Asian currencies continue to sell off vs the $ on the heels of the news yesterday that South Korea said they will look into hot money inflows stemming from the $ carry trade and the Bank of Indonesia said they are looking into the foreign buying of bills. This follows the news a few weeks ago that Taiwan was limiting foreign deposit holdings and Brazil was taxing foreign inflow transactions. As I mentioned yesterday, we may have reached a short term pain threshold in terms of $ weakness and foreign countries are fighting back as they certainly won’t wait for the Fed to act. The $ is also at a 2 1/2 week high vs the euro helped out by political infighting in the Ukraine that is holding up the 4th tranche of an IMF loan. Comments from PBOChina Gov gave no indication that they plan to alter the band of their peg to the US$ anytime soon. With 6 wks left in the yr and investors holding their nose, $ action alone will exaggerate equity moves.
While the US$ caught a bid this week, albeit modest, in part due to Bernanke’s acknowledgement of it on Monday in terms of its impact on commodity prices and thus inflation, the fed funds futures continue to reduce its belief that he’ll follow words with actions. Since Friday’s close, full odds of a 25 bps rate hike have now been pushed out to Sept 2010 from Aug. Odds of a 25 bps hike by Aug have fallen from 100% last Friday to 66% today. Odds are just 4% that the Fed raises to .75% by Sept, down from 46% last Friday.
The Nov Philly Fed manufacturing survey was 16.7, 4.5 pts above expectations and up from 11.5 in Oct. It’s the highest since June ‘07 but the figure measures the direction of change, not the degree. New Orders jumped sharply to 14.8 from 6.2 but Backlogs fell 4 pts to -5.4. Employment improved by more than 6 pts and is almost flat at -.5, the least negative since May ‘08 and the average workweek rose to +2, the 1st positive reading since Jan ‘07. Inventories rose to -17.3 from -31.8 but it just back to the Sept level and is in line with the 6 mo average, so again, no sign of inventory rebuilding, just a slowed pace of the destocking. Prices Paid fell 6 pts but is just back to its Sept level. Prices Received rose 3 pts, matching its best level since Oct ‘08. The 6 month outlook moderated as it fell 3 pts to the lowest since April ‘09. Net-net, this data confirms that manufacturing is slowly improving with slack end demand keeping the sustainability in question.
Initial Jobless Claims totaled 505k, in line with estimates and flat with a revised 505k last week. Continuing Claims, which covers the first 26 weeks of benefits, fell by 39k but were slightly above forecasts. Emergency Unemployment Compensation which takes us past 26 weeks rose by 101k which makes clear that the fall in Continuing Claims is more because of the inability to find a job which thus keeps people collecting past 26 weeks. Extended Benefits, which runs past EUC, rose by 17k. With recent legislation, benefits run up to 99 weeks. Ironically, Larry Summers in the mid ’90s wrote a piece saying that unemployment insurance is one of the causes of long term unemployment “by providing an incentive, and the means, not to work. Each unemployed person has a minimum wage he/she insists on getting before accepting a job. Unemployment insurance…increase that reservation wage, causing an unemployed person to remain unemployed longer.”
The US$ index is rising to a one week high and the US$ is also higher against emerging market currencies such as Brazil, Taiwan, and Indonesia, so the bounce is broad based. Whether it was Bernanke uttering the dollar word in terms of its impact on commodity prices and inflation on Monday, Trichet following up saying don’t ignore Bernanke’s comments, maybe (I emphasize maybe) comments today from JPM saying Brazil may increase the tax on FX inflows to further stem the rally in the Real and more vocal comments in Asia this week telling China to let the Yuan appreciate (which the Chinese say the Fed is responsible for due to their peg), we may have reached a short term global pain threshold on the US$ weakness that could spur a counter trend rally in it. The reflation today is being sold and is weighing on the futures. Also, UK banks are lower after Experian, a credit check co, said the UK banks are in the worst state in the developed world.
