CRB FMS morning report 02-05-2011

[Gertje]

Overnight Developments

Global stocks are higher with the European Euro Stoxx 50 up +0.08% and June S&Ps up +6.60 points after an elite team of US Navy Seals stormed a secret compound in Pakistan and killed Osama Bin Laden. Crude oil is down over $2 a barrel and Treasuries are weaker, while the dollar index dropped to a fresh 2-3/4 year low and pushed gold prices to a record high. Silver prices plunged to a 2-week low after the CME raised margin requirements 13%, while copper sank to a 1-1/2 month low on concern that China's growth is slowing after its Apr purchasing managers' index unexpectedly fell. European stocks also received a boost after German and French Apr PMI manufacturing indexes were both revised upward.
The Asian stock markets today closed mostly higher with Japan up +1.57%, Australia +0.04%, South KOrea +1.71%, India -0.72%. Hong Kong, China, Taiwan and Singapore were all closed for holiday. The Apr China PMI manufacturing index, released Saturday, unexpectedly fell -0.5 to 52.9, weaker than expectations of +0.5 to 53.9. South Korean stocks closed higher after Apr Korea exports climbed a record +26.6% y/y, stronger than expectations of +23.7% y/y, and as construction companies and land developers gained when the government said it will give tax incentives to real-estate investment trusts that buy unsold housing, and will establish a bank to purchase soured loans owed by builders and developers. The Australian dollar climbed to a record $1.1011 on speculation increasing commodity prices will keep pressure on the RBA to raise interest rates.


US Economic Previews

Market attention this week will focus on (1) this week's key economic reports, which include today's April ISM manufacturing index (expected -1.7 to 59.5) and Friday's April unemployment report (payrolls expected +180,000; unemployment rate expected unchanged at 8.8%), (2) the return of Congress to Washington with only two weeks left before the Treasury will hit the debt ceiling on June 16, (3) Thursday's ECB meeting which is expected to produce no rate change considering that the ECB just raised its refi rate by 25 bp a month ago, (4) the stock market, which rallied last week on continued strong earnings reports, (5) T-note prices, which have rallied fairly sharply in the past three weeks on the continued increase in gasoline prices and expectations for softer economic growth, (6) the dollar index, which fell to a new 2-3/4 year low last Friday on persistently weak U.S. interest rate differentials, and (7) crude oil prices and gasoline prices, which hit new highs last Friday as refining demand increases during spring while there is no prospect for any near-term return of Libyan production.
This will be the last heavy earnings week with 117 of the S&P 500 companies scheduled to report. Next week, only 14 of the S&P 500 companies are due to report. The strong earnings reports seen in the past two weeks have caused the consensus expectation for Q1 earnings growth to rise to +17.9% y/y from +13.0% as recently as April 1. According to Thomson Reuters, 73% of the 324 companies in the S&P 500 that have reported thus far have reported earnings above analyst expectations, substantially higher than the typical figure of 62%. Earnings have been 7% above estimates on average, which is substantially better than the long-term average of 2%. Notable earnings reports this week include Humana on Monday, Mastercard and Marathon Oil on Tuesday, Time Warner and Prudential Financial on Wednesday, Kraft and Visa on Thursday, and Pepsi Holdings on Friday.
ISM manufacturing index - Today's April ISM manufacturing index is expected to show a 1.7 point decline to 59.5, which would add to March's 0.2 point decline. The ISM index as recently as February matched the 27-year high of 61.4 posted in 2004, but is now falling on the Japanese disaster and rising gasoline prices. Expectations for today's April ISM manufacturing index weakened late last week to a 1.5 decline from a 1.1 point decline earlier in the week. Last Thursday's 25,000 rise in initial unemployment claims to a 3-month high was a discouraging sign for the economic outlook.


