It’s over…..European Leaders want exit strategy!

This market is going no where fast, similar to the golfers at the US Open. Dealers are stretching for reasons to justify doing a trade. Yesterday we had the BBA announcement that they ‘may’ expand the pool of banks that set LIBOR. This morning we have a draft to digest that states that European leaders have ‘spotted the first signs of a sustainable economic recovery’ and it’s not about rare artifacts! They conclude that the ‘looming end of the recession makes additional stimulus unnecessary’. They must now shift their focus as there is a ‘clear need for a reliable and credible exit strategy’. Next weeks FOMC could be a snoozer, market expects that they will reconfirm low rates for a long time, but, will they say anything about an exit strategy?

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

Yesterday’s US data was full of surprises. The Philly Fed did a big u-turn and improved 90% from its last print (-2.2 vs. -22.6). The reading may suggest that the manufacturing sector may be close to inventory stabilization (shipments turning positive), despite being in contraction territory.
The ‘glass half-full’ analysts do not expect the elation to remain as they pointed out that ‘some’ past improvements have ended up reversing substantially in subsequent months. But looking at the details, rapidly depleting inventory levels (a curse in the past) suggest that manufacturers have leg room to beef up production once again. Shipments led the improvement with the contraction in new orders also slowing significantly. It’s worth noting that future business activity jumped to 60.1, which may imply expansion for the next 6-months!

On the job front, US continuing claims and not initial jobless was the eye popping stat. yesterday. Initial came in on expectation (+608k), while continuing, after reaching record highs week after week fell for the 1st-time this year (6.687m vs. 6.835m). On the face of it, it seems that firms are hiring again. But, with jobless claims remaining range-bound, it suggests that firms are still cutting the workforce! We should expect to see another 5-handle in next months NFP when last months birth/death anomaly rights itself!

The USD$ currently is weaker against the EUR +0.31%, GBP +0.17%, CHF +0.11% and higher against JPY -0.22%. The commodity currencies are stronger this morning, CAD +0.22% and AUD +0.57%. Yesterday’s Canadian data surprised the market, headline and core-inflation rose more than expected last month (+0.7% and +0.1% respectively). Similar to the US trend headline CPI will likely post gains on a monthly basis, supported by high energy and food prices while core-CPI will likely moderate. The moderation should occur because of the appreciation of the loonie and expectations that the CAD will continue to gain strength over the next year. This will in effect put pressure on import prices which will eventually trickle into core-CPI. Digging deeper, it was the +8.3%, m/m, jump in gas prices and the +0.2% gain in food prices that pushed the CPI headline higher. The report will take some pressure off the BOC to initiate quantitative easing any time soon. Stronger US data is giving both equities and commodities a leg up and by default with a higher risk tolerance investors covet higher yielding assets. With the USD under renewed pressure expect dealers to want to buy the loonie on any dollar rallies in the short term.

In the O/N session the AUD remained better bid as positive US equity futures encouraged speculative buying of higher yielding currencies. All week commodity currencies have been driven by the direction of global equities (0.8052).

Crude is higher in the O/N session ($71.82 up +45c). Oil traded on the softer side yesterday mostly on the back of the surprising weekly EIA report. The report showed a bigger-than-expected gain in supplies of motor fuel. Gas inventories climbed +3.39m barrels to +205m, w/w (the biggest increase in 6-months). The increase was more than 6-times bigger than analysts had predicted, all in time for the holiday driving season in the US! On the flip side, crude oil stocks declined -3.87m barrels to +357.7m, double expectations. A bearish report for commodity prices, despite the fall in crude, over the next couple of months expect the market to focus on the driving season that ends on US Labor Day. Global concerns on the longevity of this recession continue to weigh on energy demand and by default prices. Already this week the USD has struggled intraday, one day it’s declining on the back of BRIC countries contemplating reducing their dependency on the ‘mighty greenback’ and the next day it’s climbing as we question the length of the recession. This market is all about the negative correlation of commodities and the USD’s movements. With the greenback stalling in O/N action yesterday, combined with floundering equity markets has given the ‘yellow metal’ a small bid as an alternative investment for a hedging strategy this morning ($933).

The Nikkei closed 9,786 up +82. The DAX index in Europe was at 4,833 down -5; the FTSE (UK) currently is 4,325 up +44. The early call for the open of key US indices is higher. The 10-year Treasury’s backed up 12bp yesterday (3.81%) and are little changed in the O/N session. Surprising US data is suggesting some relief is near in this recession coupled with the US government’s announcement of $104b Treasury auctions next week, slightly higher than anticipated, continues to weigh on FI prices. The Treasury will auction $40b-2, $37b-5 and $27b-7’s.

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