Trichet and Co. are ‘lousy poker players’

The definition of a ‘Greek Tragedy’ is applying for another credit card to cover existing credit card debts. Will it work? The way the market has been offloading EUR’s and divesting their European interests certainly raises some doubts. The combination of looser ECB collateral rules, which could be seen as a form of ‘easing’, and the possibility that the Maastricht stability pact will be reformed is tightening the noose around the currency. Markets had expected a relief rally bounce after last weekends EU/IMF accord announcement. What we got is nervous policy makers playing poker with Capital Markets and it seems they are running out of ‘chips’. How will the EU help other indebted nations if the need arose now that the ‘special case’ of Greece is tentatively been taken care of? The psychological 1.3000 is within range, it will be sticky down there, however, its downhill after that.

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

Yesterday’s data confirms that the US consumer is spending more and financing these purchasing by a drawdown in their saving’s, which are at the lowest level since the Lehmann fallout. The personal saving’s ration fell as expected to +2.7%. All of the gain in consumption this year has been by the ‘deployment of excess liquidity’, which has pushed the saving’s rate from 4% from the end of last year. Spending grew +0.5% in real terms and the gain in nominal terms was +0.6%. The real gains were weaker because the price deflator rose +0.1%. Digging deeper, Feb.’s spending gain was revised higher from +0.3% to +0.5%, thus making the previous month the strongest monthly gain since the cash-for-clunkers distortion last summer. Jan.’s spending rise was revised a tad lower to +0.1% vs. +0.2%. Analysts do not expect these revisions to affect last week’s quarterly consumer spending in the US GDP report. It’s worth noting that most of the ‘volume’ gain was in vehicles that drove a +3.44% gain in durable goods spending. Month-over-month, car sales have advanced +13.6% in Mar. over Feb. On the other hand, non-durable spending was up +0.4%.

Personal income advanced +0.3% m/m, marking a +0.75% gain for the 1st Q. Despite wages and salaries contributing a portion of the gain, an increase in government social benefits also helped support income growth (unemployment insurance jumped +8.7%, m/m). With the labor markets improving, investors should expect to see improvements in incomes and that can only support consumption going forward.

Finally, the PCE deflator (the Fed’s go-to preferred inflation metric) came in as expected in Mar. at +2.0%, y/y. The core deflator managed to rise +0.1%, m/m. Despite underlying price pressures appearing, the Fed believes that inflation remains well-contained, which should keep the Fed on the sideline for the remainder of this year.

Yesterday’s US ISM manufacturing index (60.4 vs. 60.0) is consistent with market belief that the manufacturing is expanding at such a pace that ‘the momentum is expected to be maintained throughout the summer’. The underlying sub-categories all have the stamina to improve further. It’s worth noting that much of the strength is arriving in the form of new foreign orders, as new export orders are climbing at the fastest pace in two decades. Mind you, with the USD depreciating just under -22% in the last year certainly helps. Inventories slipped back into contraction which does not help the inventory-to-sales ratio. Technically, firms are finding it difficult to re-stock fast enough in order to meet the combined effects of an order backlog that only keeps rising through new-orders strength. This means the whole US supply chain could come under more pressure. It’s nice to see that growth in manufacturing employment accelerated at the fastest pace in 5-years. Year-to-date, the US manufacturing sector has added +45k workers (that nearly +30% of total gains this year). It will be interesting to see what Friday’s NFP has in store for us. Finally, the prices paid component rose for a third consecutive month (78.0), mostly on the back of stronger commodity prices. To date, the higher input costs have not been passed along, thus giving the Fed extra breathing space to keep rates where they are.

