Obama’s ‘Lost Decade’, made in Japan.

More Cbanks are laying the ground work for tighter monetary rate policies, Norway, Australia, New Zealand, UK and now perhaps China. China’s economic data released this week are consistent with a V-shaped recovery assumption. However, as recovery gains momentum, concerns over growth will naturally shift to worries about policy tightening. Many analysts are worried that US officials who are contemplating an exit strategy from this entire fiscal stimulus are in danger of repeating the Japanese mistakes and plunging their economy into ‘a lost decade’ of stagnant growth. In fact the administration needs to spend even more to assure sustainable recovery despite the record budget deficit of $1.5t and a spiraling greenback!

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in another ‘whippy’ trading range.

Again US jobless claims disappoint. Initial jobless claims negatively beat expectations (+531k vs. +520k), and the shadow claims figures deteriorated yet again as the duration of unemployment continues to lengthen (average 26.5 weeks). To make matters worse, emergency claims (after continuing) jumped by +40.7k, w/w (+3.39m vs. +3.34m) and was partially offset by a drop of -16k in extended benefits (+464k vs. +481k) which follows emergency benefits. Cumulatively, that’s +10.4m Americans who are now on some form of jobless benefits, which include initial, continuing (+5.9m), emergency and extended. It’s worth noting that both the extended and emergency benefit claims were revised up from the previous week. Now that continuing has breached that psychological +6m level, perhaps we may have found our resistance point! Other data showed that US leading economic index rose for a 6th -straight month (+1% vs. +0.4%), implying that the economy is likely to expand in the New Year.

The USD$ is currently higher against the EUR -0.17%, CHF -0.22%, JPY -0.51% and lower against GBP +0.6%. The commodity currencies are mixed this morning, CAD -0.32% and AUD -0.01%. Yesterday’s Canadian sales headline was higher than expected (+0.8% vs. +0.4%), but the scope of the sales gain was narrowly concentrated. Ex-autos and gas (+0.5% vs. +0.6%), the print was flat m/m. Governor Carney does not have to worry, we are neither expanding nor contracting, we are at an equilibrium. Not surprisingly, we still witness excess inventories that should constrain a production recovery and a lack of business investment on excess capacity are significant offsets to stronger housing and consumer sector performances. Digging deeper, autos (especially light trucks +3.9%) and gas prices accounted for all of the strength in Aug. Thus, ex-autos and gas and we are flat! The BOC MPR was moderately positive for the loonie. With commodities on solid ground and risk appetite alive should favor the CAD in the near term, despite the BOC stepping up its dovish rhetoric this week. The market wants parity, we don’t need parity, but the market will want to test the loonies’ highs again. Futures have priced in a 62% that we will have reached parity by year end.

The RBA keeps providing the ammo to lift the AUD towards parity. They said it was ‘possibly imprudent’ to keep borrowing costs at a 50-year low in the minutes of its October meeting, this week. This has led the currency to its 3rd consecutive winning week. Mix in a little bit of advancing Asian bourses and we have a ‘hot’ currency in demand on pullbacks (0.9260).

Crude is higher in the O/N session ($81.50 +31c). Crude fell from its one-year high yesterday as the dollar advanced, thus diminishing the appeal of commodities to investors. Mind you, the weaker unemployment claims report helped it on its merry way. Oil prices had temporarily managed to do a u-turn and rise after this weeks EIA report showed a bigger than forecasted decline in supplies of gas. Gas inventories fell -2.2m barrels to +207m last week vs. an expected drop of only -850k. On the flip side crude stocks rose +1.3m barrels to +339.1m vs. the forecasted climb of +1.5m barrels. OPEC Secretary-General El-Badri said that ‘prices above $80 would hamper economic growth’! Technically, prices have been aggressively mobile on pure ‘speculation’. Year-to-date crude has advanced +11%, the inventory report is not bearish and can only give speculators ammo to keep prices elevated. Fundamentals do not support those actions, only when floating storage is eliminated then demand destruction will end. However, with the USD falling to its 14-year lows, the black-stuff looks undervalued!

Yesterday, the ‘yellow metal’ fell the most in a week as a resurging greenback eroded the appeal of the precious metal as an alternative investment. However, expect the commodity to remain well supported on deeper pullbacks as long term inflation worries continue to be a concern ($1,062).

The Nikkei closed at 10,282 up +16. The DAX index in Europe was at 5,762 up +62; the FTSE (UK) currently is 5,173 down -44. The early call for the open of key US indices is higher. The 10-year bonds backed up 3bp yesterday (3.42%) and another 5bp (3.47%) in the O/N session. Rally over! Dealers managed to pressurize bond prices with the announcement of a record $123b worth of US debt to be auctioned off next week. A strong leading index print convinced traders to sell even more product. However, looking at the big picture, Treasury buybacks are almost over. MBS buybacks have about $250b to go. The US Treasury still has to raise $1.8t per year (more pressure on the curve). Analysts foresee 4% 10-yr notes before the year-end and 4.5% by middle of next year!

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