U.S. Stock Market

June S&Ps this morning are trading up +6.60 points at a fresh contract high after President Obama said the US killed Osama Bin Laden. The US stock market last Friday settled higher on strong company earnings results along with strength in US personal spending: Dow Jones +0.37%, S&P 500 +0.23%, Nasdaq Composite +0.04%. The Dow and S&P 500 posted 2-3/4 year highs. Bullish factors included (1) impressive company earnings results as over 75% of the 298 companies in the S&P 500 that reported earnings results since Apr 11 have beaten analysts' estimates, (2) the larger-than-expected increase in Mar personal spending along with the upward revision to Feb (Mar +0.6% versus expectations of +0.5% and Feb revised up to +0.9% from the originally reported +0.7%), which bodes well for the sustainability of the US economic expansion, and (3) strength in energy and commodity producer after a slump in the dollar index to a 2-3/4 year low prompted a broad-based rally in commodities.
Bearish factors for stocks included (1) the weaker-than-expected Apr Chicago purchasing managers index (-3.0 to 67.6 versus expectations of -2.4 to 68.2), (2) the weaker-than-expected Apr US University of Michigan consumer confidence (+0.2 to 69.8 versus expectations of +0.4 to 70.0), and (3) comments from Fed Chairman Bernanke who said high levels of joblessness and home foreclosures are restraining the US recovery and putting people and communities at risk of being "left behind."
Terex (TEX) rose 1.8% in European trading after the US heavy-equipment manufacturer offered to buy Demag Cranes for about 883.9 million euros ($1.3 billion) to expand in the global harbor-crane market.
TiVo (TIVO) surged 20% in pre-market trading after the company settled all patent litigation with Dish Network nd EchoStar.


U.S. Interest Rate Markets

June 10-year T-notes this morning are down -1.5 ticks. T-note prices last Friday rallied after mid-morning and closed higher as weaker than expected consumer confidence and manufacturing data offset stock market strength and stronger-than-expected personal spending: TYM11 +6, FVM11 +3.7, EDU11 -0.5. The 10-year T-note yield fell to a 1-1/4 month low of 3.280%. Bullish factors included (1) the weaker-than-expected Apr Chicago purchasing managers index (-3.0 to 67.6 versus expectations of -2.4 to 68.2), (2) the weaker-than-expected Apr US University of Michigan consumer confidence (+0.2 to 69.8 versus expectations of +0.4 to 70.0), and (3) the smaller-than-expected increase in the Mar PCE deflator (+1.8% y/y versus expectations of +1.9% y/y. Bearish factors included (1) the larger-than-expected increase in Mar personal spending along with the upward revision to Feb (Mar +0.6% versus expectations of +0.5% and Feb revised up to +0.9% from the originally reported +0.7%), (2) the larger-than-expected increase in the Q1 employment cost index (+0.6% versus expectations of +0.5%), and (3) reduced safe-haven demand for Treasuries after the S&P 500 rose to a 2-3/4 year high.


Forex Markets

The dollar index this morning is weaker and fell to a fresh 2-3/4 year low in overnight trade with the dollar/yen +0.19 yen and the euro/dollar +0.36 cents. The dollar index last Friday tumbled to a 2-3/4 year low and settled lower as weaker-than-expected US manufacturing data undercut the dollar while an increase in Euro-Zone inflation boosted the euro to a 16-1/2 month high: Dollar Index -0.188, USDJPY -0.335, EURUSD -0.00142. Bearish factors included (1) the weaker-than-expected Apr Chicago purchasing mangers index, which indicates a slowdown in US manufacturing and is dollar negative, (2) early strength in the euro which rallied to a 16-1/2 month high against the dollar after the Apr Euro-Zone CPI estimate rose more than expected to a 2-1/2 year high, which bolsters speculation for additional ECB rate hikes, and (3) reduced safe-haven demand for the dollar after the S&P 500 climbed to a 2-3/4 year high. Bullish factors included (1) the unexpected decline in Mar German retail sales, which is euro negative, and (2) the stronger-than-expected Mar US personal spending, which indicates strength in the US economy and is dollar supportive.


Crude Oil

une crude oil prices this morning are trading down sharply by -$1.91 a barrel and June gasoline is -5.50 cents per gallon. Crude oil plunged in overnight trade on speculation that the death of Osama Bin Laden may ease the risk of Middle East supply disruptions. Crude oil and gasoline prices last Friday settled higher due to a weak dollar and better-than-expected US consumer spending: CLM11 +$1.07, RBM11 +2.88. Nearest-futures May gasoline posted a 2-3/4 year high. Bullish factors included (1) the continued slide in the dollar index to a 2-3/4 year low, which boosts investment demand in commodities, and (2) the larger-than-expected increase in Mar US personal spending, which bodes well for the sustainability of the economic expansion and energy demand. Bearish factors included (1) the unexpected decline in Mar German retail sales along with the slower than expected increase in South Korean Mar industrial production, which indicates a slowdown in Asian and European fuel demand, and (2) the weaker-than-expected Apr Chicago purchasing managers index, which signals reduced energy demand.


