I am confident that these Confidence numbers are not!

Are theses consumer confidence numbers a tad optimistic given the current state of affairs? This morning’s German Ifo business sentiment headline managed to advance for a 5th-consecutive month (90.5 vs. 87.4), similar to what we witnessed stateside yesterday. We are experiencing a record rate of mortgage delinquencies, credit card companies with record defaults and the potential for the US unemployment rate to reach +10% by year end. Surely these are not the ingredients that warrant stronger confidence numbers? Ah well, Policy makers PR firm’s have to be doing something to keep consumer psyche elevated. Congratulations to our ‘Depression Specialist’ vote of confidence yesterday. This one we can justify!

The US$ is little changed in the O/N trading session. Currently it is lower against 9 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Yesterday we were treated to the 1st-monthly gain in US house prices in over three years on a seasonally adjusted basis, as the year-over-year drop decelerated more than expected (-15.4% vs. -16.4%). June’s prices were +0.75% higher than May for a slight gain. The question of course is it a new trend? Is it sustainable? Analysts will have you believe that the month of Aug. is historically low for mortgage resets and that ‘shadow’ housing inventories are stockpiling rapidly (they are not being captured within narrow measures and definitions of monthly supplies). Foreclosures remain unaccounted for and many properties have not reached the market, while others have been taken off! On a quarterly basis, home prices declined -2.6%, on a seasonally adjusted basis, despite headlines showing a non-seasonal-adjusted, gained +2.87%. Not to be out-done, US consumer confidence numbers provided the market with a healthy return (54.1 vs. 47.4). Surprisingly, it was the 1st gain in 3-months as consumers maybe starting to become less worried about the outlook for the labor market. They did get a helping hand this Q, extended unemployment benefits and the ‘cash for clunkers’ changed some consumer’s sentiments. However, with unemployment rate to surpass the 10% by year end will make these gains difficult to maintain. Digging deeper, consumers were only slightly upbeat about their income. Consumer spending accounts for aprox. 70% of the US economy, any heightened nervousness will constrain spending!

The Richmond Fed regional survey disappointed this month, coming in unchanged m/m (14 vs. 14). Despite the disappointment, manufacturing in the region continues to expand. This supports the Empire and Philly Fed surveys which both confirmed that manufacturing entered into ‘expansionary territory’. However, looking out 6-months, business activity expectations still show expansion, but, at a slower pace than over the last 2-months!

The USD$ currently is lower against the EUR +0.18%, CHF +0.15% and higher against GBP -0.16% and JPY -0.05%. The commodity currencies are mixed this morning, CAD -0.20% and AUD +0.15%. Technically yesterday, the loonie managed to retreat nicely from its 3-week highs as commodities pared gains. Mind you the BOC Deputy Governor Timothy Lane and his contradicting comments about ‘maybe’ seeing growth this quarter and at the same time seeing significant upsides and downsides to the economy had headline watchers confused. The Deputy Governor was definitely talking the BOC book and reinforced that the ongoing strength of the CAD is detriment to Canadian economic growth. Some speculators will continue to bet that Canada is the true first G7 economy to exit the recession. If commodities remain elevated we are going to have a worrying BOC!

The theme remains the same and so does the AUD actions. Like clockwork, up one day and sidewise another! Australasian bourses advancing in the O/N session had investors coveting the higher yielding currencies like the AUD. Stronger fundamental data coupled with a tighter monetary policy debate pushed the currency +0.15% higher vs. the USD (0.8366). For now, the currency continues to look solid on pull backs.

Crude is higher in the O/N session ($72.40 up +35cc). Crude prices came under renewed pressure yesterday. Initially they were underpinned on the back of investors concerns that reduced lending in China may dampen demand in the world’s fastest-growing energy user. Surprisingly strong US data yesterday supported prices temporarily, but by day’s end it managed to record new session lows. Of course China is the biggest concern. If their economic activity subsides it will definitely put a cap on this market in the medium-term. Stronger than expected ‘green shoot data’ continue to provide support for commodities on pull-backs. It’s alarming that we have shifted away from the demand destruction theme! Of course a weaker greenback is boosting the appeal of commodities as an alternative investment. Technical analysts believe that $75-76 will provide strong resistance in the short term despite triggering some technical buying. Last weeks surprisingly poor inventory report from the EIA will again come under close scrutiny today, to see if inventory levels warrant these elevated prices. The most coveted indicator, the EIA, showed that US inventories declined the most in more than a year as imports plummeted and refineries increased their operating rates. Currently, refineries are operating at 84% of capacity (up +0.5% from the week before). Inventories declined -8.4m barrels, w/w. The most eye-catching detail was that imports fell -15% to +8.53m barrels a day (the biggest drop and lowest rate in 11-months since the last hurricane season). We are now officially over the hump of the US driving season and just about to enter historically a weak demand month of Sept. Despite probably seeing the worst of the recession, global growth will remain very subdued. But remember it’s also the hurricane season. Lets see what this morning’s inventory reports provides us. Gold prices advanced as investors took this week’s decline as a buying opportunity. The weak greenback continues to increase the ‘yellow metal’s’ appeal as an alternative investment ($950).

The Nikkei closed at 10,639 up +142. The DAX index in Europe was at 5,547 down -9; the FTSE (UK) currently is 4,911 down -5. The early call for the open of key US indices is higher. The 10-year bonds eased 5bp yesterday (3.44%) and are little changed in the O/N session. Dealers have managed to keep yields close to their lows despite all this weeks supply as the market debate the inflation question. Will policy makers keep rates low for an extended period of time or will all this stimuli create rapid inflation? Supply will try and dictate the shape of the US curve for the remainder of the week (5’s-+39b-Today and 7’s-+28b-Tomorrow).

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