CRB FMS morning report 07-04-2011

[Gertje]

Overnight Developments

Global stocks are mixed with the European Euro Stoxx 50 index up +0.57% and June S&Ps up +0.50 of a point. The dollar is higher and Treasuries are weaker while copper rose to a 1-1/2 week high. As expected, the BOE maintained its benchmark interest rate at 0.50% and kept its asset purchase target at 200 billion pounds following the conclusion of its monetary policy meeting. A rally in European bank stocks is leading the market higher after Portugal's government asked for a bailout. According to European officials with knowledge of the situation, Portugal is aiming for a bailout that may be worth as much as 75 billion euros ($107 billion) as record high borrowing costs forced the country to be the third in the Euro-Zone to seek a rescue package. After climbing to a record high of 585 bp on Tuesday, credit-default swaps tied to Portuguese bonds tumbled to 535 bp today. German bunds tumbled on reduced safe-haven demand with the yield on the benchmark 10-year bund climbing to a 1-1/2 year high of 3.46%. Another positive for stocks and a negative for government debt is the strength in German industrial output. Feb German industrial production rose +1.6% m/m and +14.8% y/y, stronger than expectations of +0.5% m/m and +13.2% y/y.
The Asian stock markets today closed mixed with Japan up +0.07%, Hong Kong -0.01%, China +0.40%, Taiwan +0.56%, Australia -0.10%, Singapore +0.04%, South Korea -0.32%, India -0.11%. Following the conclusion of its 2-day monetary policy meeting today, the BOJ downgraded their economic assessment of the Japanese economy for the first time since Oct and unveiled a 1 trillion yen ($12 billion) lending facility to help the economy rebuild from last month's earthquake. The BOJ said Japan's economy is under "strong downward pressure" after the earthquake damaged production facilities and weakened financial positions of companies, and pressure will persist "for the time being" before the economy recovers. The Australian dollar climbed to $1.0482, the highest level since being freely floated in 1983, after Australia's unemployment rate fell to a 2-year low of 4.9% in March as employers added 37,800 workers, more than the 24,000 forecast.


US Economic Previews

Claims - Today's weekly initial unemployment claims report is expected to show a decline of -3,000 to 385,000, adding to last week's decline of -6,000 to 388,000. Meanwhile, weekly continuing claims are expected to fall -14,000 to 3.700 million, adding to last week's decline of -51,000 to 3.714 million. Both the initial and continuing unemployment claims reports continue to point to an improving U.S. labor market, which is of critical importance to consumer confidence and spending. The initial unemployment claims series last week of 388,000 was only 13,000 above the 3-year low of 375,000 posted in late February and the continuing claim series last week hit a new 2-1/2 year low of 3.714 million persons. Last Friday's March unemployment report was positive for the labor market with the +216,000 gain in payrolls and the 2-year low of 8.8% in the unemployment rate.
Consumer credit - Today's Feb U.S. consumer credit report is expected to show an increase of +$4.6 billion, adding to the +$5.014 billion increase seen in January. Consumer credit in the past several months has been rising slowing from the 4-year low posted in September, finally arresting the decline seen from mid-2008 through mid-2010 when consumers were shrinking their debt and trying to stay afloat during the recession. The increase in consumer credit is a positive sign that consumers are more confident about their household financial situation and that they are more willing to spend money.
ECB expected to raise rates 25 bp - The European Central Bank today is widely expected to raise its 2-week refinancing rate by 25 bp to 1.25%. ECB President Trichet at last month's meeting telegraphed a rate hike at today's meeting and has kept up his hawkish tone in the meantime despite the continued rise in gasoline prices and the Japanese disaster. The ECB is concerned about inflation with the Eurozone CPI rising to a 2-1/2 year high of +2.4% in February and with the core CPI at +1.0%. The ECB focuses more on the headline CPI figure than the Fed, which focuses more on the core CPI and likes to think of energy and food prices as having only transitory effects on inflation. An ECB rate hike today would sharply contrast with the Fed's ongoing dovish policy. The Fed has another 2-1/2 months to go on its QE2 program and the market is not fully discounting a Fed rate hike for another year.


