JPY on the rampage as bonds rally.
ECB having a hard time getting its story straight on quantitative easing. Inflation watchers look to tomorrow's US CPI.
MAJOR HEADLINES – PREVIOUS SESSION
- Switzerland Apr. Producer and Import Prices out at -0.2% MoM and -3.6% YoY vs. +0.8%/-2.8% expected, respectively
- Sweden Apr. Average House Prices fell to 1.765M from 1.808M in Mar.
- US Apr. PPI out at +0.3% MoM and -3.7% YoY vs. +0.2%/-3.7% expected, respectively
- US Apr. PPI Ex Food and Energy out at +0.1% MoM and +3.4% YoY as expected
- US Weekly Initial Jobless Claims out at 637k vs. 601k expected
THEMES TO WATCH – UPCOMING SESSION
- New Zealand Mar. Retail Sales (2245)
- Japan Mar. Machine Orders (2350)
- Japan Apr. Domestic CGPI (2350)
Market Comment:
The weekly US jobless claims disappointed after last week's slightly lower data perhaps raised hopes that the pace of job losses was slowing. No such luck this time around, unfortunately. If we study the last two jobless claims/unemployment rate cycles, we can see that while jobless claims peaked in late 2001 with another small surge in early 2002, the unemployment rate did not peak until mid 2003 - a 15-18 month lag. In the early-90's recession, the weekly claims peaked dramatically in early 1991 while the unemployment rate peaked in mid-1992 - also an approximate 15 month lag. If that pattern holds true this time around, then a sharp fall in claims in coming months would mean a peak in unemployment in late 2010 - but at what level? Even a slowdown to 0.2% average increase in unemployment vs. recent increases of 0.4% or more for the last five months in a row for only a year would mean an unemployment rate of 11.3% - easily eclipsing the early 80's high water mark of 10.8%. Worse still, the real job market is already far worse than it was then in terms of underemployment.
The ECB is apparently having a hard time coming to agreement over the scope of its asset purchase scheme - and ECB officials are contradicting one another in their public statements, something that must be giving Trichet fits. Super-hawk Weber was out yesterday saying that EUR 60 billion would be the maximum for covered bond purchases and that no other asset purchase types would be necessary while Kranjec of Slovenia contradicted this explicitly with claims that the ECB would likely spend more than the EUR 60 billion already earmarked and that commercial paper and corporate bond purchases might also be a possibility. Clearly, the ECB is at odds and if things stay that way, the policy efforts from the ECB will be muddled and slow in coming. This could mean that Euro growth will strongly underperform in coming quarters if some of the "green shoots" or at least "decelerating contraction" we are seeing in the UK and the US, for example, are mostly due to those country's enormous bailout efforts and frantic money-printing. Exhibit A for this theory will be the Q1 GDP numbers from Germany tomorrow, though the Q2 numbers are where this development might be more evident.
Bonds rallied again today, though US treasuries failed to hold their new lows in yields as we are writing this. Still, EURJPY posted an impressive new low below 129.00 overnight and AUDJPY spiked to new lows as well with JPY positive factors everywhere in evidence. It is interesting to note that a EURUSD decline has not accompanied the sharp EURJPY sell-off of recent sessions. These two pairs have often moved in the same direction in recent months. If the correlation is to hold, then EURUSD should be vulnerable if EURJPY continues to sell off (if EURJPY is the leading pair, that is...) Either that, or we need to come up with a reason for the two pairs' divergence soon. In the chart below, EURJPY is the blue line and EURUSD is the red one.
AUD has managed to stage a strong comeback after posting sharp new lows in Asia and in Europe, but that comeback should find very strong headwinds, perhaps ahead of the recent 0.7700+ top, as long as metal prices (like copper, especially) are selling off and as long as equity averages are in the dumps. Still, market turnarounds don't happen all at once even if we view AUDUSD as toppish.
Inflation watchers didn't get much from today's US PPI data and will have to look at tomorrow's CPI data for more clues. The core data is not likely to show any surprise downticks for the April data. There is an extraordinarily perverse calculation that makes up a good chunk (about 25%) of the core CPI called Owner's Equivalent Rent (OER) This number inflates as natural gas prices fall as the geniuses calculating this index figure that if people are paying less for their gas, they can pay more for their rent. April saw a further sharp drop in the natural gas price (natural gas has moved from 11 dollars last July to as low as 3.5 dollars in April), which will continue to inflate the core above what it otherwise might have been. For May, however, gas prices rose, so the effect will be the opposite and we wonder if relatively stable to rising gas prices could finally allow the core CPI to show a string of deflationary readings for month-on-month data by the early fall for the first time in over five decades of data. Regardless of the "official" numbers, other analysts have noted that if the CaseShiller home price data were to be substituted for the OER, we would already be seeing strong deflationary data for months...
