Obama’s No Fool!

With Londoners bracing for battle at the G20, it seems world leaders want to join the ‘fray’, headlines suggest that regional and diplomatic spats have begun. Aso vs. Germany, obviously suffering from the Tankan report hangover last night and Sarkozy vs. everyone. To the neutral observer, reaching a consensus on anything will be a minor miracle. Not the best kept secret, but it seems that Obama’s administration believe that bankruptcy is ‘the’ option for GM and Chrysler.

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, the US Consumer confidence index rose to +26 vs. an upward revised +25.3 in Feb. Despite the monthly improvement, the scenario still points to extreme weakness in consumer spending, as the ‘present’ situation sub-index continues to deteriorate, falling to a new record low of +21.5 from +22.3 m/m. The report clearly states that personal consumption will not contribute to growth any time soon. As per usual, weak labor markets are the main reason of concern for the consumer. It’s worth pointing out that the diffusion sub-index fell to -44.1 in Mar. from -42.3 in Feb. This provides further evidence that current conditions are getting worse! This Friday’s NFP is expected to be around -650k once again, however the market cannot rule out a deeper pullback. Expectations for the labor market are a bit better, respondents who see fewer jobs fell to 42.6 from 47. Individuals continue to pare back spending on any big ticket items because of job uncertainty.

Contrasting with the Richmond, Philly and Kansa City Fed reports, the Chicago PMI fell to +31.4 in Mar. from +34.2 m/m (analysts conclude that this mornings ISM manufacturing index will be little changed this month, +35.8). Digging deeper, surprisingly the sub-components of new orders and employment actually saw a slight improvement, but remains in a contraction phase. An area of concern was in the production numbers, but one should expect ‘new orders’ to pare this figure next month.

Finally, not a good sign yesterday was the S&P/Case Shiller Price index falling to a new record low for Jan. This provides further proof that home prices have not finished their downward spiral with prices down -19%, y/y (a new record low).

The USD$ currently is higher against the EUR -0.62%, CHF -0.56% and lower against GBP +0.15% and JPY +0.37%. The commodity currencies are weaker this morning, CAD -0.33% and AUD -0.92%. Yesterday’s Canadian real-GDP plunged -0.7% m/m in Jan. (very much as expected), which suggests that the 1st Q will probably be the worst in 50-years! This provides further evidence for BOC governor Carney to most likely slash the benchmark O/N rate again by another 25bp later in the month (50bp), this will sideline well into 2010. With monetary policy muted, it will force Carney to use non- conventional policies in the shape of quantitative easing. The report reveled that almost every sector experienced weakness. Rallying equities and commodities aided the loonie somewhat yesterday. However, in the big picture of things the currency does remain under pressure as the ‘big dollar’ and floundering oil prices have been dictating direction. Month-end and quarter-end flows distorted yesterday picture somewhat. Due to the uncertain outcome of G20 events, look for investors to want to buy USD on any pull backs at the moment.

In the O/N session Australian saw its retail sales fall -2% in Feb. (1st decline in 5-months) vs. an expected -0.5%. This has caused the AUD to ease on concerns that weakening economic growth will force the RBA to cut lending rates once again, thus reducing the appeal of their higher yielding assets. The fear of the recession deepening has traders looking to sell the currency on upticks for now (0.6900).

Crude is lower in the O/N session ($48.60 down -106c). Yesterday crude prices rebounded somewhat after Monday’s plummeting global equity market convinced consumers that this recession may be deepening and further adding to the theory of demand destruction. The strength of the greenback is contributing to the volatile price action. Crude prices have tumbled nearly 10% since the middle of last week, but remain 10% higher this Q after Geithner unveiled a plan to remove ‘toxic assets’ from banks. Qatar’s oil minister said earlier in the week that ‘demand remains slack and it is unlikely to reach $60 a barrel this year’. Prices of late have been driven by the USD actions. Fundamental data has been very bearish and warrants a further weakening of prices as demand destruction remains buoyant. Last week prices encroached on its 4-month highs as advancing global equities psychologically signaled that fuel demand would increase a theory difficult to buy into at the moment. The EIA report showed that US inventories climbed to their highest level in 16-years as demand waned. It was the 22nd gain in 26-weeks and left stockpiles +13% higher than the 5-year average for the period. A bearish report that will certainly put OPEC and future production cuts back onto the dealing table. This morning’s weekly report is expected to bring forth more bearish news. The strength of the greenback has pressurized the yellow metal as an alternative investment for now. Gold remains better bid on deeper pullbacks as the fear of inflation occurring on the back of the Fed’s plans to buy debt has investors wanting the commodity ($920). Be weary that the G-20 is expected to ask the IMF to make proposals to use proceeds from planned gold sales to support poorer nations this week.

The Nikkei closed 8,351 up +242. The DAX index in Europe was at 4,021 down -62; the FTSE (UK) currently is 3,874 down -52. The early call for the open of key US indices is lower. The 10-year Treasury’s eased 1bp yesterday (2.70%) and are little changed in the O/N session. Treasury prices remain better bid on pull backs as the 3rd-outright purchase of debt by the Fed earlier this week combined with weaker US business activity and house price reports had investors seeking some FI for surety purposes. Currently deeper recession fears is doing battle with US debt sales which are expected to triple this year to a record of $2.5t. For now, the fear of this global recession deepening has encouraged risk aversion strategies that is given the bond market a stronger bid. Excess supply concerns will occur later.

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