Wake-up Call - Durable goods orders last pointer before US 3Q GDP

Durable goods orders last pointer before US 3Q GDP

The earnings season still produces interesting earnings releases from major companies, but today's Durable Goods orders from the US will be the last pointer before US GDP on Friday.

What's going on?

European equity markets will most likely open down. The close of the US was pretty much in line with the close of the European session in terms of levels, but Deutsche Bank disappointed the markets this morning, which is driving futures down. Look for an opening roughly 0.25% down. Ford released record earnings in its 107 year old history – presenting an EPS of 48c vs. 38c expected. Furthermore the debt reduction in Ford is going at record pace and this has made Ford predict that it will equal its cash balance with its debt by year end. Another string of earnings will be released today and those who have the largest market mover potential are: Volkswagen and Novo Nordisk in Europe and in the US the names to look for are P&G and ConocoPhillips.

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Calendar

GMT	Event	Saxo Bank	Consensus	Previous
08:00	Eurozone M3 YoY (SEP		1.3%	1.1%
12:00	NO Deposit Rates		2.00%	2.00%
12:30	US Durable Goods Orders MoM (SEP)	1.4%	2.0%	-1.3%
12:30	US Durable Goods Orders ex. Transportation MoM (SEP)	0.5%	0.5%	2.0%
14:00	US New Home Sales MoM (SEP)	0.0%	4.2%	0.0%
20:00	NZ RBNZ Official Cash Rate		3.00%	3.00%

Economic data highlights	Saxo Bank	Consensus	Actual	Previous	Revised
SW PPI MoM (SEP)		0.0%	0.4%	-0.5%
SW Interest Rate		1.00%	1.00%	0.75%
UK GDP QoQ (3Q)	0.5%	0.4%	0.8%	1.2%
US S&P/CaseShiller 20-City HPI MoM (AUG)	-0.10%	-0.20%	-0.28%	-0.13%	-0.21%
US Consumer Confidence (OCT)		49.9	50.2	48.5	48.6
US House Price Index MoM (AUG)		-0.2%	0.4%	-0.5%	-0.7%
US Richmond Fed Manufacturing Index (OCT)		1	5	-2

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Markets at a glance

US Durable Goods Orders is an interesting report today both in terms of future production and third quarter GDP released on Friday. Nondefense capital goods shipments is a reliable indicator of businesses investments in durable equipment in the GDP report. We are looking for bounce back from August’s 1.3% decline to 1.4% MoM (consensus: 2%). The less volatile ‘ex transportation’ series is expected to some improvement in September, but the trend is clearly slowing from earlier this year.

The New Home Sales report for September is released today and consensus is looking for a 4.2% gain month-on-month.  Housing starts rose by 0.3% in September to 610,000 (annualised) as sales in the housing sector are stabilising after the disruptive homebuyer tax credit.

US consumer confidence – as measured by the Conference Board – rose slightly in October to 50.2 from 48.6 earlier. We still need to see a sustained increase over several months, however, because the man on the street clearly still believes the US is in a recession. Since 1967 the average confidence in recession was 68.9 so we still have some way to go for this to be merely an average recession. In expansions, the average is an almost unimaginable 99.6. This was also confirmed by the weekly ABC Consumer Confidence report out late yesterday, which showed a decline to -47 from -46. The ABC series has been hovering in the -40 to -50 range for two years.

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Equities

Ford posted very strong earnings yesterday – actually record earnings in its 107 year old history. Among the major car producers in the US Ford clearly came out of the crisis better than both GM and Chrysler and announced yesterday that they will equal their debt with cash by year end. This is very good news for Ford shareholders as Ford will now be able to, even more aggressively than before, to invest in new products without hurting the deleveraging process that has been going on since 2008.

FX Update: G20 reaction doesn’t fit?

The market is running with the idea that something significant happened over the weekend with the new G-20 communiqué – but is the reaction in line with the actual statement and its implications?

G-20 communiqué slams the USD
The market has reacted rather strongly to the new G-20 statement – an indication, perhaps, that very little to nothing was expected to happen over the weekend. Instead, we get a very lengthy and relatively firm statement from the G-20 that the world needs to move toward “market-determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies.” The statement also focuses on both sides of the competitive devaluation problem: which shows the leaders who drafted the statement that the interest here is not only in pointing the finger at China, but also at the major economies and their need to be “vigilant against excess volatility and disorderly movements in exchange rates” to help “mitigate the risk of excessive volatility in capital flows facing some emerging countries”.

The statement asks the IMF to perform an oversight role, though one that is far more circumscribed than the rather dramatic idea from Geithner that it should oversee absolute caps on current account levels. Here is a link to the full text of the communiqué.

All in all, it is a fairly impressive statement that contains a strong recognition of the issues driving currency tensions – but there is a vast chasm that often separates good intentions from actual actions – and one can cynically wonder how quickly perceived self-interest will prove the decisive factor going forward rather than the spirit of cooperation. The reaction to the statement will quickly be dwarfed by the more pressing subject of the coming US mid-term election and next Wednesday’s FOMC meeting outcome, which will more severely test the market’s expectations.

On the surface, it appears that the market has already reacted more than the actual communiqué warrants. Certainly from an interest rate spread point of view, the communiqué has had no real bearing. Rather, the enthusiastic response of risk appetite to the situation is the real driver at the moment, as the market feels that any sign of international cooperation and reduction of trade tensions is a good thing for international capital flows and therefore risk. As we have seen endlessly in the past, this always results in a weaker greenback…

Data this week
Out shortly today we have the US Existing Home Sales for September. We can count on this figure to absolutely nosedive in October on the ongoing foreclosure gate issue, so this data point will not get particular attention.  Also today, Bernanke’s partner in QE crime, Dudley of the NY Fed will be out speaking.

Other data highlights for this week include:

Tuesday:

• Sweden Riksbank Interest rate decision – interest rate spreads and strong risk appetite are very supportive of a stronger SEK at the moment, and the Riksbank will deliver with a rate hike today  - but let’s see how hawkish the forward guidance is from the bank.
• UK Q3 GDP – looking for signs of deceleration now with the Q3 report, but just wait to see what happens in Q4 as austerity measures bite. GBP is weaker on the idea of the government austerity punishing growth while the central bank prints money to ease the pain. The pounds only hope is for strong risk aversion, which would result in pro-risk position squaring.
• US Aug. CaseShiller Home Price Index – US home prices teetering on the edge of falling again – and the foreclosure crisis is going to mean a likely renewed fall for a time as uncertainty reigns and as the crisis could mean a more expensive home buying process
• US Oct. Consumer Confidence – record underemployment and 40+ million Americans on food stamps, with the Tea Party expected to sweep to victory and the longer term unemployed to begin losing their benefits. Will the talk next year be of record homelessness? The situation in the US is extraordinarily dire at the lower end of the income spectrum.

Wednesday:

• Australia Q3 CPI: The Aussie is sharply higher to start the week, partly from the G20 reaction, but also after a strong PPI reading – but Thursday’s CPI reading will have a strong bearing on central bank’s decision making in the near term.
• Norway Norges Bank Deposit Rate decision: Norges Bank going nowhere soon and the new governor Olsen is considered dovish.
• US Sep. Durable Goods Orders – a volatile data series that was quite strong last month – how will this month’s data fare. Expectations are for another positive number.
• US Sep. New Home Sales – have dropped back toward record lows again recently. Less likely to be impacted as much as the Existing Home Sales by the foreclosure crisis due to lack of title problems.

