Ugly US Retail Sales data pour cold water on frothy sentiment.
Key carry trade AUDJPY finds resistance at 200-day MA - is this the FX litmus test for sentiment?
MAJOR HEADLINES – PREVIOUS SESSION
- Australia Mar. Business Confidence out at -13 vs. -22 in Feb.
- Sweden Mar. CPI Headline at 0.2% YoY and Underlying at 1.5% YoY vs. 0.5/1.7% expected, respectively
- US Mar. PPI out at -1.2% MoM and -3.5% YoY vs. 0.0%/-2.2% expected, respectively and vs. -1.3% YoY in Feb.
- US Mar. PPI ex Food and Energy out at 0.0% MoM and 3.8% YoY vs. 0.1%/4.0% expected, respectively and vs. 4.0% YoY in Feb.
- US Mar. Advance Retail Sales out at -1.1% and ex Autos out at -0.9% vs. +0.3%/0.0% expected, respectively
THEMES TO WATCH – UPCOMING SESSION
- US Feb. Business Inventories (1400)
- US Fed's Evans to Speak (1430)
- US Fed's Bernanke to Speak (1730)
- US Fed's Stern to Speak (2045)
- US Weekly ABC Consumer Confidence (2100)
- New Zealand Mar. Business PMI (2230)
- UK Mar. RICS House Price Balance (2301)
- US Fed's Rosengren to Speak (0130)
Market Comment:
Another bank was out reporting better than expected earnings - this time Goldman Sachs, which announced earnings a day earlier than expected yesterday and handily beat estimates. Goldman likely did everything in is creative accounting arsenal to make this earnings report look good so that it could raise the capital necessary with a stock offering to pay back the TARP funds it was forced to receive to the government ASAP. It has become clear from recent reports that the big banks are losing talent in droves due to the executive compensation rules that come as strings attached to public TARP funds. The Goldman earnings report added further impetus to the sharp rally triggered by the Wells Fargo report, as US financial stocks have now almost doubled from their March lows. It feels like the rally is getting a bit frothy at these levels.
Many should certainly take a second look at their suddenly rosy view of the fundamentals after today's ugly US Retail Sales data, which showed with- and ex-Autos sales far worse than expected. The US economy is consumption, and if consumption is not recovering, than neither is the US economy. As the grand cyclical analysis has underlined again and again: Americans have to save more of their money, and they the effect of having their wealth destroyed by the collapsing credit bubble (both in their investment portfolios and real estate holdings) makes for permanently altered behavior. No amount of Bernanke helicopter drops will alter this trend. US Retail Sales ex Autos are currently at Index 91.4 if we use the July 2008 number as Index 100 - a severe contraction.
The US PPI data showed a sharp drop in March and a flat reading for year-on-year comparisons, but the ex Food and Energy readings continue to show surprising resilience. It's hard to understand exactly who in the supply chain has enough pricing power to continue to raise prices, but we would definitely like to see this core number dropping toward zero before we become more worried about the deflation scenario deepening. In cycles past, the PPI generally led the CPI, though this relationship has broken down in this cycle as the collapse in demand was so sharp that end products prices dropped most rapidly.
Looking at the market reaction to the US data today, it seems clear that it wasn't really prepared for a sudden sign of weakness. EURUSD has been confusing in recent days, and we might as well throw the shortest term technicals in the bin as we saw sharp moves in absurdly illiquid trading conditions over the Easter holiday. Now that we are out of holiday mode again, we continue to look for a close below that 100-day moving average - now coming in around 1.3180 - as a key sign that a new bear move is on its way.
Chart: AUDJPY
AUDJPY is probably one of the better barometers for risk appetite in this cycle, as many have invested tremendous hope in the rally in equities and the miraculously fatuous idea that the Chinese are ready to resume strong growth already in the coming quarter despite collapsing global trade. The pair found hard resistance right at the 200-day moving average and have reversed sharply. If risk aversion resumes here, this could be one of the higher beta trades and could see a very sharp correction.
