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Weekly Market Commentary

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US April Core PPI rose 3.00% annualised

Mon, May 26 2008, 08:56 GMT
by Nicole Elliott

Mizuho Corporate Bank

Overview

Rather scary and jittery markets with Nymex Crude Oil headlining at a record $135.09 per barrel. Talk of inflation sent benchmark Schatz yields to this year’s highest at 4.28% and their UK equivalent to 5.11%. This fed through to longer dated maturities (with curve flattening) and was in part caused by the money market which is still very clogged up. We feel these moves may have been exacerbated by traders using terribly tight stops. Corporates too have played a part, US bond issues $95.5B in April, another $92.5B so far this month, just below the record $106B of May 2007. No fools, planning for a rainy day and grabbing money while they can.
The FX market has generally moved into consolidation mode, except the Australian dollar which hit a record high of $0.9655, while the Mexican peso at 10.346 is stronger than it has been in five years. Commodities were mixed with meats and precious metals a little higher, Rhodium at a record $9600 per ounce, softs and grains a little lower. Baltic Dry and Capesize indices soared to new records of 11,648 and 18,051 respectively. G7 equity indices reversed suddenly from retracement resistance levels, led by the Dow Jones Transportation Average which formed a ‘shooting star’ on Monday at a new record high of 5,536. Brazil’s Bovespa the only one to rally to a record high at 73,779.

Political and Economic Developments

US April Core PPI rose 3.00% annualised, the fastest pace since December 1991, caused by massive increases in intermediate and crude goods. Singapore April CPI +7.5% Y/Y, a 26-year high, caused by housing as well as the usual culprits: food and oil. Similarly Saudi Arabia where March CPI was 9.6% because of spiralling rents. Hong Kong April CPI running at 5.4% Y/Y. And so on and so forth.
The US Q1 Home Price Index dropped –1.7% Q/Q, -3.1% Y/Y, the lowest reading since OFHEO started compiling it in 1975. US April Existing Home Sales are running at just 4.89 million per annum, the lowest since the series began in 1999, and the supply overhang is 4.55M, equivalent to 11.2 months’ worth of sales. Nationwide prices dropped 8% and a whopping 16.7% in the West.

Underlying Themes

Minutes of the April 29/30th FOMC reiterated their concern that while ‘overall inflation remained elevated…continuing strains in the interbank and other financial markets’ were a drag, therefore painting a very downbeat picture of the economy. The Fed cut 2008’s GDP forecast to between +0.3% and +1.2% Y/Y from the +1.3% to +2.0% Y/Y they had predicted just three months ago. Revision or volte-face? One has to put up with this sort of thing from traders and other pundits who clamoured for dramatic rate cuts and when these were delivered then accused the Fed of doing too much too soon. Now the Eurodollar interest rate strip is suggesting rate cuts should be reversed, pronto. Come on! Pimco’s Bill Gross said, ‘today’s world, including its inflation rate, is changing. Being fooled some of the time is no sin, but being fooled all of the time is intolerable’. Agreed, but because of this he then goes on to suggest investing in BRIC countries. Why? George Soros noted, ‘the prevailing market opinion is that this crisis is like previous ones. This time the ability of the authorities to handle the crisis is constrained…they’ll not be able to avoid a recession’. Maybe, maybe not, but then he is plugging a book. Another one from the Ministry of Silly Walks: the Institute of International Finance wants to change accounting rules so that illiquid assets can be valued using historical rather than market prices. This alliance of 300 companies, among which are some of the banks which have written down $300B so far, is serious about this idea but would not comment further in the FT. No wonder, after accepting billions in government bail-outs.

What to watch for next week

Monday 26th May holidays in Bermuda, the UK and US and May CPI for the different German states is due from this day. Tuesday Japan April Corporate Service Prices, final German Q1 GDP and June GfK Consumer Confidence, UK Nationwide May House Prices, April BBA Mortgage Approvals, US March Case-Schiller Home Price Index, April New Home Sales and May Consumer Confidence. Wednesday just EU March Current Account and US April Durable Goods Orders while the Norges Bank decides on rates. Thursday Japan April Retail Sales, EZ15 Money Supply, May German Unemployment, Eurozone Sentiment, UK CBI Quarterly Distributive Trades, US Q1 GDP and April Help Wanted Index. Friday Japan April CPI, Unemployment, Household Spending, Industrial Production, Construction Orders, Housing Starts then May Tokyo CPI and PMI. UK May GfK Consumer Confidence, Eurozone CPI, April Unemployment, German Retail Sales, US Core PCE, Personal Income, May Chicago PMI and final University of Michigan Sentiment. Sunday 1st June is the tenth anniversary of the founding of the ECB.

Positioning and Technical Analysis

Stock indices are likely to suffer from the ‘sell in May’ syndrome, noting that many US firms’ half-year end is in May, pushing them into tidying up their books. Investors must be more careful and separate out currency, maturity, and credit quality when it comes to interest rates. Treasury yields should retreat, possibly very sharply. While Crude Oil and energy products might remain at these elevated levels for some time, other commodity prices will continue to correct and consolidate. Likewise the US dollar, but do not confuse this with strength. This is just a temporary lull, one that might be quite protracted.

• Download full Weekly Market Commentary with charts

Published on  Mon, May 26 2008, 09:09 GMT

Archive

• Counterparty risk is at the core of current woes
  Published On Mon, Oct 6 2008, 10:05 GMT
• Interest rate markets are dysfunctional and polarised, credit quality and relative liquidity the key issues
  Published On Fri, Sep 26 2008, 14:30 GMT
• Several asset classes might continue to struggle at key chart levels, but will eventually break
  Published On Mon, Sep 15 2008, 06:44 GMT
• The Yen has gained against all currencies bar none, and Yen crosses slumped towards their lowest prices of the last year or two
  Published On Fri, Sep 5 2008, 14:21 GMT
• The world is still stuck on the horns of a dilemma facing slower growth and very high inflation
  Published On Fri, Aug 22 2008, 14:30 GMT

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Mizuho Corporate Bank  | 1-3-3, Marunouchi, Chiyoda-ku, Tokyo 100-8210
http://www.mizuho-cb.co.uk | Nicole.Elliot@mhcb.co.uk