Thursday

• Japan BoJ Target Rate – more QE on the way? As the JPY heads ever stronger ,we have to remember that it is actually the BoJ that is at the vanguard of QE measures at the moment, not the Fed.
• New Zealand RBNZ Cash Target – RBNZ not expected to move at this time as it is on hold for a while mulling the fallout of the Christchurch earthquake and generally soft data, but the market is still pricing in about 50 bps of tightening for the coming year.

Friday

• Japan Sep. CPI, Household Spending, Industrial Production – many signs pointing to a slowing Japanese economy here – one doesn’t envy the BoJ!
• Canada Aug. GDP – market looking for a significant bump after a couple of weak months of data, but this is likely not enough to turn the decelerating trend.
• US Q3 GDP – Q3 GDP expected stronger than Q2, but only by a fraction and look what wonders this growth is doing for the job market… The slack in the economy is still far too large to trigger convincing improvement in the job market.
• US Oct. Chicago PMI – the last of the major regional manufacturing surveys and the one that has stayed the strongest. This comes ahead of Monday’s ISM release.

Looking ahead
USDJPY is not far from the 80 level again today as treasuries are rallying once again – can the BoJ do anything to stop the implications of seemingly ever shrinking two-year interest rate spreads between the US and Japan? That spread is fast nearing its theoretical limit on the downside and it will be interesting to see what the BoJ brings to the table at its Thursday policy announcement.

With equities also rallying to within striking distance of 1200 in the US S&P500 again, it appears the market is trying to get back into Everything Up/USD down mode, but it is hard to imagine that we get a strong extension of this trade until the actual FOMC statement is in the rear view mirror next week since so much is already priced into expectations for this meeting.

Be careful out there.

Economic Data Highlights

• Japan Sep. Adjusted Merchandise Trade Balance out at ¥588B vs. ¥496B expected and ¥570B in Aug.
• Australia Q3 Producer Price Index rose +1.3% QoQ and 2.2% YoY vs. +0.5%/1.4% expected, respectively
• China Sep. Leading Index out at 101.81 vs. 101.84 in Aug.
• UK Sep. BBA Loans for House Purchase out at 31.1k vs. 31k expected and vs. 31.8k in Aug.
• EuroZone Aug. Industrial New Orders out at +5.3% MoM and +24.4% YoY vs. +2.2%/+19.3% expected, respectively
• US Sep. Chicago Fed National Activity Index out at -0.58 vs. -0.30 expected and -0.49 in Aug.

Upcoming Economic Calendar Highlights

• US Sep. Existing Home Sales (1400)
• US Oct. Dallas Fed Manufacturing Activity (1430)
• US Fed’s Bullard to Speak (1730)
• UK BoE’s King to Speak (1900)
• US Fed’s Dudley to Speak (2030)
• Japan Sep. Corporate Service Price Index (2350)
• Australia Q3 NAB Business Confidence (0030)

Interesting TIPS auction result

Today we saw an auction of US 4.5-year TIPS that resulted in a -0.55% nominal yield, as the market places a strong bet that the Fed’s efforts will result in the successful generation of inflation down the road. What does this mean for USDJPY?

Market bids up the TIPS
The strong TIPS auction result out of the US today caused a bit of a shockwave to run through the US bond market, as the implication of a negative nominal yield on the these securities says that the market is making a strong bet that the CPI will rise strongly over the next few years, considering that an investor can currently get 115 bps of positive nominal yield on a standard 5-year treasury. The strong auction result ironically (on the surface) saw bonds selling off heavily, as an extreme bet on TIPS suggests that fewer investors will trust the non-inflation indexed securities, some $100 billion of which, 3-,5-, and 7-year denominations, will be auctioned in the coming three days.  Another trust issue apparently not heavily playing into today’s strong TIPS auction result: should anyone ever trust the official CPI statistics? If the TIPS buyers are very right on inflation, we should all be very scared, as the average duration of US public debt is rather short and the budget deficit would quickly spiral out of control if interest rates rise too quickly. One would think that the strong sell-off would put a floor under USDJPY, but let’s see how the next three days of auctions do.

Chart: TIPS vs. standard treasuries
The chart below compares the development of the Jan 15 2016 inflation protected bond vs. the 5-year standard yield benchmark. Note the extensive widening in the divergence of the two as the market places a strong bet since the Fed started dropping QE2 hints in August.(Note also the slight comparison of apples with oranges here since the duration of the specific TIPS security we selected is different at every data point while the benchmark is always shifting to  select the closest security to the five year duration - so the comparison is a bit rough - though the behavior of the two curves proves that it i relevant.) Data source: Bloomberg.

Revisiting AUDUSD and volatility
We showed the chart below some time back, and it is interesting to revisit it now that AUDUSD has made another attempt at taking out parity. The risk reversals suggest that upside pressure is waning – and note again how the past behavior suggests that risk reversal divergence is very interesting for market timers.

Chart: AUDUSD vs. 1-month Risk Reversal skew
The chart shows that as AUDUSD has revisited its high, the risk-reversal skew has tilted more sharply to the downside rather than to the upside. This could suggest tougher headwinds for Aussie bulls. Data source: Bloomberg.

Today : Low Inflation = Massive Gold Rise!

The most common myth or misperception in the gold market today goes something like this:

"Since inflation rates are low, then there's no reason for gold to go up very much."

This misunderstanding is expressed in many different ways, such as:

"Since the Consumer Price Index shows only 4% inflation, then gold should go up by no more than about 4% per year."
or

"Since M1 is showing only moderate inflation, or deflation, then gold prices are due for a moderate gain, or even a fall."
or

"Since inflation expectations are moderate, and interest rates on bonds are low, then gold's outsized gains are unsustainable, and thus in a bubble."
or

"When interest rates begin to rise, the more attractive rates will pull money out of gold and back into bonds."

All of these statements are not true because they are only vaid when the world is on a fully backed gold standard.

But we are not on a gold standard!

Instead, paper money is highly leveraged to the underlying gold.  So much so that, only in theory could the gold be used to back up paper money, and only as a last resort if paper money began to die through rejection by the people, which leads to hyperinflation.

There is about $15 trillion in the US banking system, and only about $0.35 trillion worth of gold to back it up, if the gold even exists, and has not been sold or leased into the market to try to manipulate the market and contain gold's price rise in dollars.

(261 million oz. of "official" U.S. gold x $1350/oz. = $0.35 trillion)  This is gold leveraged 42 to 1.  This implies that gold could rise 42 times.  That's 42 x $1350 = $56,700/oz.

If you count all the unfunded liabilities of the US government, the leverage is hundreds to one.

So, to sum up, the popular myth correctly assumes that inflation will pour into gold, and on a one to one basis.  But it incorrectly assumes that paper money is fully backed by gold, but it's not.  And the myth also fails to account for all the prior inflation of previous years, which will also pour into gold and silver.

Here's a bit more math that more clearly shows why the myth is wrong.

The US government's budget now exceeds $3.5 trillion, but only collects $2 trillion, and thus, is printing/creating/borrowing $1.5 trillion of new money to pay the bills.  With M3 at about $15 trillion, the money creation inflation may be said to be about 10%.

