When they cry you buy. When they are ‘Yellen’ you’re selling!

It was a difficult day yesterday to interpret. Yes, US data was ‘less bad’ so it was good. Who wants to get too enthusiastic about negative numbers and traders manipulating their portfolios around various benchmarks for month and quarter-end trading? Oh, if investors only knew what lay behind their monthly statements. Painting by numbers makes Picasso look like a beginner. US delinquencies rates on less risky mortgages more than doubling pressurized equities and Janet Yellen stating that the prospect that policy makers could leave rates near ‘zero’ for the next several years does not give one a warm and fuzzy feeling that the US economy will turn the corner within 6-months!

The US$ is weaker in the O/N trading session. Currently it is lower against 10 of the 16 most actively traded currencies in a ‘whippy’ illiquid trading range.

Less bad is good for the greenback so it seems. Yesterday, US existing home prices fell less than expected in April. The Case-Shiller composite fell -18.12%, y/y, as prices ‘only’ declined -0.6%, m/m (the smallest monthly decline in over a year). Lower prices and relatively low mortgage rates should help lift both new and existing home sales, but, tight credit conditions continue to limit growth in the sector.

Chicago PMI came in higher than expectations, +5 points to 39.9, m/m. The monthly improvement is considered good news as analysts believe that the effects of auto-plant temporary shutdowns have been less painful than anticipated. But, the confidence indicator remains in ‘contraction’ territory, further proof that manufacturing activity is still in a cyclical slowdown. Digging deeper, all the sub-components showed improvement (production was up +1.2 pts, new-orders +4.3, inventories +3 and employment +4). Data continues to prove that manufacturing will contract further, but the pace of decline seems to have decelerated.

Finally, a surprise, US Consumer confidence fell last month to 49.3 vs. 55.4, m/m, on the back of a weak labor market and rising energy costs. The headline print is well above the record low we experienced in Feb (25.3). These variables will only discourage any extra discretionary spending for the 3rd Q.

The USD$ currently is lower against the EUR +0.38%, CHF +0.31% and higher against GBP -0.02 and JPY -0.46%. The commodity currencies are stronger this morning, CAD +0.68% and AUD +0.20%. There were no surprises in yesterday’s Canadian GDP data. The headline came in on expectation at -0.1%, and the 9-month downward spiral remains intact! On a quarterly basis, Canada’s economy shrank by -5.4% in the 1st Q, and -3.7% in the 4th Q. Some analysts point out that because Canada is lagging other countries in depleting their inventories (the scourge of this recession) and imposing stringent production cuts, 2nd and 3rd Q’s will not fair any better. Digging deeper, 15 out of the 21 manufacturing sub-sectors showed a decline (not just an Auto issue!) and I am sure we have not seen the appreciation of the CAD effect on export numbers just yet. It was not just the manufacturing sector, lower activity in the energy sector and retail trade continues to drive down the headline GDP. Other data revealed that Canadian IPP index unexpectedly declined -1.1%, m/m last month for the 2nd-consecutive month. The weakness can be blamed on the +6.4% appreciation of the loonie vs. its southern counterparty over the time period. If one excluded translation costs the index would have risen +0.4%. Governor Carney seems to have got it right when he said last week that Canada’s recession is as deep as their largest trading partner. Today is Canada Day, a national holiday, depending on the USD, expect the loonie to remain under pressure and USD’s to be bought on pull backs.

The AUD found its ‘sea legs’ again after retail sales numbers increased twice as much as analysts expected last night (+1.0% vs. +0.3%) and advanced against the USD in the O/N session. This quarter will be the best performance by the currency vs. its US counterpart in 14-years. Renewed optimism that the global slump is easing is providing support for most of the higher yielding assets and commodity currencies (0.8062).

Crude is higher in the O/N session ($71 up +111c). Yesterday the market was looking at the fundamentals and not relying on ‘what if’s’. Crude prices aggressively retreated from its 8-month highs after fundamental data showed that US consumer confidence unexpectedly declined last month and that the UK economy shrank the most in over 50-years. Despite paring some of the losses on the back of China’s manufacturing expanding, prices have also come under pressure on speculation that today’s weekly inventory reports will show a rise w/w. The temporary strength of the greenback aided by month and quarter end portfolio clean up ahead of the employment report tomorrow also rained on the ‘bull’s parade’. It worth noting that the commodity will have gained around 39% last quarter, the largest advance in 20-years as a rebounding world equity markets and a weaker dollar persuaded investors to buy the ‘black stuff’ as an alternative investment. The IEA lowered its 5-year forecasts for global crude demand because of the economic slump. They are cutting daily consumption levels by -3m bpd until 2013. Markets continue to see little evidence of an economic recovery in the weekly commodity reports. Last week the API reported that gas stockpiles increased to +211.4m barrels and crude supplies fell -72k barrels to +356.6m, while the weekly EIA announcement supported the API findings. Refineries are also operating at the highest rates this year (+87.1%) and fuel demand is off -5.5%, w/w (the biggest year-to-date). Demand destruction remains commodities greatest nemesis and not volatile currency levels. The ‘yellow metal’ managed to aggressively retreat similar to other commodities yesterday as the USD index rallied against its major trading partners. However, technical support under $925 from ‘physical buyers’ (jewelers etc) and a weaker greenback in the O/N session has lent support to the commodity ($931).

The Nikkei closed 9,939 down -18. The DAX index in Europe was at 4,878 up +70; the FTSE (UK) currently is 4,308 up +60. The early call for the open of key US indices is higher. The 10-year Treasury’s backed up 5bp yesterday (3.54%) and is little changed in the O/N session. It was the 1st day in 4 that bonds prices retreated, all on the back of reports showing that the pace of decline in home prices slowed and US business activity shrank less than forecast in June (see above). Already this week yields managed to touch their lowest level in a month after China declared that they will stick with its foreign reserve policy for the time being. Month and quarter end shenanigans has led to whippy trading ranges across most asset classes. Tomorrow we have both the ECB and NFP to contend with before the long w/d in the US.

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