US Trade Balance stable for the first time in six months or more. RBNZ and Australian Employment Report on tap in Asia.
MAJOR HEADLINES – PREVIOUS SESSION
- US Weekly Consumer Confidence rose to -47 vs. -48 expected and -49 last week
- Japan Apr. Machine orders fell -32.8% YoY v. -29.5% expected and -2.2% in Mar.
- Japan May Domestic CGPI fell -5.4% YoY vs. -5.1% expected
- Australia Jun.Westpac Consumer Confidence surged 1277% vs. -4.3% in May
- Australia Apr. Home Loans rose 0.9% vs. 1.5% expected
- China May Producer Price Index fell -7.2% YoY vs. -6.9% expected
- China May Purchasing Price Index fell -10.4% YoY vs. -9.6% in Apr.
- China May Consumer Price Index fell -1.4% YoY vs. -1.3% expected and -1.5% in Apr.
- Sweden Apr. Industrial Production fell -21.2% YoY vs. -20.5% expected and -22.1% in Mar.
- Sweden Apr. Industrial Orders fell -30.0% YoY vs. -20.6% in Mar.
- Norway May CPI rose 3.0% YoY vs. 2.9% expected and Underlying CPI rose 2.9% YoY vs. 2.7% expected.
- UK Apr. Visible Trade Balance out at -£7003 vs. -£6400 expected
- UK Apr. Industrial Production rose +0.3% MoM vs. -0.1% expected but fell -12.3% YoY vs. -12.4% expected
- US Apr. Trade Balance out at -$29.2B vs. -$29.0B expected and -$28.5B in Mar.
- Canada Apr. International Merchandise Trade out at -0.2B vs. 1.0B expected
- Canada Apr. New Housing Price Index out at at -0.6% MoM vs. -0.3% expected
THEMES TO WATCH – UPCOMING SESSION
- US Fed's Lacker to Speak (1400)
- US Weekly Crude Oil and Product Inventories (1430)
- UK May NIESR GDP Estimate (1500)
- US Fed's Duke to Speak (1615)
- US Fed's Beige Book (1800)
- UK Bank of England's Sentance to Speak (2020)
- New Zealand RBNZ Official Cash Target (2100)
- Japan Q1 Final GDP Estimate (2350)
- Australia May Employment Change and Unemployment Rate (0130)
Market Comment:
Ahead of the US equity open, equity futures were trading well over a 1% higher than yesterday's close as equities continued to power higher in Asia. It seems the optimism of late is boundless. Long dated treasuries in the US were mired close to the lower end of recent price action, with the 10-year yield closing in on 4.0%. This was despite a very successful auction of $35 billion in 3-year notes yesterday from the US treasury which saw a bid-to-cover ratio of over 2.8, somewhat confounding the mounting claims that the US fed will . Someone is buying this stuff! A more relevant test for the US Treasury market comes with today's smaller auction of 10-year treasuries. Considering the longer duration of these notes, it is more interesting to see whether the market displays faith in the ability of the US to make good on its debt for the longer time horizon.
Sterling probed below the key 0.8580 low in EURGBP today, the lowest level since last December, but failed to hold on its initial try. The UK trade balance is showing remarkable inability to recover despite the very cheap pound of the last eighteen months. Capital flows will remain more important than trade flows, however. The ECB's Weber was out once again with almost absurdly hawkish comments, including: "central banks can raise rates before needed as a precaution". The market seems to increasingly be looking at these comments as wolf-crying, as there was little reaction, and we are all well aware of Mr. Weber's hawkishness by now. In any case, we wonder if the GBP strength is piggybacking the global recovery story and how the currency will be have when equities sell-off and the market decides that not all will be smooth sailing from here on out. Of some concern for GBP is the stagnation in banking stocks, which have been stuck in a range for a month now. Still, a break is a break for the EURGBP pair. In GBPUSD, we saw the exact high this morning at the final 0.764 retracement at 1.6470, the last level of note ahead of the recent 1.6664 high.
The US Trade Deficit for April stabilized, the first month in some time that we haven't seen a strong contraction. This suggests a slowing in the economic slowdown, as imports perhaps stabilized in that month. There are reports of reduced trade traffic in May, however, so it will be interesting to see the May numbers. Ex petroleum, the US trade deficit is now less than a third of its worst levels in he 2004-2007 timeframe at a "mere" -$14 billion
Watch out for the interesting data points from Oceania overnight, with the RBNZ expected to keep rates unchanged at 2.50% and the Australian employment report on tap. The unemployment rate is expected to surge to 5.7% from 5.4%. The market today was focused on the huge surge in consumer confidence, the largest rise in 22 years.
With optimism bubbling so enthusiastically, the new catchphrase of late is "exit strategies": or concern for how central banks will raise rates and/or pull the liquidity rug out from under the market. What about final demand - no one is seriously discussing where the final demand in the economy is going to come from.... Isn't this all too premature? Where is the structural solution for all of the past crimes created by the credit bubble? It is simply not there yet. It would seem that conditions are ripe now, with so many now boarding the recovery train, for some ugly surprises in the near future. At this point, however, the surge in optimism has last so long, that our confidence is rather low in calling the timing of a turn. WHen the move does turn, we suspect that the USD and the JPY could come back with a vengeance.
Chart: EURUSD
The surge in EURUSD over the last couple of days turned tail right around the 0.618 Fibo retracement for the sell-off from the 1.4338 top to the 1.3805 low coming in around 1.4135. That level and the 0.764 Fibo at 1.4212 are the final levels barring the way to the top. To the downside, we have yet to close below the 21-day moving average (blue line) and the big structural levels are the "neckline" like area around 1.3800 and then the very important support/old resistance at 1.3723.