This is the true inflation, the money creation, and this is only in the US; but the rest of the world is inflating, too.  The US is regarded as about 1/4th to 1/5th of the world economy, and the rest of the world's paper money systems are not in much better shape, and often worse, so the world's paper money inflation rate can be roughly estimated at 4-5 times bigger, or perhaps $6 trillion per year.

The world annual production of gold is about 2300 tonnes, which, at 32,151oz./tonne, is 74 million ounces.  At $1350/oz., that's $100 billion dollars worth of new annual world gold production.

See the problem?  How can $6 trillion ($6000 billion) of new money annually, buy only $100 billion of new gold annually, without a massive increase in the price of gold?

Gold prices would have to rise about 60 times, just to balance out the new money creation of the world.  That implies a gold price of $81,000.

The US budget deficit alone, the $1500 billion, is 15 times larger than the $100 billion world annual gold production.

Thus, when the pile of paper money is already so very large, then small increases in the very large pile are relatively huge to the underlying tiny gold market.

Remember there is a bit of truth about the myth, and it's that all paper money creation will flow into gold on a 1 to 1 basis, as it eventually must.  Remember, all paper money will flow into real money, since all paper money represents a potential claim on real money, and can potentially be spent on gold, and this has implications far beyond what most analysts are capable of thinking about, or writing about.

The 10% annual inflation of the US money supply today, which is $1.5 trillion can, alone, cause gold to rise 15 times, up 1,400% to over $20,000/oz!

Therefore, there is no reason to think that gold is in a bubble.  Did gold increase 15 times this year from $1000 to $15,000?  No?  Then gold has not yet "kept pace" with the inflation.  Paper money is the bubble, it's the bubble that created the housing bubble, and paper money will remain a bubble for years to come, until it all comes crashing down, and flows into gold.

The thing to remember about gold is that it is like a magnet that attracts and devours fake money.  It will draw into itself all the fake money in the entire world until the paper money fraud is extinguished from the system, and it will do this naturally, all on its own.

The reason is that any fool can see the truth of the situation today, and more and more people are buying gold.  As more and more people buy gold, the gold price will continue to rise.  As more and more people see gold prices rise, even the most foolish of fools will naturally and simply follow the trend, and buy gold for the obvious gains they are seeing.

This is why the "powers that be" are manipulating the gold prices, trying to keep them down, or contain the rise, with a vengeance.  This is why there are so many forms of paper gold to buy that don't require real delivery, such as leveraged programs, certificate programs, storage programs, IRA programs, futures contracts, options on futures contracts, ETF's, futures on ETF prices, options on ETFs, etc.  All such forms of paper gold are merely tricks designed to prevent people from buying real gold, which prevents gold's real price from going up, which keeps the paper money fraud going.

After all, as gold rises a mere 30% per year, as it has been done over the last year, and an average of about 20% per year for the last ten years, it's far more attractive than most other investments.  But furthermore, as I've shown you, the real potential is for gold to go up by 15 times, when US paper money is inflated by a mere 10% per year.

And what happens if things continue as they are for the next 15 years?  With paper money inflation at 10%, and with silver increasing at 30%?

If inflation of paper money continues at 10% per year, for 15 years, the $15 trillion in the US banking system grows to $63 trillion, having grown about $6 trillion in the final year!

See for yourself at http://www.smartmoney.com/compoundcalc/

That shows that on a large pile of money, 10% growth is clearly unsustainable!

And what happens when silver continues to gain 30% per year for the next 15 years?

The annual silver production market today is $15 billion.  So that grows to $768 billion, which is still a very managable, small, and realistic figure, with plenty of room to continue to grow in a world with $63 trillion to spend!

This shows that on a small pile of money, 30% annual growth is very realistic and sustainable for 15 years.

I strongly advise you to take possession of real gold and silver, at anywhere near today's price, while you still can.  The fundamentals indicate rising prices for decades to come.

Sincerely, 

Jason Hommel

Jim Rogers: Paul Krugman is an idiot... Obama barely knows anything about the world

From BullSource:

Financial guru Jim Rogers joins Judge Napolitano on Freedom Watch to discuss gold and the failure of Keynesian economic policies.

"Whenever you print money, people look for a refuge, gold," says Rogers. He points out that government will blame its mistakes on the press and the people rather than itself.

... Rogers calls out the flaws of Keynesian economist Paul Krugman. "He should resign," advises Rogers. “He doesn’t know anything about economics...

Read full article (with video)... 

Risk still has pedal to the metal

Our measures of risk appetite across markets suggest that traders are still aching to put on risk, even as the USD weakness is not particularly pronounced ahead of the weekend. What gives? Also, a look at the EURCHF breakout and what might be driving it.

USD and G-20
We noted that markets were finally beginning to move in different directions this morning. Not much has changed on that account today, though the ranges are rather muted ahead of the weekend as the market mulls whether anything is. The crazy Geithner idea could actually gain acceptance and come to pass in some form simply because it is an easy framework to agree on and an impossible one to enforce. This article from Reuters aptly compares the Geithner plan with the EU stability pact that has proven so toothless even for the comparatively tight-knit EuroZone.

Risk appetite: still pedal to the metal
While bonds have eased lower (yields higher) and the market has taken its foot off the “death to fiat currencies” trade as gold and silver consolidate, other measures of risk appetite expanded sharply over the last couple of trading sessions, including junk bond spreads and corporate credit measures (a very strong start to earnings season is helping out there). The pause in the USD down move has also seen FX implied volatility recede a bit. Emerging market bond spreads remain relatively supportive of risk positions as well. But while there are no real signs of danger at the moment for the risk bulls in many of these kinds of indicators – we would suggest that complacency is dangerously higher and speculative positioning very heavy, judging from evidence in sentiment surveys, the fact that we’re seeing record inflows into EM equity funds, and based on positioning surveys by the CFTC. We must also consider the idea that the Bush era tax cuts may come to an end after all on the potential for mad and lame duck Democrats in no mood to cooperate with Republicans ahead of the changing of guard early next year. The tax cuts are set to expire on January 1. This Reuters article offers good coverage.

As for our chart below – it shows the USD carry traders taking a pause here even while risk appetite has moved higher – but we have would postulate that the USD could be the tail wagging the dog at the moment because of the strength of the market’s USD view.

 EURCHF and interest rate spreads.
EURCHF has been a bit reluctant to participate in the EUR strength evident in other crosses, but now we finally see the market bidding up EURCHF on its recent break of key resistance around 1.3500 after a false break yesterday. The reason for the CHF weakness? Perhaps the panic easing off on the precious metals trade is one reason, but also the interest rate spread has long ago started stretching more drastically to the Euro’s advantage, as the below chart of the  2-year swap spreads between the EuroZone and Switzerland indicate. The rate EUR rates are headed higher lately is unsustainable in our view, though one can also argue that there is more upside to price into this pair if spreads are the only focus. Further out, we wonder how long the market can fail to focus on the longer run sovereign debt/EuroZone framework issues and the potential for a situation like that in France to spiral out of control. At present, the market is trading the Euro like Germany is the only country in the bloc…

Norges Bank gets new Governor
Norges Bank's new governor, Oeystein Olsen, was appointed today and his first speech suggested he will do little to rock the boat and make Norway stand out in any way from the international policy scene on monetary policy as he suggested that the krone's strength would be a determinant of interest rate policy. "Norges Bank cannot go alon for sure; international developments including itnerest rate paths abroad will potentially affect" policy "via the exchange rates", he was quoted as saying in a Businessweek article today.

