Stress tests results postponed!

You now want to deliberate findings on the ‘stress tests’? It either is or it’s not, how much more sugar coating is required before the public get to see them? Bank’s PR firms are working overtime preparing to spin their good-will story to the masses! With most of Europe closed for May Day, other centers have been watching with fascination the WHO’s country counting H1N1 chart. It has now spread to 11 countries. Do we expect capital markets to start pricing in the insurance premium again?

The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies, in a ‘subdued’ trading range.

Despite the positive spin in the advanced 1st Q GDP results for consumer consumption (+2.2% annualized gain) earlier in the week, yesterday’s data showed that US consumption fell off in Mar. even after the strong gains in the 1st 2-months of this year (-0.2% vs. -0.1%, m/m). Analysts believe the report suggests that the consumer ‘may have received a temporary boost from lower tax payments and government transfers’. It’s worth noting that with personal income falling (-0.3% vs. -0.2%) for 6 out of the past 7-months, consumption can be expected to remain weak in the foreseeable future. With government transfers and lower tax payments supporting growth in Jan. (+1.1%) and Feb. (+0.4%), an even faster pace of deterioration in salaries in Mar., along with weaker proprietors’ income (-0.6% m/m), rental income (-3.7%) and supplements to wages & salaries (-0.1%), have all contributed to this weaker headline. The personal savings rate advanced last month to +4.2%, all on the back of job and economic uncertainty, by default this was bound to affect consumption. With the Fed preferring to use the PCE deflator as their inflation measure of choice as opposed to us using CPI, last month’s deflator eased to +0.6%, y/y, further evidence that this is the lowest growth rate in 50-years. With the y/y rate at +1.8% the Fed should be concerned about disinflationary pressures!

Other data yesterday revealed that continuing claims remain a concern. The headline surprised to the upside, rising to a new record of +6.27m high! It’s now nearly odd’s-on that we will breach that 10% unemployment rate by mid-summer. Imagine what the number would look like if we pooled all the millions that do not qualify for UI. Not as negative, but alas not much better, initial jobless claims came in lower than expected (+631k vs. +645k), well within the 600-650k band width that points to another horrible NFP number for April. We should expect the 6th consecutive decline of around -500k+!

The USD$ currently is weaker against the EUR +0.40%, CHF +0.35% and stronger against GBP -0.06% and the JPY -0.67%. The commodity currencies are stronger this morning, CAD +0.26% and AUD +0.44%. The loonie managed to print a new 3-month high yesterday as global optimism that we may have seen the worst of this recession has helped to promote the ‘carry’ and riskier trades. If the equity market can keep the faith then by default commodity currencies will surely get another leg up in the short term. With Chrysler filing for Chapter 11 protection, this will hardly aid the currency. The loonie had remained vulnerable like many other currencies as investors gravitated towards some sort of risk aversion trading strategies as fears that the ‘unstoppable’ virus would curtail a recovery in the global economy. But, this market has been able to price out this insurance premium by month end demands. Technically there should be some good market support for the USD at the 1.1850 level. Analysts expect the currency to once again trade under pressure and head towards the 1.2500 level by end of this quarter, but that all depends on stocks!

Higher yielding currencies are benefiting from that glimmer of hope that we have witnessed the bottom of this recession. This renewed optimism is dragging the AUD to its 9th consecutive gain. With S&P’s rallying nearly 10% this week has only looked favorably on other commodity currencies. The trend remains your friend, look to buy AUD on pull backs (0.7319).

Crude is lower in the O/N session ($50.51 down -61c). Well the same reasons has the crude prices range bound for now, record inventories, swine (H1N1) flu potentially curtailing travel demand and renewed optimism that the worst may be over. One of these variables should eventually dominate and dictate the new range. The neutral observer must be surprised in how resilient the market is given a 19-year high inventory record. Supplies rose +4.05m barrels to +374.7m barrels last week vs. an expected increase of +1.8m barrels. This headline print prompted Libya’s top oil official to state that OPEC will ‘keep all its options open, including a production cut before next months meeting’. Like all fellow members, they remain concerned with the overhang of prices with these elevated stock prints. Since Sept. OPEC members agreed to slash +4.2m barrels from its daily production and to date 83% of members have been compliant. However, despite some strong fundamental data of late, anomalies like the Swine flu outbreak could curtail air travel in the short term and by default increase inventories once again. Already this week the Algerian Oil Minister Khelil stated that non-OPEC members have left the market oversupplied by about +720k barrels a day. This bearish report along with demand destruction should provide some muted rallies for the black stuff. Similar to Bonds, Gold printed another monthly decline as the ‘yellow metals’ appeal floundered with the surprisingly strong rally in equities of late ($881). Mind you it was month end yesterday and traders were happy to book any profits!

The Nikkei closed 8,977 up +149. The DAX index in Europe was at 4,769 up +64; the FTSE (UK) currently is 4,241 down -2. The early call for the open of key US indices is higher. The 10-year Treasury’s backed up 1bp yesterday (3.13%) and are little changed in the O/N session. The FI asset class managed to solidify a monthly loss yesterday, the largest since Jan., as renewed optimism that we may have seen the worst of the recession combined with record weekly government issues keep depressing treasury prices. It’s all about ample supply vs. buy-back’s that have dictated FI prices of late. Next week the US government plans to sell a record $71b in long-term debt. With dealers wanting to cheapen the curve, 10’s has a chance of trading towards 3.25%!

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