The US consumer-M.I.A!

The US consumer, where are you? The precious ‘variable’ that the US Fed believes will lead us out of this recession in the short term has gone ‘walk-about’. Data yesterday reveled that US household debt growth actually went negative for the second time in 57-years. That is the 2nd consecutive quarter of a negative reading, not good news for medium term global recovery is it?

The US$ is mixed in the O/N trading session. Currently it is lower against 8 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Yesterday, US headline inflation increased last month, but, it was less than expected (+0.1% vs. +0.0%, m/m, -1.3%, y/y). Notably higher energy costs (gas +3.1%) and import prices (depreciation of the USD) dragged the headline print higher in May. However it was the ‘broad-based’ weakness amongst all the other sub-components that managed to soften the rise. Core-CPI (ex-food and energy) hit the target (+0.1%, m/m, +1.8%, y/y). We should expect energy prices to continue to grind higher and by default the continuation of a rising CPI trend. Analysts expect what ever discretionary income that consumers have remaining, most of it will go towards gas expenditure, especially on the back of wage reduction and deflation. One should expect this recession will continue to dampen inflation as the output gap widens further despite ongoing monetary and fiscal stimulus. If green shoot economics begin to root, then we may see a positive headline print for CPI by year end on a year-over-year basis! Prices are down -1.3%, y/y, mostly on the back of record high commodity prices this time last year. Digging deeper, house prices continued to decline (-0.1%) on the back of weaker fuel and utility prices, while food (-0.2%), personal computers (-1.6%), and other good and services (-0.2%) also saw a decline in prices on the month. The consumer continues to hoard and spend less with less! Other data by the Dep. of Commerce showed that the US current-account deficit narrowed in the 1st Q to $101.5b.

The USD$ currently is higher against the EUR -0.03%, GBP -0.10%, CHF -0.04% and JPY -0.21%. The commodity currencies are mixed this morning, CAD -0.18% and AUD +0.17%. The loonie remained close to home yesterday after tumbling to new monthly lows in the morning session on the back of crude and equities paring some of their initial losses. In the O/N session the currency has reversed its actions and strengthened for the 1st time in 4-days as commodities rise. Canadian data yesterday showed that leading economic indicators fell less than expected last month (-0.1% vs. -0.6%), as declines in the manufacturing and retail sectors were mostly offset by gains in housing and stocks. This mornings CPI numbers should at least provide us with a better direction play. If one believes that green shoot economics is very much in play, then technically the market is giving CAD bulls an opportunity to re-load they long positions before the currency once again makes an assault towards parity vs. its largest trading partner. However, expect dealers to continue to sell CAD on USD pull backs in this environment as investors question the duration of this recession.

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 (0.7940).

Crude is higher in the O/N session ($71.33 up +30c). Oil traded heavily 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 late afternoon action yesterday, combined with floundering equity markets have given the ‘yellow metal’ a speculative bid as an alternative investment for a hedging strategy ($937).

The Nikkei closed 9,703 down -137. The DAX index in Europe was at 4,795 down -4; the FTSE (UK) currently is 4,271 down -7. The early call for the open of key US indices is lower. The 10-year Treasury’s eased 5bp yesterday (3.69%) and are little changed in the O/N session. The winning streak continued yesterday as treasury prices rose for a 5th straight trading session. With US consumer prices rising less than expected last month eased the market concerns that inflation would accelerate in the short term as the economy strengthened. This warranted dealers grabbing yield. The Fed’s $7b buy-back total also aided prices (May-2016-19). The market awaits for today’s auction announcements.

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