As for the market reaction to today's announcement, interest rate moves suggested that we have a fairly dovish new governor on our hands, though the FX reaction was far more NOK positive. The next key supports in EURNOK are 8.0500 (a previous high) and the psychologically important 8.00 level, which is just above 8.00. It would seem that Mr. Olsen's would take away some of the potential downside for the pair, though the Norges Bank has long had a tendency to quickly intervene verbally in the market on large currency moves. The chart below suggests that there is no pressure at all on the downside from an interest rate perspective.

Commodity Weekly: Correction hits Gold and Silver.

This week China raised its key interest rate and speculation about U.S. quantitative easing and the wider implication left the front page, at least for a little while.
The move initially stopped the dollar from weakening further with some commodities suffering setbacks as a consequence. Gold is on course for its first proper weekly loss in almost three months while the energy sector continues to trade sideways to slightly lower.  The Reuters Jefferies CRB index which tracks 19 leading commodities was flat on the week with big discrepancies between markets.

 The whole agricultural space is still caught up in the weather related storm that has swept around the globe these past few months. This has caused widespread disruption to production which in turn has seen agricultural commodities perform very strongly.
How strong can be seen on the below sector split from the Dow Jones UBS commodity index. The overall performance of the DJ-UBS index is showing a year to date increase of four percent which is primarily due to the weak performance of the index heavy energy sector which count for more than 30 percent of the total index.

 We have seen the correlation between strong gold and weak dollar increase recently. With the dollar finding some strength ahead of the G20 meeting in South Korea this weekend gold has come under some pressure resulting in the first weekly loss in 3 months. It is during a correction phase that the underlying strength of a market will be tested and this is the situation we now have. The next couple of weeks could almost decide whether the 2010 high have been seen already or whether this correction will attract new buyers who have been holding back waiting for such an opportunity.
As usual silver has underperforming during the correction just like it has been outperforming during the recent rally. Support can be found down towards 22.18 and 21.34 which are Fibonacci retracement levels of the recent rally. The equivalent retracement levels for gold can be found at 1300 and 1272 with trend line support at 1,311 also worth watching. A move back above 1,350 could signal a resumption of the uptrend with the next major target being 1,400.

 WTI crude oil continues to find itself entrenched in a relatively tight range between 80 and 85 dollars. The Chinese rate hike during the week scuppered another attempt at breaking higher as dollar strength sent it looking for support.
The speculative long position held by money managers such as hedge funds rose to near record levels last week and this would be a cause for concern. A break below 80 dollars could trigger some long liquidation resulting in a deeper correction. A failure however to reach a deal to quell the global currency unrest at the G20 meeting in South Korea could be seen as being supportive for oil and other commodities as the dollar risk resuming its recent decline.

Natural gas slumped another four percent this week as the weekly storage data from the U.S. showed inventories continuing to rise at a faster pace than expected. With the pickup in winter demand not expecting to outweigh supply for another few week’s inventories could reach the record levels seen last year adding. This is adding to the oversupply worries that have kept prices under pressure for months and have led to the forty percent price drop year to date.
The long crude short natural gas ratio spread (WTI crude oil divided by natural gas) is a favoured value trade by many hedge funds and only a significant change in direction of this spread, which has seen crude outperform natural gas by 70 percent since June, could bring some support back to the beleaguered market.

 Turning to the agricultural sector we saw strong performances from coffee with the price of Arabica coffee beans rising above 2 dollars per pound for the first time in 13 years. This comes amid fears that adverse weather across key growing regions in South America will lead to further supply downgrades. Columbia, the second largest producer of Arabica, have already said that a fungus is damaging plants and may reduce the output for 2011.
Columbia had been expected to produce 10.5 million bags during the 2010/11 season but recent revisions have seen that reduced by ten percent. Combined with reduced output from Brazil, the world’s largest grower, demand could outstrip demand over the next twelve months by 1.3 million bags according to analysts.
Having rallied strongly since June the two dollar level reached this week could provide some near term resistance but demand from roasters will probably keep it supported on a potential setback.
The price of rice has also continued to rally increasing the focus on this grain which is the stable diet for more than three billion people across Asia. The main harvest in Thailand may drop by 20 percent after the worst floods in four years hit the growing regions. This has resulted in the Thai export price, which is the benchmark for the Asian market, having rallied ten percent from the July low and could rally another ten percent before year end as rice importing nations steps in to meet their needs.
A food crisis like the one in 2008 is luckily still very unlikely with the Thai benchmark trading at half the level seen back then. Continued weather developments have to be watched carefully as actual supply worries more than speculative interest have been driven these markets recently.

 The January rough rice futures contract traded in Chicago reached 14.59 dollar per hundredweight this week and with seasonal demand picking up some analysts forecasting additional price rises towards the sixteen dollar level seen last year in December.

FX Update: China cooling, but what about competitive devaluation theme?

EURUSD tried to take out 1.40 again in Europe on resilient EuroZone activity surveys. But risk measures and inconsistent moves elsewhere suggest that we may have a hard time reverting fully to the Everything Up/ USD Down trade in the same way as before.

Posen and Osborne pound sterling
The BoE’s Posen was out continuing his dovish pronouncements, complaining about the “patchy” UK economic recovery and suggesting that inflation targeting is a goo d policy to pursue and that inflation is trending downward (yes – slightly, but still at levels that are considered so high that Mr. King is required to write a letter of explanation to the Chancellor …!) and will continue to do so. Mr. Posen is the new Blanchflower of the BoE – but will he prove as predictive of the course of BoE policy as his former colleague? Meanwhile, importantly, Chancellor Osborne was out saying that the Bank of England is always there should an economic slump develop in the wake of the government’s austerity measures aimed at reducing the budget deficit. Poor UK economic data and a resumption of the Everything Up/USD Down trade spelled trouble for the pound, which is essentially a fellow traveler of the greenback at the moment now that BoE policy appears on the cusp of following Fed policy.

Fed Beige Book and EURUSD
The Fed’s Beige Book was actually mildly positive relative to the bond market’s apparently dim view of the economy, as eight of the 12 Fed districts reported growth, while two reported mixed results, one was “holding steady” and one “remained slow” . In any case, it didn’t dampen enthusiasm much for selling the USD much as EURUSD was back trading above 1.40 in the European session today. Euro upside was aided by the continuing upward spiral in yields at the short end of the curve in Europe as well as very resilient preliminary PMI’s for October. The German 2-year yield is up over 25 bps from mid September. How long is the ECB willing to watch the screws tighten as the rest of the world devalues?

Chart: EURCHF

EURCHF breaking to a new high since early August as European rates continue to pressure Euro crosses higher and as the Euro is the preferred reserve alternative in a devaluing world.

Chinese data
There wasn’t much in the Chinese data that was the apparent cause of the recent PBOC decision to raise rates. Generally, the data was on the soft side relative to recent trends. More interesting to us than these numbers, we finally have the electricity consumption data out for September. Many believe that electricity consumption is a more reliable indicator of Chinese economic activity than the “official” figures. The September electricity consumption more than confirms the slightly softness in the growth and production figures as it was up just under 9% YoY, the lowest level of growth in just over a year. It appears that the regime is allowing the economy to cool somewhat.

