Obama waves Red Flag to China!

One of Obama’s first calls of duty was to wave the ‘red’ flag to China. The whole world knows that China is managing its currency. But, the new US administration is stating that they believe that China is ‘manipulating’ it’s currency. Dangerous accusation, which is most likely true, they are the largest buyers of US Treasuries and the US government, needs buyers. Already this week, China subtly indicated that they will shift some of their foreign reserve investment into EUR and JPY and shy away from US treasuries. Now that is a long term problem!

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

US economic data continues along the path of misery. Yesterday, US Housing Starts plunged to new record lows going back 50-years. The market continues to deteriorate as builder confidence plummets alongside weaker home sales and by default bringing starts and permits down as well. Analysts now believe with housing data performing so poorly that next week’s 4thQ real-GDP will likely contract by at least -4.5% q/q. Housing starts fell more than expected last month, plummeting -15.5% m/m to +550k units (this is the 2nd-double digit monthly decline). Other data also showed that permits also unexpectedly fell +549k. Digging deeper, both single and multi-family starts contributed to the decline with single starts falling -13.5% while multi starts were down -20.4%. Analysts now believe that with both new and existing sales still declining each month, despite mortgage rates and home prices continuing to fall, capital markets should expect to see starts fall further in the coming months as builders try and reduce current inventory levels once again!

Not to be outdone, US layoffs are on the rise again. With the US economy continuingly being battered from home and abroad, more and more Americans are seeking unemployment assistance. Last week’s initial jobless claims pushed higher, advancing +62k to +589k, perhaps providing further evidence that we will see another large decline in NFP for Jan. coupled with a larger revision for Dec. Will we eclipse that psychological -1m mark? Continuing claims also rose to a new 27-year high of 4.607m from a revised 4.510m last week. It seems that more and more individuals cannot find work once they are laid off. This would equate to a 9% unemployment rate and perhaps even higher as analysts expect continuing claims to increase over the coming months.

The US$ currently is higher against the EUR -1.21%, GBP -1.64%, CHF -0.76% and lower against JPY +0.32%. The commodity currencies are weaker this morning, CAD -0.52% and AUD -1.35%. Canadian retail sales data fared no better yesterday. The loonie remains well entrenched on that slippery slope towards our medium term target of 1.2800. Compared to year-ago levels, total retail sales are down -0.4% while retail sales ex-autos were up by only +0.8% y/y. In volume terms, real retail sales were up by only +1% y/y. The top-line dollar value of retail sales fell, -2.4%, m/m, which is the biggest drop in 11-years. While core-retail sales ex- autos fell -2.3% m/m. Retail sales ex- autos and gas were flat on the month. Its worth noting that after controlling for price effects, Canadian retail sales fell by -0.6% in Nov. over Oct. Much of this decline can be attributed to lower unit auto sales. There were no surprises from Governor Carney this week as he cut borrowing costs by 50bp to the expected 1%. Traders continue to bet that the BOC will repeat their actions next month and then remain on hold for the remainder of the year. Governor Carney expects the real-GDP to fall by -1.2% this year, notably weaker than the +0.6% expected last Oct. Interestingly, growth for next year has been revised up to +3.8% from +3.4%, as they believe both fiscal and monetary policy actions will start to make an impact. One can expect oil to once again come under renewed pressure and by default the loonie will lose its luster!

The AUD dollar is heading for a weekly decline as losses in global equity markets convince investors to shy away from higher yielding currencies (0.6457). The fear of a deeper recession has analysts speculating that the RBA will be forced to push borrowing costs below 2%, once again doing no favors for the currency.

Crude is lower O/N ($42.54 down -113c). No surprises with the weekly EIA report. As expected it rose for the 15th time out of the last 17-weeks last week. This caused crude prices to tumble yesterday, as the ongoing recession curbs demand. Inventories rose +6.1m barrels to +332.7m, the highest level since Aug. 2007. Analysts had expected stocks to rise by +1.4m barrels. Refineries have reduced operating rates by a further -2% as fuel consumption erodes. Refineries operated at 83.3% of capacity, the lowest for the week in 18-years. The 4-week weekly averaged +19.4m barrels a day, down -4.7%, y/y. Gas stocks also increased significantly, they jumped +6.48m barrels to +220m vs. an expected rise of only +1.8m barrels. At the moment there is a strong correlation with equities and commodities. Earlier this week it was all about futures contracts expirations. Investors closed out their Feb. short covering positions, booking profits as we entered a new contract period. Demand destruction remains the order of the day. Last week OPEC said that demand for its black-stuff will decline -4.2% this year as the recession in the US, Europe and Japan curbs fuel consumption. It’s expected that consumption of OPEC’s oil will shrink -1.4m barrels a day to +29.5m barrels. Analysts anticipate that we will once again test Dec. lows and even print a $20 handle, all this on the back of the North American reports been so poor. Gold rebounded sharply yesterday as global equities found it difficult to maintain any positive traction. Investors are drawn to this safer heaven yellow metal as a store of value ($866).

The Nikkei closed 7,745 down -306. The DAX index in Europe was at 4,079 down -140; the FTSE (UK) currently is 3,974 down -77. The early call for the open of key US indices is lower. The 10-year Treasury yields backed up 8bp yesterday (2.59%) and are little changed in the O/N session. The front end of the US yield curve remained better bid after yesterday’s weaker US Economic data. The 2-10’s spread managed to steepen 5bp to 183. Unlike longer maturities, where a great deal of supply is expected for next week and the prospects for an aggressive stimulus package will continue to weigh on longer dated product.

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