CRB FMS morning report 14-04-2011

[Gertje]

Overnight Developments

Global stocks are lower with the European Euro Stoxx 50 index down -0.62% and June S&Ps down -6.90 points at a 2-week low. The dollar and Treasuries are higher, with the yield on the 10-year T-note falling to a 1-week low on increased safe-haven demand due to renewed European sovereign-debt concerns. German Finance Minister Schaeuble told Germany's Die Welt newspaper Greece may need to restructure its debt should an audit in June question the nation's ability to pay creditors. The head of Standard & Poor's European debt evaluation team said bondholders of Greek debt might see a 50% to 70% "haircut" on their Greek securities if the nation restructures its debt. Credit-default swaps to insure Greek government debt rose 7 bp to a record 1,068 bp, according to CMA. The yield on Greek 10-year debt rose 14 bp to a euro-era record high of 13.06% and Portuguese 10-year government bond yields rose 10 bp to 8.84%, the highest since Bloomberg began collecting the data in 1997. In its monthly bulletin for Apr released today, the ECB said it will monitor upside inflation risks "very closely" and that "risks to the medium-term outlook for price developments remain on the upside." Hawkish commentary from ECB policy makers bolstered speculation the ECB will further tighten monetary policy after ECB Executive Board member Bini Smaghi said that inflation risks in the Euro-Zone mean low interest rates are no longer acceptable, while ECB Council member Weber said further monetary policy tightening will be "warranted" in 2011 if the ECB's economic forecasts are met.
The Asian stock markets today closed mixed with Japan up +0.13%, Hong Kong -0.50%, China -0.55%, Taiwan +0.26%, Australia -0.55%, Singapore -0.41%, South Korea +0.88%. Asian stock markets were undercut after Phoenix TV reported that China's Mar CPI, to be released later today, will show an increase of +5.3% y/y to +5.4% y/y, higher than expectations of +5.2% y/y. Takeover speculation lifted some Japanese stocks as Isuzu Motors closed 6.2% higher, even after it denied a report that Volkswagen AG is considering taking a stake or purchasing the company. South Korea's Kospi Stock Index finished higher after Hyundai Motor, South Korea's largest automaker, closed up 4.5% after it said its Indian unit will introduce 2 new models a year until 2014 to retain its number two sales ranking there. A decline in banking stocks led China's Shanghai Stock Index lower after estimates from a Chinese banking regulator said China's banks may have to raise about 860 billion yuan ($131 billion) of stock over 6 years to meet stricter capital rules and that lenders may need an additional 1.26 trillion yuan in supplementary capital by the end of 2016. The report from China Securities Journal that China is likely to raise the reserve requirements for banks in the "near future," also pressured Asian stock prices today.


US Economic Previews

Unemployment claims - Today's weekly initial unemployment claims report is expected to show a decline of -2,000 to 380,000, adding to last week's decline of -10,000 to 382,000. Meanwhile, weekly continuing claims are expected to fall -20,000 to 3.703 million, adding to last week's decline of -9,000 to 3.723 million. The unemployment claims series both remain favorable and have yet to provide any evidence that businesses are reducing their employment staff levels in response to the recent rise in gasoline prices, the Japanese disaster, and the decline in consumer confidence. The initial claims series is only 7,000 persons above the 3-year low of 375,000 posted on Feb 25. The continuing claims series last week fell to a new 2-1/2 year low. As long as the unemployment claims series both continue to move lower, the markets will not be overly worried about a significant economic hit from the rise in gasoline prices.
PPI - Today's Mar PPI is expected to show an increase of +1.0% m/m and a core increase of +0.2% m/m, adding to February's increases of +1.6% m/m and +0.2%, respectively. On a year-on-year basis, the Feb PPI is expected to jump to +6.1% y/y, which would be a new 2-1/2 year high, from the 11-month high of +5.6% seen in February. Meanwhile, March core PPI is expected to edge higher to a new 1-1/2 year high of +1.9% y/y from the current 1-1/2 year high of +1.8% y/y posted in February. Taking 2.0% as a reference point for the upper limit for inflation, the Feb PPI is already way above that level at +5.6% and the core PPI is just slightly below that level at +1.8%. The upward pressure on prices at the producers' level is clearly a negative factor for the overall inflation outlook.
30-year T-bond auction - The Treasury today will sell $13 billion in 30-year T-bonds in a reopening of February's 4-3/4% 30-year T-bond of Feb 2041. The $13 billion size of today's 30-year is unchanged from the last eleven 10-year reopenings. Today's 30-year issue was trading at 4.55% in when-issued trading late yesterday afternoon. The 12-auction averages are as follows: 2.69 bid cover, $19 million in non-competitive bids, 5.9 bp tail to the low yield, 15.3 bp tail to the low yield, and 46% taken at the high yield. The 30-year is a little below average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buying, have taken an average of 38.9% of the last twelve 30-year T-bond auctions, which is well below the 12-auction average of 42.3% for all recent Treasury coupon auctions.