Looking ahead
It’s tempting to believe we’re just going to snap back to the old pro-risk trades here if we simply look at equities and some of the USD crosses, but there are more divergences this time around to suggest that the Everything Up/USD Down trade is weakening a bit even if it still has powerful proponents. AUD is reluctant to go much higher here because of the recent RBA comments, Gold has only taken back about a quarter of the lost ground from the recent top in prices, long US Treasuries seem to take four steps forward and three steps back. Risk measures are a bit sideways…If these other factors begin to point more unanimously to the upside again for risk and down for the USD, then we’ll believe in a strong resumption of the old trend. Until then, the market may continue to chop around treacherously for both bears and bulls. Meanwhile, the November 2-3 one-two punch is fast approaching and offers the highest odds of serving as an important inflection point in this market.

Also meanwhile, we have the G-20 finance ministers putting their heads together this weekend. Usually these conferences come and go without the need for much comment or affect on the market, but this time around, there is far more likelihood of strong comments from the participants and more pressure on China than ever before to move on its currency. The question is how much comes to light now vs. at the November 12 main event in Seoul, when the politicians are also involved.

Economic Data Highlights

• China Q3 GDP out at 9.6% YoY vs. 9.5% expected and 10.3% in Q2
• New Zealand Sep. Credit Card Spending out at +0.9% MoM and +4.1% YoY vs. +2.1% YoY in Aug.
• New Zealand Oct. ANZ Consumer Confidence Index out at 113.6 vs. 116.4 in Sep.
• China Sep. Producer Price Index out at +4.3% YoY vs. 4.1% expected and 4.3% in Aug.
• China Sep. Purchasing Price Index out at +7.1% YoY vs. 7.5% in Aug.
• China Sep. CPI out at +3.6% YoY as expected and vs. 3.5% in Aug.
• China Sep. Retail Sales out at +18.8% YoY vs. 18.5% expected and 18.4% in Aug.
• China Sep. Industrial Production out at +13.3% YoY vs. 14.0% expected and 13.9% in Aug.
• Switzerland Sep. Trade Balance out at 1.69B vs. 1.2B expected and 0.58B in Aug.
• Germany Oct. preliminary Manufacturing PMI out at 56.1 vs. 54.6 expected and 55.1 in Sep.
• Germany Oct. preliminary Services PMI out at 56.6 vs. 54.9 expected and 54.9 in Sep.
• EuroZone Oct. preliminary Manufacturing PMI out at 54.1 vs. 53.2 expected and 53.7 in Sep.
• EuroZone Sep. preliminary Services PMI out at 53.2 vs. 53.7 expected and 54.1 in Sep.
• UK Sep. Major Banks Mortgage Approvals out at 44k as expected and vs. 45k in Aug.
• UK Sep. Retail Sales ex Auto Fuel out at 0.0% MoM and 1.8% YoY vs. +0.2%/+1.9% expected, respectively
• Switzerland Oct. ZEW Survey out at -27.5 vs. -5.1 in Sep.
• Canada Sep. Leading Indicators out at -0.1% MoM vs. +0.2% expected and +0.6% in Aug.
• US Weekly Initial Jobless Claims out at 452k vs. 455k expected and 475k last week.
• US Weekly Continuing Claims out at 4441k vs. 4420k expected and 4450k last week

Upcoming Economic Calendar Highlights

• US Fed’s Bullard to Speak (1400)
• EuroZone Oct. Consumer Confidence (1400)
• US Sep. Leading Indicators (1400)
• US Oct. Philly Fed (1400)
• US Fed’s Bullard to hold press briefing (1800)
• US Fed’s Hoenig to Speak on US Economic Outlook (0145)

Weekly Commodity Update: Commodities cooling in the lead up to QE2

Ole S Hansen, Senior Manager, Saxo Bank

The CRB index went down 1.5 on last week. Crude had its biggest 1 day percentage fall in 8 months and gold saw its biggest drop since July, as the Chinese rate's affect rippled through the markets. Silver also correct 6.5% down from recent peaks.

October FX month in review

Extract from Saxo Bank FX Monthly - October 2010

The last month has been a dramatic one for all asset classes. Here are a few highlights of the goings-on in the currency market since our last publication:

• Competitive Devaluation Strikes. The Brazilian Finance Minister recently declared that the world is engaging in “currency wars” as nations fight to prevent their currencies from appreciating in order to remain competitive in the global marketplace and reap what they can of insufficient world demand. On the one side of this war, we have the rapidly weakening currencies from low-growth developed nations led by the US that are devaluing their currency through ZIRP and QE aimed at boosting growth and preventing deflation. Japan and the UK are the other two major developed countries current either actively intervening (Japan) or threatening renewed QE (the UK.). This is triggering massive capital flows to the higher yielding emerging markets, which can’t absorb the flows without tremendous currency strengthening effects (they also boost the economy and become a self-fulfilling yield enhancer as higher growth rates mean policy must be kept relatively tight as well). In response, highly export-dependent countries like Korea and Brazil have enacted various capital controls and other policies aimed at punishing inflows and stemming currency strength. Above all nations fighting currency strength stands China, which accumulated an astounding USD 100 billion in reserves in September alone. Currently, the easy money policies of the Fed are triggering wild speculation in all major risk assets, but we still wonder whether this is sustainable – see more below in Cognitive Dissonance an in our Outlook section.

• The Euro finally gets respect. So far, despite street protests in Greece and a new bank bailout in Ireland that will mean an astonishing 30% of GDP shortfall in that country’s budget deficit, the EuroZone has managed to keep a lid on the sovereign debt and default fear situation as the ECB has bought sovereign bond debt (and as large European banks have front-run this buying). At the same time, the sudden realization that ECB policy is extremely tight relative to the more aggressive “QE” troika of the Fed, BoE and BoJ in a world of competitive devaluation, drove the Euro sharply higher after it had clearly become oversold versus the broader market. Short rates in Europe have dramatically risen vs. the other G-4 currencies as the ECB’s sovereign bond buying operations are sterilized and as it remains clear that the ECB is not interested in changing its overnight rate, further aggravating the liquidity at the short end of the curve. Is there more to squeeze out of this trade? Versus the USD, we’re not so sure.

• AUDUSD nips at parity. Just after Bernanke’s October 15 speech in which he outlined some of the tools the fed could use to fulfil the Fed’s mandate in a “low inflation environment”, AUDUSD pipped parity before falling later in the day, and AUD vs. the rest of the G-10 has eked out new highs for the cycle as risk appetite marched ever higher globally on the anticipation of endless easy liquidity from the US Fed and as commodities prices also rose sharply as a corollary of the competitive devaluation theme. But is the AUD rally overdone once again?

Download the full report here

FX Update: China hikes, risk wilts

Risk appetite is pulling back after a lousy earning report and outlook from Apple Computer late yesterday and a surprise decision to raise rates by the PBOC.  Meanwhile, US banks report great results as mortgage clouds continue to gather.  Risk trades at risk here…

A hike in China
The PBOC’s decision to hike rates has served as a bit of a spanner in the works for the current market paradigm of “Easy money all around – let’s speculate wantonly!”. This is the first move by the PBOC since….2007 and suggests that the Chinese are very concerned about something here since they are willing to rock the boat in this fashion. The speculation can only be that CPI will come in very high when China releases a raft of data on Thursday. Food prices are weighted very heavily in the Chinese CPI, and grain prices are sharply higher from just a couple of months ago. This is a critical political season in China, as it sets about crafting its new 5-year plan for 2011-15 (let’s all remember that this is a command economy…). 8-10% growth forever, anyone? Forever might end within the next 12 months. While the reaction in the Chinese equity market to the PBOC hike suggests no domestic panic in China, any whiff of anything resembling a pulling of the plug on the liquidity-fest is anathema to the competitive devaluation/QE front-running theme and the market shrinking away from risk trades at the moment makes eminent sense and may have longer to run.