The USD$ is higher against the EUR -0.21%, GBP -0.32%, CHF -0.21% and JPY -0.21%. The commodity currencies are weaker this morning, CAD -0.16% and AUD -0.60%. An about turn was expected and delivered yesterday with the loonie. With North American equities advancing and commodities on a firm footing had speculators once again coveting growth currencies. With the market expecting the BOC to hike rates sooner than later is providing some sort of ceiling for the USD. With the EU/IMF accord tentatively in place some off the insurance premium is accordingly been priced out. Canadian fundamentals, similar to Australia have been hitting it out of the park when compared to other economies. Unlike the RBA, the BOC seems to be behind the blackball when it comes to their lending rate adjustments. Governor Carney reiterated to a House of Commons committee last week that it’s ‘appropriate to begin to lessen the degree of monetary stimuli’. Now that some of the European uncertainty has lessened, one should expect better buying of the loonie on dollar rallies ahead of this week’s North American employment reports.

It was not surprising. The RBA hiked their benchmark interest rate for the sixth-time in seven month (+4.50%) after policy makers raised their outlook for inflation and believed that their domestic economy is well insulated from the Greek debt fall out. The currency in O/N trading managed to fall against all its major trading partners after Governor Stevens said borrowing costs are around ‘average’, thus signaling that it may slow the pace of advances. Also providing pressure to the currency is the softer Asian bourses coupled with weaker commodity prices. Stevens said that inflation may not slow as much as earlier forecast and ‘now appears likely to be in the upper half’ of the RBA’s target range of 2-3% over the coming year. The minutes leans heavily towards a ‘lack of urgency’ to push rates higher in the medium term. The Bank can afford to hold in a ‘wait and see mode’. Now that the rate decision is out of the way, expect growth currencies to be guided by equities and commodities. For now the market expects to be a better seller of the currency on rallies (0.9187).

Crude is lower in the O/N session ($85.50 down -69c). Crude prices pared their early gains on the back of stronger growth numbers out of the US as investors worried about China imposing its third increase to bank reserve ratios in as many months. Investors fear that this action will slow demand growth in the world’s second-biggest energy consumer. With the dollar out performing the EUR had investors taking some profit off the table. Last week’s Fed rhetoric coupled with the weekly EIA report showing that refineries cap-u is at the highest level in two years gave the black stuff a ‘leg up’. With the Fed emphasizing the strength of the economic recovery in their minutes had a positive impact on the commodity. It’s worth noting, that in total, refiners have dragged their utilization rate higher by +6.4% last month alone and all the while not knowing how much fuel demand will rise in the next few months. Analysts remain concerned that the European contagion issues will dominate risk aversion. The lack of volatility has ‘temporarily’ dampened any selling enthusiasm. Expect better selling to remain on rallies.

Gold continues to extend its bullish rally and squeezing weak shorts out of their positions. Yesterday it managed to print a new 5-month intraday high on European debt concerns and this despite the announcement of the EU/IMF accord. With the EUR continuing to trade under pressure on fears that the bailout package for Greece will not win support from the region’s governments managed to push the yellow metal to record yearly highs in both the EUR and CHF. Contagion fears are expected to provide a floor for the commodity in the short term. Last month the commodity climbed +5.9% as investors sought surety to hedge against financial turmoil in Europe. In reality, investors continue to prefer the yellow metal over paper money as an asset alternative. Various technical analysts believe that $1,300 is a possible one-year target with consumer support. Downgrades and fear of defaults will continue to have investors wanting an alternative to an ‘on going weakening’ of the EUR ($1,180).

The Nikkei closed at 11,057 up +132 (closed). The DAX index in Europe was at 6,123 down -44; the FTSE (UK) currently is 5,500 down -52. The early call for the open of key US indices is lower. The US 10-year backed up 3bp yesterday (3.67%) and is little changed in the O/N session. Treasury prices eased for the first time in 3-day’s as the EU/IMF Greek accord was digested in the North American time zone. Stronger US growth data made it easier for some investors to book some profit after last weeks run up to monthly low-yields. The flight to quality is abating and investors can be expected to sell the shorter end of the US yield curve. Of course, the contrarian will remain nervous about the containment of the ‘Greek Tragedy’ and be expected to be better buyers on pull backs, especially now with the lack of new US product coming to the market. We have to wait another two week’s for dealers to take down supply.

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