U.S. Stock Market

June S&Ps this morning are trading down -6.90 points. The US stock market yesterday settled slightly higher as bullish US retail sales data was offset by President Obama's plan to cut spending and raise taxes to reduce the deficit may slow the economy: Dow Jones +0.06%, S&P 500 +0.02%, Nasdaq Composite +0.61%. The Dow and S&P 500 both fell to 2-week lows but recovered their losses and closed higher. Bullish factors included (1) relatively strong Mar US retail sales which increased for the 9th consecutive month and signals economic strength (+0.4% and +0.8% less autos versus expectations of +0.5% and +0.7% less autos), (2) the Feb business inventories report that showed the US retailers inventory-to-sales ratio falling to 1.31 months, the fewest since data began in 1992, which may help boost factory output as retailers restock their bare shelves and replenish lean inventories, and (3) the Fed's Beige Book that stated the economy expanded at a "moderate" pace across much of the US in Feb and March, led by manufacturing, with labor markets showing improvements in most regions.
Bearish factors for stocks included (1) concern that President Obama's plan to trim the deficit by $4 trillion over 12 years will weaken the economy with the proposed reduction in spending and an increase in taxes, (2) concerns the European sovereign-debt crisis will continue to linger after the warning from the IMF that Euro-Zone nations face bank and sovereign funding "challenges" and that European banks will probably need government help to increase the quality and quantity of their capital to regain access to funding markets, and (3) weakness in bank stocks after regulators said the 14 largest US mortgage servicers must pay back homeowners for losses from botched foreclosures.
Financial stocks may be active to the downside today after Goldman Sachs downgraded the industry to "neutral" from "overweight."
Apple (AAPL) slipped 1% in European trading after people with knowledge of the matter said the company isn't planning to unveil a new iPhone at its June developers' conference, breaking with its practice in past years.


U.S. Interest Rate Markets

June 10-year T-notes this morning are up +8 ticks at a 2-week high. T-note prices yesterday recovered from early weakness and closed higher after President Obama said he's seeking $4 trillion in deficit reduction in 12 years or less: TYM11 +9.5, FVM11 +5.7, EDU11 +1.0. Bullish factors included (1) President Obama's plan to cut $4 trillion in cumulative deficits within 12 years with $3 in spending cuts and interest savings for every $1 in tax increases, (2) the Fed's action to purchase $5.01 billion of Treasuries as part of its QE2 asset-purchase program, and (3) strong demand for the Treasury's $32 billion auction of 3-year T-notes that had a bid-to-cover ratio of 3.25, higher than the 12-auction average of 3.14. Bearish factors included (1) relatively strong Mar US retail sales which increased for the 9th consecutive month and signals economic strength (+0.4% and +0.8% less autos versus expectations of +0.5% and +0.7% less autos), (2) comments from Dallas Fed President Fisher who was quoted in the German newspaper Handelsblatt saying "I see the risk that we won't be able to keep inflation under control," (3) slack demand for the Treasury's $21 billion auction of 10-year T-notes that had a bid-to-cover ratio of 3.13, weaker than the 12-auction average of 3.16, and (4) supply pressures ahead of Thursday's $13 billion auction of 30-year T-bonds.


Forex Markets

The dollar index this morning is higher with the dollar/yen -0.72 yen and the euro/dollar -0.68 cents. The dollar index yesterday rebounded from early losses and finished higher on President Obama's plan to cut the US budget deficit by nearly $4 trillion in 12 years: Dollar Index +0.127, USDJPY -0.255, EURUSD -0.00341. Bullish factors included (1) President Obama's plan to cut the US deficit by $4 trillion in cumulative deficits within 12 years, which is dollar bullish, (2) the increase in Mar US retail sales for the 9th consecutive month, which signals economic strength and is dollar supportive, and (3) increased safe-haven demand for the dollar after the warning from the IMF that Euro-Zone nations face bank and sovereign funding "challenges" and that European banks will probably need government help to increase the quality and quantity of their capital to regain access to funding markets. Bearish factors included (1) strength in the euro after Mar German wholesale prices rose at their fastest pace in 29 years while Mar French CPI increased at its strongest pace in 29 months, which stokes speculation the ECB will continue to tighten monetary policy and is euro supportive, and (2) hawkish comments from ECB Council member Coene who said the ECB gave a clear signal that last week's rate increase wasn't a one-off by saying monetary policy remains supportive for economic growth and employment.


Crude Oil

May crude oil prices this morning are trading down -99 cents a barrel and May gasoline is -3.09 cents per gallon. Crude oil and gasoline prices yesterday moved higher on a weak dollar and a plunge in US gasoline inventories to a 5-month low: CLK11 +$0.86, RBK11 +7.83. May crude posted a 1-1/2 week low but recovered its losses and finished higher. Bullish factors included (1) the weaker dollar, which encourages investment demand in commodities, (2) the larger-than-expected drop in weekly gasoline inventories which fell to a 5-month low (-7.0 million bbl to 209.7 million bbl versus expectations of -850,000 bbl), (3) increased demand after US gasoline demand rose +3.7% w/w in the week ended Apr 8 to 9.18 million barrels a day, and (4) the unexpected plunge in the refinery utilization rate to a 2-month low, which indicates reduced output of gasoline and distillate products in the weeks ahead (-3.0 to 81.4% versus an expected increase of +0.5 to 84.9%). Bearish factors included (1) the larger-than-expected increase in weekly crude oil inventories which rose for the sixth consecutive week to a 3-1/2 month high of 359.3 million bbl (+1.63 million bbl versus expectations of +1.0 million bbl), and (2) the +26,000 bbl increase in weekly crude inventories in Cushing, OK, delivery point for WTI crude, to 41.9 million bbl, the highest since the DOE began tracking stockpiles at the hub in 2004.