RBA Minutes
The RBA minutes were relatively Aussie negative, especially since the currency’s strength was mentioned as a factor in the outlook as a potential aid in easing inflation going forward. This sets up the dynamic  of: too much strength in the Aussie means the RBA is less likely to hike, which means that the AUD uptrend from here on out will be a self-limiting process, meaning downside becomes the side of least resistance in terms of volatility potential. It was also noted in the minutes that the decision was “finely balanced”. This combined with the Chinese rate hike aimed at slowing the Chinese economy has the Aussie in the hot seat for a very good reason today.

Chart: AUDUSD
The news flow today not kind to the Aussie, which could fall across the board on today’s developments. The big focus to the downside here could be the old 0.9400+ high if momentum continues in the short term.

US Housing Surprise?
Interesting to note that despite the new mortgage fiasco in the US, the NAHB survey out yesterday, which measures buyer interest for new homes and is one of the more leading indicators in the US housing market, actually ticked a few points higher in September from its lowest level in a long time in Augus. One might take this as an encouraging sign, but to some measure it is likely also due to the fading effect from the expiration of the homebuying incentive tax that ran out at the end of April and cannibalized forward demand. One might also thing that new homes might sell better in the coming few months than existing homes for those who feel they absolutely must buy a house because they are moving, but don’t want to risk the potential title/ownership hassle of an existing home. At least new homes have a clear title! The other housing related data today was actually less encouraging, as housing starts were about the same as the previous month and building permits dipped sharply. The 539k annualized in the latter figure is the third lowest figure on record.

Bank of Canada
Despite the sharp move weaker in CAD ahead of the BoC decision today, the decision itself failed to throw the currency a rope as USD selling has intensified this morning. The Bank’s statement was cautious as the Bank noted the shift to fiscal consolidation in the developed countries, where it felt growth would be weaker. Canada’s growth potential was also downgraded and the bank also expected household spending to decelerate. All in all, no major surprises, but this is clearly not a bank that is looking to hike any time soon and one would expect the market to reduce forward rate expectations to closer to neutral. Considering the news flow of the day here and the relatively large shock to the AUD uptrend from developments – one has to wonder how long AUDCAD can maintain the parity level here.

Earnings season
Perhaps the US equity market’s most important equity, Apple Computer, fell sharply overnight after earnings somewhat disappointed expectations and as product sales and margins disappointed. A cautious outlook didn’t help. This is important stuff, coming from the market’s poster child of a growth stock and a USD 275 billion company.. This morning’s focus was on Goldman Sachs’ and Bank of America’s earnings – who of course reported great results – but the latter company is at the center of the mortgage furor due to its overtaking of the most reviled mortgage lender (due to their aggressiveness in the sub-prime area and size), Countrywide Financial, in early 2008.

Looking ahead
At what point does he shut down of an entire large nation affect the Euro? Shouldn’t it be soon? And if the USD is doing well here on this consolidation in risk appetite, shouldn’t its fellow traveler the pound also be doing well? For those not wanting to read between the lines, we will simply come right out and say it: why is EURGBP trading at 0.8800 right now – shouldn’t 0.8700 be more appropriate, or even lower at the moment? It appears that the focus is definitely away from GBP at the moment as the USD is the prime mover here.

It appears that this PBOC rate hike, US mortgage situation and the bit taken out of Apple might finally be enough to trigger a reasonable consolidation of this Everything Up/US Dollar Down trade for at least a time. if momentum continues to increase here in the short term on the anti-trend will be the 1.3350 area in EURUSD and the 0.9400 area in AUDUSD. Those levels might appear rather far off, but the April top in risk appetite and subsequent May fall-out showed us what can happen when these persistent moves with virtually no retracements can mean when the downside finally does arrive in a hyper-correlated market.
Interesting to note that the USD strength is unfazed here just after the Fed’s Lockhart is out saying that the Fed needs to get big on QE if it wants to do it at all. 

Economic Data Highlights

• EuroZone Aug. Current Account out at -7.5B vs. -4.1B in Jul.
• EuroZone Aug. Construction Output out at -8.5% YoY vs. -6.9% YoY in Jul.
• Germany  Oct. ZEW Survey out at -7.2 vs. -7.0 expected and -4.3 in Sep.
• EuroZone Oct. ZEW Survey out at 1.8 vs. -2.0 expected and 4.4 in Sep.
• UK Oct. CBI Business Optimism out at 2 vs. 8 expected and 10 in Sep.
• UK Oct. CBI Trends – Total Orders out at -28 vs. -19 expected and -17 in Sep.
• US Sep. Housing Starts out at 610k vs. 580k expected and 608k in Aug.
• US Sep. Building Permits  out at 539k vs. 575k expected and 571k in Aug.
• Canada Bank of Canada left rate unchanged at 1.00% as expected

Upcoming Economic Calendar Highlights

• US Fed’s Evans to Speak (1340)
• US Fed’s Dudley to Speak (1400)
• US Fed’s Lockhart to Speak (1530)
• US Fed’s Fisher to Speak (1650)
• US Fed’s Kocherlakota to Speak (1720)
• UK BoE Governor King to Speak (1850)
• US Fed’s Bernanke to Speak (20000)
• US Weekly API Crude Oil and Product Inventories (2030)
• US Weekly ABC Consumer Confidence (2100)
• US Fed’s Duke to Speak (2300)
• Australia Aug. Westpac Leading Index (2330)
• Japan BoJ Deputy Governor Nishimura to Speak (0130)

Weekly Market Wrap Up With Steve McDonald

Welcome to this week's market wrap-up with Steve McDonald. A few weeks ago Steve talked about a large corporation that was shifting focus and moving into the data management field. The company is now rumored to be a takeover candidate by some the biggest names in the tech industry. A major agriculture player just announced tremendous earnings-per-share numbers, and Steve says it's just the start of a huge demand increase. Some bad news coming out of Canada and our northern border states could mean big profits if you take Steve's advice and act now, and one of our experts may need to revise his gold price projections. And finally, the Slap-In-The-Face award, where socialized medicine is causing outrage in one European country.

Christian Hill
Managing Editor
Investor's Daily Edge 

FX Update: Bond markets trying to tell us something?

Risk appetite is extending its recent rally and the USD is weaker – anything new in that refrain? Interestingly, bonds are looking like a fading horse in the crazy “everything up” race. Implications, anyone?

The US equity market is setting new highs since early May on the strength in Intel earnings yesterday and hopes that the global recovery will continue to mean strong corporate earnings. The generally complacent risk atmosphere is also seeing the USD weaker – no big surprise there. But there is still a bit of a divergence in the major asset classes relative to recent action as bond markets are still on a weak footing today after failing to post/hold new lows for the cycle yesterday. This begs the question that must be answered in the days to come: is this a win/win market as the likes of David Tepper has claimed (this was the hedge fund manager who famously appeared on CNBC a few weeks ago and proclaimed that markets could only go up because either there was real growth, which is great, or the Fed will continue to pursue QE which would float all markets anyway, which is also good) or is this purely a speculative mini-bubble that will be pricked as soon as the market’s false hopes of the beneficial effects of QE2 are dashed? We lean more toward the latter, in which case, this bond sell-off bears more significance than the market is currently recognizing. As well, a correction in the bond market could finally give the JPY bears some hope if it proves more durable than the 24-hour consolidation we have seen thus far.

