The NY session saw the higher commodity, lower USD correlation play out. The latest weekly oil inventory report confirmed the recent move higher in prices as the supply/demand imbalance continued to narrow. Oil jumped above $65/bbl and we would think the $70/bbl level now remains vulnerable in the short-term. Crude oil and EUR/USD have been correlated by more than 90% in the month of May and this led to further upside. The pair remains in an hourly down-channel between 1.3970/1.3800 and tested the top of this formation multiple times in the session, before settling near 1.3940. A break back above 1.40 should see more buying interest emerge.
Euro also enjoyed a pretty robust correlation with stocks today. These two assets have been in a ''love-hate'' relationship all month but today was one of those days that they decided to move in tandem. The S&P rocketed more than 1.5% and back above the 900 level to boot. May is shaping up to be one of the most range-bound months in recent memory, with the price action contained between 875/930. The rally today was puzzling given all of the holes in the reportedly ''better than expected'' economic data however.
The "booming" April durable goods report (up 1.9% on the headline vs. expected 0.5%) had many jumping for joy and once again calling the end of the US recession. The details, however, suggest the exact opposite. The "core" number which excludes the notoriously volatile defense and aircraft components actually fell -1.5% on the month to match the cycle low annual run-rate of -24%. This is an ominous sign for 2Q capital expenditures as the "hand-off" will be similar to what we saw in 1Q. The lack of business investment will continue to put pressure on jobs (continuing claims just made a new record high by the way at 6.79 million) and this in turn will hurt retail activity in the months ahead.
Mortgage delinquency data for 1Q came out as well and it showed a spike in the default rate to 9.1% from 7.9% the prior quarter. The details are grim with the subprime delinquency rate rocketing to a fresh record of 25.0% from 21.9% while prime borrowers defaulted at a 6.1% rate from 5.1% prior. The rub here is that these numbers occurred during a period when many US banks engaged in a ''foreclosure moratorium'' at the behest of the US government. This means that the 2Q numbers are only likely to get worse. Not to sound like a broken record, but this is just another bad indicator for the health of the US housing market. The stock market has finally woken up to the fact that today's data are anything but rosy.
The equity market rally has the potential to extend to overseas marts now and we would look for the yen crosses to remain ''better bid'' on the follow. One of the important levels to watch is the 200-day SMA in USD/JPY which sits at 97.20 currently. It tested briefly above it in NY but a daily close above would suggest more strength is in the offing. We would then target the