Metals

Metals prices this morning are trading mixed: GCM11 -$0.90, SIK11 +0.388 and HGK11 -0.040. Copper prices slipped to a 1-week low in overnight trade after LME copper inventories climbed to a 9-1/4 month high. Metals prices yesterday finished mixed as inflation concerns boosted precious metals, while concern that China will further restrict credit undercut copper: GCM11 +$2.00, SIK11 +0.171, HGK11 -0.089. Bullish factors included (1) increased demand for precious metals as a hedge against inflation after Mar French CPI and Mar German wholesale prices accelerated and Dallas Fed President Fisher said that "I see the risk that we won't be able to keep inflation under control," and (2) the increase in Mar US retail sales for the 9th consecutive month, which shows economic strength that may boost demand for industrial metals. Bearish factors included (1) the rally in the dollar, (2) the report from China's Economic Information Daily that said banks' reserve ratios may be increased by 50 bp on either Apr 15 or Apr 22 as part of the PBOC's efforts to contain inflation, which may slow economic growth and demand for industrial metals, and (3) the +3,225 ton increase in LME copper inventories to a 9-1/4 month high of 449,925 tons.


Grains

Grain prices this morning are weaker: CK1 -10-1/4 cents, SK1 -13-1/2 cents, and WK1 -18 cents. The grain markets yesterday settled mixed as wheat prices were pressured by forecasts for rains in the Great Plains while corn prices rose on the prospects of delayed plantings due to wet and cool weather in the Midwest: CK1 +3 cents, SK1 +3-3/4 cents, WK1 -6-3/4 cents. May wheat slipped to a 1-1/2 week low. Bearish factors included (1) the stronger dollar, which discourages investment demand in commodities and may erode US export prospects, and (2) forecasted rains for the US Great Plains, which may alleviate dryness and boost the yield potential of the US winter wheat crop. Bullish factors included (1) strength in gasoline, which boosts ethanol prices and corn demand, (2) concerns that wet and cool weather in the US Midwest will delay corn planting, and (3) speculation that the recent decline in soybean prices to a 3-week low will spur foreign demand.


Meats & Softs

Meat prices yesterday finished higher on increased foreign demand for US meats: LCM1 +1.75, LHM1 +21.00. Softs yesterday settled mixed with May sugar slumping to a 6-month low after India said its sugar cane plantings increased while May coffee rose to a 1-month high on supply concerns: SBK1 -0.79, KCK1 +5.75, CCK1 +13, CTK1 -2.38.


Global Financial Calendar

Thursday 4/14/11
US 0830 ET Weekly initial unemployment claims expected –2,000 to 380,000, previous –10,000 to 382,000. Weekly continuing claims expected –20,000 to 3.703 million, previous –9,000 to 3.723 million.
0830 ET Mar PPI expected +1.0% m/m and +6.1% y/y, Feb +1.6% /m and +5.6% y/y. Mar PPI ex food & energy expected +0.2% m/m and +1.9% y/y, Feb +0.2% m/m and +1.8% y/y.
0900 ET Fed Governor Elizabeth Duke delivers speech on “Credit Conditions for Small Businesses” at the International Factoring Association Conference in Washington D.C.
1100 ET Treasury announces the amount of 5-year TIPS to be auctioned on Apr 21.
1230 ET Philadelphia Fed President Charles Plosser speaks at the 20th annual Hyman P. Minsky Conference in New York on the state of the U.S. and world economies.
1300 ET Treasury auctions $13 billion 30-year T-bonds.
1315 ET Fed Governor Daniel Tarullo speaks on a panel discussion titled “High-wire Act: Balancing Growth and Inflation” at the Bertelsmann Foundation’s “Back to Work” conference.
1630 ET Weekly money supply report and Fed balance sheet.
1845 ET Richmond Fed President Jeffrey Lacker speaks at the University of Baltimore’s Merrick School of Business.
N/A G7 meeting in Washington DC.
EUR 0400 ET ECB publishes monthly report for April.
GER 0700 ET New government economic forecasts released in Berlin.
CAN 0830 ET Feb Canada manufacturing sales expected +0.1% m/m, Jan +4.5% m/m.
CHI 2200 ET Q1 China GDP expected 9.4% y/y, Q4 +9.8% y/y.
2200 ET Mar China industrial production expected +14.0% y/y, Feb +14.9% y/y.
2200 ET Mar China CPI expected +5.2% y/y, Feb +4.9% y/y.
2200 ET Mar China producer prices expected +7.2% y/y, Feb +7.2% y/y.
2200 ET Mar China retail sales expected +16.5% y/y, Feb +11.6% y/y.