Overnight news items

• China’s FX reserves jumped an absurd $150 billion in September, keeping alive the old global imbalances like 2008-09 never happened.  It also points to lots of hot money entering the Chinese economy again. The overall Chinese trade surplus was the smallest in five months, as exports came in slightly lower than expected and imports were very strong. CNY rose….by about 0.12% against the USD, equivalent to about 17 pips in EURUSD….
• UK Jobless claims rose by the most in eight months as the jobs recovery seems to be largely over in the UK. The overall claimant count rate has dropped from 5.0% to 4.5% from the height of the recession to the most recent data, and compared with generally below 3% in the few years before the crisis.
• USDCAD is close to toying with parity after the official house price data nudged slightly higher rather than the slight decline expected. More recent data suggests far less cause for optimism on the Canadian house price front as we maintain the stance that the Canadian housing bubble is ripe for a severe correction in the year(s) ahead based on declining 

Looking ahead
One of the more intriguing ideas circulating around at the moment is that Bernanke’s threat of QE2 is causing the “wrong” kind of inflation as the market moves to speculate in hard assets as the fears of currency devaluation mount. This means that the majority of people – whose income is obviously not increasing in line with speculative developments – are seeing their costs rise and buying power decrease. This is a highly destructive path for the economy if it is allowed to continue. The next chance for the Fed to speak comes on Friday as Chairman Bernanke is scheduled to speak at a Boston Fed Conference on Friday and he certainly ought to say something to the markets since the markets have been saying so much about what they believe about the potential effects of his policy trajectory. This would be the first real chance for a sell the rumor (sell the USD on QE2), buy the fact (because it won’t have the salutary effect currently priced into the market’s speculative frenzy) Stay tuned!

In the meantime, watch out for the batch of NZ data out tonight as the NZD rally seems to be having a hard time finding a ceiling. Tomorrow’s highlights include the chance to compare and contrast Canada and the US’ trade deficits, as the former continues to post record deficits that this competitive devaluation obsessed market is not noticing. The BoC can’t be happy as it watches Canadian terms of trade fundamentals crumbling rapidly. Could the next move by the BoC actually be a cut? That is certainly not priced into the market, which is still pricing in some 30+ bps of tightening over the coming 12 months. Is that medium term value we smell in USDCAD?

As for the status of the strength of bond markets, today we have the 10-year US Treasury Auction and tomorrow we get a 30-year T-bond auction. Yesterday’s 3-year auction was notable for its weakness relative to recent auctions.

Economic Data Highlights

• UK Sep. Nationwide Consumer Confidence out at 53 vs. 59 expected and 62 in Aug.
• Australia Oct. Westpac Consumer Confidence out at 117 vs. 113.2 in Sep.
• Japan Aug. Machine Orders out at +10.1% MoM and +24.1% YoY vs. -3.9%/+8.7% expected, respectively and vs. +15.9% YoY in Jul.
• New Zealand Sep. Non-resident Bond Holdings out at 64.0% vs. 62.7% in Aug.
• China Sep. Trade Balance out at $16.88B vs. $17.75B expected and $20B in Aug.
• China Sep. Foreign Exchange Reserves out at $2.65T vs. $2.5T in Aug.
• China Sep. New Yuan Loans out at 596B vs. 500B expected and 545B in Aug.
• Switzerland Sep. Producer and Import Prices fell -0.1% MoM and rose +0.3% YoY vs. +0.1%/+0.4% expected, respectively
• UK Sep. Jobless Claims Change rose 5.3k vs. 4.5K expected
• UK Aug. Average Weekly Earnings ex Bonus rose 2.0% 3M/YoY vs. 2.2% expected and 1.6% in Jul.
• EuroZone Aug. Industrial Production rose 1.0% MoM and 7.9% YoY vs. +0.8%/+7.4% expected, respectively and vs. +7.2% in Jul.
• Canada Aug. New Housing Price Index rose +0.1% MoM vs. -0.1% expected
• US Sep. Import Price Index fell -0.3% MoM and rose +3.5% YoY vs. -0.2%/+3.8% expected, respectively and vs. +4.0% in Aug.

Upcoming Economic Calendar Highlights

• UK BoE’s Sentence to Speak (1740)
• US Fed’s Bernanke to discuss Business Innovation (2010)
• US Weekly API Crude Oil and Product Inventories (2030)
• New Zealand Sep. REINZ Housing Price Index/House Sales (2100)
• New Zealand Sep. Business NZ PMI (2130)
• New Zealand Aug. Retail Sales (2145)
• US Fed’s Lacker to Speak (2345)
• Japan Sep. Domestic CGPI (2350)

Bonds creating a bit of dissonance

Finally, one asset seems to be peeling away from the everything-up-against-the-USD trade, as bonds have seen a bit more back and forth again despite the threat of imminent Fed buying and a reasonable auction result today. What does this mean for USDJPY and the current market paradigm?

Chart: Saxo Bank Carry Trade Model
First, our daily check-in with our carry trade model shows that underlying risk factors continue to support the general upward trajectory in risk appetite – even more strongly than in previous days now that FX volatility has come off further today with the latest slowdown in USD depreciation. This begs the question, of course, on the degree to which the USD move is leading risk indicators and vice versa – and the possible answer is that this is a reflexive process.

An endlessly fascinating article from Artemis posted by the hyperactive Zerohedge staff discusses the meaning and risks of the highly correlated markets and the potential this creates (or risk this reflects) of systemic risk. Also a good look at the everything up trade and compares this market to selling pineapples at a farmer’s market. Highly worth a read.

Chart: VIX vs. VIX future
Along the lines of the correlation and volatility discussion from the above article – click on the chart below for a look at the spread between the “spot” VIX and the 5th VIX future vs. the S&P500 to see how unusual this market has  become relative to the last few years.  

Bond markets to spoil the party?

If the “Everything up” trade is all about the potential for currency devalution meaning appreciation in asset prices, at some point the bond buyer has to wake up and say, “Why should I own bonds when the currency in which they are denominanted will mean negative real rates versus other asset classes? Shouldn’t I rather own stuff or a company that makes stuff and services on which they can raise prices to reflection inflation?” Let’s not presume to claim that bonds have hit the wall here – but at some point, the logic of this market falls apart and not everything can go up simultaneously, regardless of Fed actions. The last couple of days have seen a slight break in the everything up trade as bonds show some sign of weakness - which harks back to more normal market conditions when yields tend to rise as risk appetite rises as well. But in a market where the logic was formerly that Fed actions are supposed to support ALL asset prices, then this is a sign that the power of the Bernanke put is fading somewhat.