U.S. Stock Market

June S&Ps this morning are trading up +0.50 of a point. The US stock market yesterday finished with modest gains on carry-over support from a rally in European stocks along with strength in technology companies: Dow Jones +0.27%, S&P 500 +0.22%, Nasdaq Composite +0.31%. The Dow rose to a 2-3/4 year high and the S&P 500 posted a 1-1/2 month high. Bullish factors included (1) carry-over support from gains in European stocks after Feb German factory orders rose nearly 5 times estimates, which signals economic strength that boosts confidence in the global economic outlook, (2) strength in technology stocks after Cisco rallied on speculation it will sell or spin off its consumer business, and (3) comments from Atlanta Fed President Lockhart who said he doesn't expect the Fed to tighten monetary policy by year-end with inflation still low and the economic recovery fragile.
Bearish factors for stocks included (1) weakness in commodity producers led by a fall in Monsanto after the world's largest seed producer said agricultural-chemical earnings declined, and (2) the 5 bp rise in the 10-year T-note yield to a 4-week high of 3.546% as inflation expectations increased.


U.S. Interest Rate Markets

June 10-year T-notes this morning are trading down -1.5 ticks. T-note prices yesterday weakened as inflation expectations rose along with carry-over weakness from a jump in the 10-year German bund yield to a 1-1/2 year high: TYM11 -12.5, FVM11 -6.5, EDU11 +0.5. The 10-year T-note yield climbed to a 4-week high of 3.546%. Bearish factors included (1) an increase in inflation expectations after the difference between yields on 5-year T-notes and 5-year TIPS, or the break-even rate, reached 2.41 points, the widest in 2-3/4 years, and (2) carry-over weakness after the 10-year German bund yield surged to a 1-1/2 year high of 3.436%. Bullish factors included (1) dovish comments from Atlanta Fed President Lockhart who said he doesn't expect the Fed to tighten monetary policy by year-end with inflation still low and the economic recovery fragile, and (2) the Fed's action to purchase $1.970 billion of Treasuries as part of its QE2 asset-purchase program.


Forex Markets

The dollar index this morning is higher with the dollar/yen -0.43 yen and the euro/dollar -0.50 cents. The dollar index yesterday slumped to a 1-1/2 week low as the euro strengthened to a 14-1/2 month high against the dollar on speculation the ECB will raise interest rates even further after they raise them on Thursday: Dollar Index -0.368, USDJPY +0.626, EURUSD +0.01088. The yen tumbled to a 6-1/4 month low against the dollar. Bearish factors included (1) speculation the euro's interest rate differentials will widen further in favor of the euro as the ECB begins to hike interest rates while the Fed maintains its overly easy monetary policy, (2) the larger-than-expected increase in the Feb German factory orders, which is euro supportive, (3) supportive interest rate differentials for the euro after the 3-month Euribor rate increased for the fourteenth consecutive day, +0.7 bp to a 1-3/4 year high of 1.269%, and (4) comments from Atlanta Fed President Lockhart who said he is not "leaning" to Fed policy tightening this year. Bullish factors included (1) the fall in the yen to 6-1/4 low against the dollar on the outlook for further emergency stimulus from the BOJ, and (2) the attempt from Jean-Claude Juncker, head of the Euro-Zone finance ministers, to jawbone the euro down from a 14-1/2 month high against the dollar when he said the euro's exchange rate may be "slightly overstated."


Crude Oil

May crude oil prices this morning are trading up +9 cents a barrel and May gasoline is -0.41 of a cent per gallon. Crude oil and gasoline prices yesterday rallied to 2-1/2 year highs but finished mixed as gasoline closed lower on the smaller-than-expected drop in weekly inventories and crude settled higher after German factory orders surged: CLK11 +$0.49, RBK11 -0.84. Bullish factors included (1) the slide in the dollar index to a 1-1/2 week low, which boosts investment demand in commodities, and (2) the surge in Feb German factory orders by nearly 5 times estimates, which signals economic strength that may lead to increased energy demand. Bearish factors include (1) weakness in gasoline after weekly DOE gasoline inventories fell less than expected (-357,000 bbl versus expectations of -1.9 million bbl), and (2) comments from the UAE Energy Minister who said that world oil markets are "adequately supplied" and "the surge in prices is a reflection of geopolitics and natural disaster but not the fundamentals."


