Is this the beginning of the end of the ECB?

Like a school yard fight, European CBankers continue to bicker about policy implementation, what’s needed and how much. There is no cohesion, only the fundamental data remains consistent! The Euro-zone has contracted at a record pace in the 1st Q (GDP -2.3% vs. -1.65, q/q), as companies cut production and jobs to survive the ‘worst global slump in more than 60-years’. Analysts had been admiring from afar how the conservative Trichet and Co. went about tackling the recession. Social, political and cultural issues were the biggest threat for the Euro-currency survival. Optically, council members are in danger of doing more damage than all the sates themselves!

The US$ is mixed in the O/N trading session. Currently it is lower against 10 of the 16 most actively traded currencies in a ‘subdued’ trading range.

US Initial unemployment claims came in above expectation yesterday (+32k to +637k w/w). This has pushed the 4-week moving average up for the first time in over a month, which inevitably will dampen the ‘green shoot’ optimism claims. The Dep. of Labor believes that the layoffs in the auto-industry have begun to show up more meaningfully in filings. Claims related to Chrysler’s bankruptcy distortions was enough to offset a possible cooling pace of layoffs in other sectors. This trend will be more pronounced going forward as companies make greater efforts to downsize, idle factories and restructure (like Chrysler closing 1/4 of its dealers!). Disappointingly, the US unemployment rate forecast of 10% remains on track for mid-summer. Continuing claims surged another +202k last week to +6.56m for the 15th-straight week of record highs. Record numbers are receiving extended federal aid after exhausting their State sponsored benefits. A horrible number and fact that more workers are having trouble finding jobs, as companies cease to hire. Already this week we have seen that the duration of being unemployed is starting to tick higher.

The US economy remains very weak which was strongly reflected in yesterday’s April producer prices report. Green shot economics seems to be getting ahead of the relevant fundamentals. In reality producer prices continue to reflect the weak economic activity and waning demand. Ex-food and energy advanced a pitiful +0.1%, m/m, while headline prices rose more due to a +1.5% m/m surge in food costs and a +2.3% jump in gas prices.

The USD$ currently is higher against the EUR +0.23% and CHF -0.09% and lower against GBP +0.03% and JPY +0.45%. The commodity currencies are weaker this morning, CAD -0.14% and AUD -0.52%. The loonie floundered yesterday as commodities struggled and dampening a rally in higher-yielding currencies. Over the past 3 trading sessions the currency managed to pare back just over +2% of last weeks violently achieved gains. Since the middle of Mar. at the loonies’ 54-month low, the commodity currency advanced +11% vs. its largest trading partner. A portion of its recent strength has been attributed to excessive optimism rather than on fundamentals. One should expect global euphoria to dampen, with that investors can expect to see better levels to own this commodity currency. The country’s fundamentals are strong when compared to other G7 partners, but it exports 70%+ of its goods and services south and 50% of that revenue is commodity based. Expect to see the USD/CAD to grind higher.

The AUD has posted its first weekly loss in months this week, mostly on the back of Asian equities trading heavily and US retail sales unexpectedly dropping last month, thus reducing investors’ appetite for the higher-yielding assets (AUD, NZD and CAD). Despite looking attractive, all high yielder’s moves are aggressively overdone and it’s only natural that the market will want to consolidate even further (0.7533).

Crude is higher in the O/N session ($58.83 up +21c). The IEA is forecasting that world oil consumption this year will fall the most in over 28-years, another inventory statement that has capped last weeks aggressive rally in the short term. The fundamentals of the oil market warrant a much deeper pull back. The IEA cut their daily estimates to +83.2m barrels, which is down -3%, y/y. That’s -230k less than last month’s estimates. The US jobless claims headline managed to pressurize prices even further as it’s dampens ‘green shoot’ optimism that the worst of this recession may be over. Already this week, the EIA revealed an unexpected decline in inventories as imports plunged to the lowest level in 8-months. Crude supplies fell -4.63m barrels to +370.6m vs. an expected increase of +1m barrels (imports fell -12% to +8.71m). Earlier this week the API reports showed that supplies dropped by -3.13m barrels, w/w. Yes it was a bullish headline number, but, record high inventory levels continue to be the negative variable in the price equation. Year-to-date, crude prices have advanced +33%, mostly on the back of a high percentage of OPEC members conforming to the last 9-months of production cuts. Surprisingly this week, OPEC stated that they boosted oil production last month for the 1st time since July. (+967k barrels a day over quota). They are now adhering to 77% of their self imposed cuts to production, the previous month it was 82%. There remains a strong correlation between equities and oil, and at the moment equity prices seem to have got ahead of themselves. This would imply that $60 a barrel remains a strong resistance point in the short term. The commodity market certainly has got ahead of its fundamentals and profit taking is probably warranted. Gold rose as a weaker dollar has boosted the demand for the ‘yellow metal’ as a hedge against inflation ($925).

The Nikkei closed 9,265 up +171. The DAX index in Europe was at 4,746 down -8; the FTSE (UK) currently is 4,398 up +35. The early call for the open of key US indices is higher. The 10-year Treasury eased 3bp yesterday (3.09%) and is little changed in the O/N session. Prices remain range bound as equities tried to keep their head above water and the US government completed the last of this week’s buy-back in the short end of the curve. They have rallied 26bp from its highest yield printed last week (3.38%), which was coincidentally the beginning of the 2-week pause in US Government record sale of debt. There is still a large amount of supply coming down the pipe and the amount being issued by the Treasury supersedes the current appetite of the Fed’s buy-back program. Something has to give!

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