Chart: USDJPY and 10-yr rate spread
Regardless of our discombobulated attempt at unraveling the markets – we should consider what a rise in bond yields might mean for the Japanese Yen. Has everyone forgotten that the BoJ has already leapfrogged the Fed in bringing out QE2, that the it is practicing unsterilized currency intervention and that its long run debt problems are even worse than those in the US? If yield spreads head the wrong way for Japan relative to the US, it is hard to understand what force – besides emotional ones – would keep the JPY on a depreciating path, unless it’s the idea of Japanese exposure to the Chinese growth mir(age)acle. The chart below shows that the yield spread out where the Fed would supposedly be intervening has actually widened slightly in favor of the USD lately. Another extension in the bond bull from this consolidation could put the pressure back on the USDJPY – but at present, this looks interesting. Of course - just as we finish writing this and as we are on the cusp of sending it out - treasury futures rallied smartly, taking away most of the day's losses. Regardless, we are at an important inflection point around 2.50% on the US 10-year heading into Friday's speech from Bernanke.

Chart: the “eventually this all goes wrong” trade – 10/30 slope
Despite the bull market in bonds, the longest end of the market has been a reluctant participant in the bond bull, as the 10/30 part of the yield curve has steepened sharply as the currency devaluation trade plays out, as the market recognizes that it can’t end well in the long run when central banks are bent on destroying their currencies. Note that the Japanese yield curve was the first move on this theme and therefore might be worth following more closely in the future since the long term fundamental bond investor should be most suspicious of JGB’s.

Foreclosure-gate
Obama vetoed a bill that would have allowed banks to get through the foreclosure issues more easily – leaving the legality of many foreclosures in question. At the same time, Obama refused to call for a moratorium. This issue is worth following in the weeks to come due to the risk for massive legal action and fallout from the mess – especially on the part of the largest banks. The largest banks’ equities have been tightly rangebound well almost everything else has been rallying.

FX Update: No Bretton Woods III just yet ...

The IMF/G20 finance minister meeting yielded nothing of import over the weekend – not a tremendous surprise for market participants, as global markets try to decide whether there are more piles of fiat currencies to burn or whether enough is enough for now.

Our favorite quote of the day come from a Bloomberg article about the failure of the G20 finance ministers to come up with a resolution to the currency disputes: “Finance ministers and central bankers pledged cooperation, yet did little to show they would alter their ways beyond agreeing to let the IMF study the matter”. Nothing like agreeing to study something to show commitment! Another part of the article talks about China being accused of undervaluing its currency while the developed countries were accused of flooding the emerging markets with capital. Both sides have a good point. Also, the latter accusation shows how the “decoupling” theme is revealed as a self-fulfilling prophecy because how can EM economies not grow when they are bursting at the seams with new funds and the credit booms they trigger?

This current boon to growth is also a risk, however, a risk that will be made evident if the capital flows stop or even reverse. As we have fretted endlessly over recent weeks, however, we ask again what the catalyst would be for such a change of heart by this market? We’re getting a bit of uncertainty in the charts in key instruments like AUDUSD and Gold, but as long as the status quo is maintained, the pressure mounts and mounts on the USD, with only extremely lopsided market positioning the salient risk. And the more lopsided the market becomes, the more violent the correction potential – so hang on to your seats, everyone, as we’ve already gone far and there is plenty of energy pent up in this market if the current paradigm is disappointed or refuted at some point.

Chart: EURUSD
EURUSD showing a bit of uncertainty even as it recently vaulted beyond the 55-week moving average and the 0.618 Fibo retracement area around 1.3900. This could just be a pause as the market contemplate whether it wants to take the pair above the 1.40 level or signs of larger consolidation. Note that momentum has come off somewhat after the last two days of “long-legged doji” candlesticks – classic markers for uncertainty. Note also that EURUSD rallies and sell-offs often pause close to major big figures (1.50 on the upside last time around and just below 1.20 on the downside.)

Looking ahead
Watch out for the parade of Central Bank officials speaking from Washington this week, though most of the focus will be on tomorrow’s FOMC minutes release, which might round out the market’s knowledge of how heavily the Fed is leaning to move on QE in November and the degree of dissent within the FOMC on whether QE is warranted at all. Remember that the composition of the FOMC changes rather dramatically at the first of the year. (We can’t help but wonder if some of the dissenting voices get loud as the more clever dissenters (are there any?) realize that Bernanke’s policies are doomed and they might smell political opportunity…)

Below we look at a few data highlights this week. Note that this is by no means a complete calendar of upcoming events. In particular we have left out a number of key CB speakers out this week, so watch out for those on a day to day basis:

Tuesday

• UK Sep. RICS House Price Balance – this is the leading survey on UK housing and suggests very rapidly falling prices lately
  Australia NAB Business Confidence/Conditions – was coming off in recent months from very high levels, but the August Confidence number was quite strong at 11.
• UK Sep. CPI/RPI – the BoE really needs a solidly sub-3.0% headline CPI figure and core CPI well below 2.5% (expected are 3.1%/2.6%) to get the numbers headed in the right direction relative to the BoE’s dovish inflation forecast.
• UK Aug. Trade Balance – last month’s deficit was a modern record – how can the GBP escape becoming a poster child for further devaluation in this current environment if risk appetite stays up and we get another bad figure?
• US FOMC Minutes – a bit more insight into the internal FOMC debate – and very critical for the themes this market is currently trading

Wednesday

• Canada Aug. New Housing Price Index – tick-tock on the Canadian version of the housing bubble…this will offer an interesting data point.

Thursday

• New Zealand Sep. REINZ House Price Index/House Sales – there’s a stale bubble in NZ housing as well. Prices have flattened out, but not yet turned down.
• New Zealand Aug. Retail Sales - retail sales have leveled out in recent months
• Canada Aug. International Merchandise Trade – a new record large deficit in July and no prospect for improvement should serve as a brake on any further CAD appreciation
• US Aug. Trade Balance – Jul. finally saw a sharp improvement that may be a result of a slowing of inventory building and weaker domestic demand.
• US Sep. PPI – consensus expectations are for a modest rise and commodity input prices are up sharply of late. The core PPI is well off the lows of the cycle (1.5% YoY is consensus)
• US Weekly Initial Jobless Claims – the trend is definitely going the right way, but we need this well below 400k a week and possibly 350k to really see an improvement in the US job market.

Friday

• Canada Aug. Manufacturing Sales – signs of a decline developing as inventory restocking mini-boom may be behind us.
• US Sep. CPI – CPI releases are critical now that the Fed decided to single out low inflation as a key policy concern with the last monetary policy statement.
• US Sep. Retail Sales - The US consumer hasn’t completely gone on strike yet – sales have been slow, but no clear signs of a decline just yet – though the last time around, clear declines in end consumption were not evident until mid-2008 even though the recession began in late 2007.
• US Oct. Empire Manufacturing - the first of the major regional manufacturing PMI
• US Oct. Preliminary University of Michigan Confidence - confidence has clearly been declining again lately.

Economic Data Highlights

• Norway Sep. CPI out at +0.6% MoM and +1.7% YoY vs. +0.8%/+1.9% expected, respectively and vs. +1.9% in Aug.
• Norway Sep. Underlying CPI out at +0.7% MoM and +0.9% YoY vs. +0.9%/+1.1% expected, respectively and vs. +1.4% YoY in Aug.

Upcoming Economic Calendar Highlights

• EuroZone ECB’s Trichet to Speak (1600)
• US Fed’s Yellen to Speak (1845)
• UK Sep. BRC Retail Sales Monitor (2301)
• UK Sep. RICS House Price Balance (2301)
• Australia Sep. NAB Business Conditions/Confidence (0030)
• Japan Sep. Consumer Confidence (0500)