Oct Housing Starts totaled 529k annualized, well below forecasts of 600k and down from 592k in Sept. It’s the lowest level of starts since April and the drop in Permits show that it won’t pick up so soon. Permits were 552k annualized, 28k below forecasts and down 23k from Sept. I put a big caveat on this Oct data as the uncertainty over whether the tax credit was going to be extended certainly influenced behavior both on the buyers and builders standpoint. With that said, with a national housing market that still has too much inventory, a slowdown in starts is welcome.
Oct CPI rose .3% headline and .2% core, both .1% above expectations. Y/o/Y, CPI is down .2%, the smallest rate of decline since Feb ‘09. The core rate is now up 1.7% y/o/y, the highest since June. Helping to boost the core rate was a 1.6% rise in new vehicle prices and a 3.4% gain in used cars and trucks. Let’s thank the Clunker plan for that as the rest of us now have to pay higher prices for our cars. The headline reading was boosted by a 1.5% rise in energy prices. Owners Equivalent Rent was flat and makes up 24% of the CPI and rents fell by .1%. Apparel prices fell by .4%. Medical care rose by .2%. Overall commodity prices rose by .5%, led by the rise in energy. Bottom line, the inflation readings over the next 6 months will only get worse (meaning higher) as the y/o/y comparisons get very easy and persistent US$ weakness and higher commodity prices work its way through the economic inflation stats with the degree being the only question.
The purchase component of the weekly MBA data reflected no bounce after the Nov 6th extension of the home buying tax credit. It fell 4.7% for the week and is lower for 6 straight weeks at the lowest since Nov ‘97 even as the average 30 yr mortgage rate fell to the lowest level since May at 4.83%. We should expect some fence sitters to come off now that the tax credit is alive thru the spring but if it doesn’t in the next few weeks it begs the question of how much demand was pulled forward. Oct Housing Starts are out today. Refi’s fell 1.4% but comes after large gains in the prior two weeks. ABC confidence rose 1 pt to a 6 week high led by the personal finance component which rose to an 11 week high. Ahead of the CPI report at 8:30, y/o/y CPI in Canada rose for the first time since May but in line with forecasts. Today’s y/o/y drop is expected to be the smallest over the past 7 months as the inflation comparisons get much easier. II said bears fell to the lowest since Aug.
While the US Treasury market is having another impressive day that is sending yields down to 3.32%, the lowest since Oct 8th on a closing basis, the 5 yr CDS in US government debt is rising today to 30 bps, the highest since July 29th when the 10 yr bond yield closed at 3.66%. It hasn’t fallen in two weeks and is now up 10 bps over the past month. It highlights the amazing performance of the US Treasury market in the face of it and in light of the well spoken about headwinds.
The Nat’l Assoc of Home Builders sentiment index for Nov was 17, 2 pts below expectations and flat with the Oct reading which was revised from 18. Present conditions remained unchanged but future expectations did rise 2 pts. Prospective Buyers Traffic remained punk at 13 for the 2nd straight month. The NAHB is clarifying that today’s release of the Nov sentiment figure did reflect the uncertainty of whether the home buying tax credit was going to be extended or not. NAHB Chairman said “When the HMI survey was conducted at the beginning of this month, home builders were facing the imminent expiration of the $8,000 first time home buyer tax credit at the end of Nov, with no guarantee that this valuable buyer incentive would be extended.” The NAHB Chief Economist said “today’s report confirms that home builders and buyers were in something of a holding pattern in early Nov as the anticipated expiration of the tax credit drew near and congressional action had not yet taken place to address this.” He did though also attribute the weakness to “the challenges that builders are facing in obtaining credit for new housing production and appropriate appraisal values for their homes continued to worsen.”
NYPost CARTOON
I send this to NOT make any political statement whatsoever because George Bush’s face can be superimposed on Obama’s and the cartoon will still have the same impact. I send it to highlight that relying on foreigners to finance half of our debts can last without consequence until it doesn’t. It also highlights the importance of growing the savings rate in the US as this pool of savings can be used for investment so we can rely less on the kindness of strangers.