Metals

Metals prices this morning are trading weaker: GCM11 -$0.10, SIN11 -3.019 and HGN11 -0.045. Metals prices last Friday finished mixed as a weak dollar and inflation concerns boosted precious metals, while a slowdown in growth hurt copper: GCM11 +$25.20, SIN11 +1.058, HGN11 +0.0825. June gold posted a record high of $1,556.50 an ounce and July copper fell to a 1-1/2 month low. Bullish factors included (1) incessant dollar weakness after the dollar index fell to a 2-3/4 year low, which boosts demand in precious metals as an alternative investment, and (2) the larger than expected increase the Apr Euro-Zone CPI estimate which rose to a 2-1/2 year high and boosted demand for gold as an inflation hedge, and (3) the -10,808 ton decline in weekly Shanghai copper inventories to a 4-month low of 128,268 tons. Bearish factors included (1) the weaker-than-expected Mar Korea industrial production which increased at its slowest pace in 6 months and signals reduced industrial metals demand, and (2) concern that Chinese copper demand may weaken further with expectations of additional interest rate hikes by the PBOC as soon as this weekend.


Grains

Grain prices this morning are mixed: CN1 -6-1/4 cents, SN1 -8 cents, and WN1 +1/4 of a cent. The grain markets last Friday finished higher on weather concerns and the weak dollar: CN1 +27-1/4 cents, SN1 +40-1/2 cents, WN1 +23-3/4 cents. July corn fell to a 1-month low but recovered their losses and finished higher and July wheat fell to a 2-week low but recovered its losses and closed higher. Bullish factors included (1) the fall in the dollar index to a 2-3/4 year low, which may boost investment demand in commodities and increase US export prospects, (2) strength in gasoline, which boosts ethanol prices and corn demand, (3) the report from Global Weather Monitoring that predicts below normal temperatures and above-average rainfall in the Midwest over the next 10 days, which fuels speculation of further planting delays, and (4) the prediction from the China National Grain & Oils Information Center that Chinese demand for corn will grow faster than supply in the next 10 years on rising production of livestock feed and biochemicals. Bearish factors included (1) the hike by crop researcher Safras & Mercado in their soybean production estimate for Brazil this year to 72.9 MMT, higher than a Mar forecast of 71.6 MMT and higher than the Brazilian Agriculture Ministry's forecast of 72.2 MMT, and (2) the prediction from Commodity Weather Group LLC that US corn yields this year may be "well above trend" by the time of harvest because more favorable conditions are expected in Jun and July, despite planting delays from wet weather.


Meats & Softs

Meat prices last Friday finished mixed as hogs fell on speculation domestic demand for pork is slowing: LCM1 +1.75, LHM1 -12.75. Jun hogs slipped to a 1-1/2 month low. Softs last Friday settled mixed with July cocoa rallying to a 1-1/2 month high on an escalation of violence in the Ivory Coast, while July sugar slumped to a 6-3/4 month low on expectations of record sugar production this year in Thailand, the world's second-biggest exporter: SBN1 -0.26, KCN1 +0.65, CCN1 +60, CTN1 +6.00 limit-up.


Global Financial Calendar

Monday 5/2/11
US 1000 ET Mar construction spending expected +0.3%, Feb –1.4%.
1000 ET Apr ISM manufacturing index expected -1.6 to 59061, Mar –0.2 to 61.2. Apr ISM prices paid expected -2.0 to 83.0, Mar +3.0 to 85.0.
1130 ET Weekly 3-mo and 6-mo T-bill auctions.
JPN 0100 ET Apr Japan vehicle sales, Mar -37.0% y/y.
FRA 0315 ET Revised Apr French PMI manufacturing expected no change at 56.9.
GER 0355 ET Revised Apr German PMI manufacturing expected no change at 61.7.
EUR 0345 ET ECB Vice President Vitor Constancio along with fellow ECB Council member Mario Draghi and EU Economic and Monetary Commissioner Olli Rehn speak at a EU-sponsored conference in Brussels.
0500 ET ECB President Jean-Claude Trichet and German Finance Minister Wolfgang Schaeuble speak at the inauguration of new Bundesbank President Jens Weidmann in Frankfurt.
CAN 0830 ET Mar Canada industrial product prices expected +0.3% m/m, Feb +0.7% m/m.
0830 ET Mar Canada raw materials price index expected +3.5% m/m, Feb +1.8% m/m.
CHI 2100 ET Apr China non-manufacturing PMI, Mar +16.1 to 60.2.
UK n/a UK markets closed for May Day.