Metals

Metals prices this morning are trading stronger: GCM11 +$1.70, SIK11 +0.158 and HGK11 +0.058. Metals prices yesterday finished higher for a second day as inflation concerns boosted demand for precious metals while strong German factory orders lifted copper: GCM11 +$6.00, SIK11 +0.204, HGK11 +0.1055. Jun gold posted a contract high and nearest-futures Apr gold posted an all-time high of $1,462.30 an ounce, May silver climbed to a 31-year high and May copper rose to a 1-week high. Bullish factors included (1) the fall in the dollar index to a 1-1/2 week low, (2) increased demand for precious metals as a hedge against inflation after Atlanta Fed President Lockhart said a Fed rate hike was unlikely this year, (3) the prediction from Rio Tinto that there may be a global copper deficit this year between 400,000 and 500,000 metric tons as copper demand in China and emerging countries grows faster than mine output, and (4) the stronger-than-expected Feb German factory orders, which suggests economic strength and increased consumption of industrial metals. Bearish factors included (1) the unexpected decline in Feb UK industrial production, which indicates reduced industrial metals consumption, and (2) concerns that China's action to raise interest rates for the fourth time in the last 12 months will slow its economy and its demand for industrial metals.


Grains

Grain prices this morning are higher: CK1 +8-1/4 cents, SK1 +3-1/2 cents, and WK1 +5 cents. The grain markets yesterday settled mixed as corn weakened on profit taking and soybeans rose on speculation US soybean carry-over may be reduced on Friday: CK1 -3-3/4 cents, SK1 +3-1/4 cents, WK1 -4 cents. Bearish factors included (1) weakness in gasoline, which undercuts ethanol prices and corn demand, (2) profit taking in corn futures after prices climbed 17% over the past week, and (3) forecasts for rains to cover the southern Great Plains over the next four days, which may reduce stress on the US winter-wheat crop from recent dryness. Bullish factors included (1) the slide in the dollar index to a 1-1/2 week low, which may boost investment demand in commodities and increase US export prospects, (2) speculation the USDA will cut its US soybean carry-over estimates on Friday.


Meats & Softs

Meat prices yesterday settled lower on concern the recent rise in prices to record highs threatens to curb demand: LCM1 -17.50, LHM1 -17.50. Softs yesterday settled mixed as May cotton closed limit-up at a 1-week high as adverse weather in Australia threatens its cotton harvest along with speculation the USDA on Friday may cut its US cotton production estimates for this year: SBK1 -0.84, KCK1 -3.10, CCK1 +24, CTK1 +7.00 limit-up.


Global Financial Calendar

Thursday 4/7/11
US 0345 ET Cleveland Fed President Sandra Pianalto speaks on a panel discussion at the Global Interdependence Center Conference in Rome on “Capital Markets in the Post-Crisis Environment.”
0820 ET Richmond Fed President Jeffrey Lacker speaks to the 2011 Ferrum College Forum on Critical Thought, Innovation & Leadership on “Innovation in he New Financial regulatory Environment.”
0830 ET Weekly initial unemployment claims expected –3,000 to 385,000, previous –6,000 to 388,000. Weekly continuing claims expected –14,000 to 3.700 million, previous –51,000 to 3.714 million.
1030 ET Mar ICSC chain store sales, Feb +4.2% y/y.
1100 ET Treasury announces amounts of 3-year T-notes (previous $32 billion), 10-year T-notes (previous $21 billion) and 30-year T-bonds (previous $13 billion) to be auctioned Apr 12-14.
1500 ET Feb U.S. consumer credit expected +$4.600 billion, Jan +$5.014 billion.
1630 ET Weekly money supply report and Fed balance sheet.
FRA 0245 ET Feb French trade balance expected –5.70 billion euros, Jan –5.89 billion euros.
GER 0600 ET Feb German industrial production expected +0.5% m/m and +13.2% y/y, Jan +1.8% m/m and +12.5% y/y.
UK 0700 ET BOE announces interest rate decision and asset purchase target (expected no change to the 0.50% benchmark rate and no change to the 200 billion pound asset purchase target).
EUR 0600 ET European Commission releases quarterly report on the Euro-Zone.
0745 ET ECB announces interest rate decision (expected +25 bp increase in the 2-week refinancing rate to 1.25%).
0830 ET ECB President Jean-Claude Trichet speaks at monthly press conference.
CAN 0830 ET Feb Canada building permits expected +2.0% m/m, Jan –5.1% m/m.
JPN n/a BOJ announces interest rate decision (expected no change to the 0.00% to 0.10% benchmark rate).

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