Trichet’s Tokyo Tirade

‘All for one, and one for all’ this Dumas quote can never be applied when describing the ECB. The EUR has weakened vs. the USD and JPY after Trichet in Tokyo admitted that he has ‘failed to eliminate concerns about a split amongst policy makers’. This ‘ambiguity’ will delay the economy’s recovery and undermine investor confidence even further. We have not seen the worst from Europe, we are being prepared for mass layoffs and a summer of tension, as unemployment is rising fast throughout the world due to increased bankruptcies, collapsing investment spending and declining demand for labor. Does it not seem that these equity markets continue to get ahead of the ‘natural negative fundamentals’ that’s appearing around us?

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

Not a good day for US fundamental data yesterday. Continuing claims crossed the psychological abysmal +6m mark while initial jobless figure came in lower than expected (610k vs. 660k). One should not read too much into this drop for various reasons, firstly, seasonal concerns play a factor and secondly, the holiday shortened week according to analysts may have also distorted the seasonal adjustment which probably pushed initial claims temporarily lower last week. With continuing claims crossing that threshold will once again be negative for the unemployment rate and we could see the 9% mark by late spring and double digits sooner than expected.

Housing starts failed to impress again, at least that’s consistent (+510k vs. +570k, -10.8%). However they are higher than the Jan. low (488k), but be aware that last months figures negates Feb.’s gain. This puts the 1st Q down -21% q/q. Again expect construction spending to have a big impact on the GDP headline at the end of the month. Digging deeper, it was the multiple sector that spearheaded the decline while single family homes remain entrenched at record lows.

Not to be outdone in the new record’s category, US building permits fell to a new 49-year low (+513k vs. +564k, -9%) as inventory levels remain exceptionally high, thus reducing the room for any new housing activity. The same parameters continue to impede progress for this sector, erosion of consumer wealth, rising unemployment and conservative consumer spending is not going to change anytime soon.

And finally, the Philly Fed Manufacturing index surprised to the upside yesterday (-24.4 vs. -35) as the region contracted at a slower pace this month with orders beginning to stabilize. If one adds this to the NY Fed numbers earlier this week (-14.7 vs. -38.2), then perhaps both Bernanke and Obama’s view that the US economy is starting to show signs of progress even despite some landmines remaining.

The USD$ currently is higher against the EUR -0.61%, GBP -0.70%, CHF -0.83% and JPY -0.09%. The commodity currencies are mixed this morning, CAD -0.31% and AUD +0.09%. Oh to be burned at the bottom or the loonies 3-month high yesterday. After aggressive early more gains for the currency, it was quickly given back and then some as rumors of a Medley report revealing that the BOC will slash 25bp and initiate quantitative easing measures. This was nothing new, what happened to all the traders who had said this was priced in? Perhaps they are hugging their long CAD positions that they managed to accumulate believing that a break of 1.2000 due to option expiries would open the flood gates to 1.1800-50 below. Markets remain thin and volatile and somewhat at the mercy of commodities and equities. Canada’s trade sector reversed course in Feb., posting a surprising gain of +2.2%, m/m vs. -5.3%. Digging deeper the strength is on the back of increased auto production after shutdowns in Jan. Ex-all auto and its components, manufacturing sales fell -0.2%, stronger evidence that the trade sector quite rightly remains under pressure as global demand wanes, look at China. A quantitative easing method has seen currencies depreciate significantly when their governments started the program (BOE, BOJ, and Fed). Expect traders to be better buyers on pull backs once again.

The AUD continues to remain under pressure against the crosses, especially JPY, on the back of China saying its economy expanded at the slowest pace in almost 10-years earlier in the week (+6.1% vs. +6.8%). This has raised concerns that the global recession will deepen and investors will avoid the riskier assets. For now, look for traders to continue to sell on upticks (0.7200).

Crude is lower in the O/N session ($49.59 down -39c). Oil did not stray too far from home yesterday, if anything perhaps better bid after US jobless claims fell last week. However this temporary relief of the data was explained away above and one should expect the underlying oil fundamentals to weigh once again on the black stuff’s prices. This week’s EIA report showed that inventory levels had climbed to a new 19-year high. Crude stocks advanced +5.67m barrels to +366.7m vs. an expected +1.76m, the highest levels since Sept. 1990. More importantly, demand destruction remains an issue with total daily demand averaging +187m barrels over the past 4-weeks, that’s down – 5.2%, y/y. Gas inventories declined -944k barrels to +216.5m, while distillate fuels (includes heating oil and diesel), fell -1.17m barrels to +139.6m. Refineries are operating at +80.4% of capacity, down -1.5%, w/w, and the lowest level in 7-months. The fundamental data is abysmal. This was an extremely bearish report supported by demand destruction. Sooner or later, the market will wake up and rely on the fundamentals. OPEC for an 8th-consecutative month cut its forecast for oil demand this year; they lowered it by -430k barrels a day to +84.18m and expect demand in industrialized countries to fall even further this year, while developing economies are likely to see only minor growth. They next meet on May 28th to review production quotas. Crude had started the week under pressure after an IEA report for this year shows that total global demand may fall to its lowest level in 5-years. This is very much in line with OPEC’s views. They expect consumption to fall -2.4m barrels a day to +83.4m, that’s a decline of +2.8% as worldwide GDP falls by -1.4%. Until we see inventories decline substantially and sustainable demand destruction, there will not be a sustainable price gain. Finally Gold is loosing its luster. It was difficult to comprehend why this commodity was holding in so well with inflation a non-issue and no need for investors to purchase any for a hedge play. With the threat of the IMF needing to offload 3500+ tons of the yellow metal, expect the market to sell on upticks ($872).

The Nikkei closed 8,907 up +152. The DAX index in Europe was at 4,608 down -1; the FTSE (UK) currently is 4,051 down -2. The 10-year Treasury’s backed up 3bp yesterday (2.81%) and are little changed in the O/N session. Finally, concerns about future supply are starting to weigh on treasuries despite the US governments buy-back program ($300b, to date $55b). There is a glimmer of hope that the US economy may be stabilizing after both the Empire and Philly Fed manufacturing index surprised us this week to the upside, slowing down contraction. We can expect longer dated securities to remain range bound until the market can figure out this demand vs. supply debate. Remember there is no price pressures in the US, eventually speculators will want to have some yield in their portfolios.

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