

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