CRB FMS morning report 12-05-2011

[Gertje]

Overnight Developments

Global stocks are lower with the European Euro Stoxx 50 down -1.13% and June S&Ps down -7.00 points. The dollar and Treasuries are stronger, with the dollar index at a 3-1/2 week high, while commodities slumped, with copper dropping to a 5-1/4 month low. Crude oil declined over -$2 a barrel after the IEA cut its 2011 global oil demand forecast by -190,000 barrels a day saying "high oil prices have finally begun to dent demand." Stock prices fell as China raised banks reserve ratio requirements again and after European factory output unexpectedly declined in March. Mar Euro-Zone industrial production fell -0.2% m/m and rose +5.3% y/y, weaker than expectations of +0.3% m/m and +6.3% y/y. The euro slipped to a 1-1/4 month low against the dollar amid speculation Greece may have to restructure its debt after ECB Executive Board member Tumpel-Gugerell said other countries will be asked to help Greece as the country will need "longer" to be able to refinance itself via the markets. The British pound fell to a 3-week low against the dollar after Mar UK industrial production increased +0.3% m/m and +0.7% y/y, weaker than expectations of +0.7% m/m and +1.1% y/y.
The Asian stock markets today closed mostly lower with Japan down -1.50%, Hong Kong -0.94%, China -1.38%, Taiwan +0.15%, Australia -1.76%, Singapore -1.47%, South Korea -2.19%, India -1.34%. A slump in commodities fueled declines in Asia-Pacific markets led by losses in mining companies and raw material producers on concern demand for commodities will wane as global central banks tighten their monetary policies. The Australian dollar fell as markets cut back their expectations for an RBA rate hike next month after Apr Australian employment unexpectedly fell -22,100, weaker than an expected increase of +17,000 and the biggest decline in 2 years. After the Asian markets closed, the PBOC raised banks' reserve requirements by 50 bp to 21% for the biggest lenders effective May 18.


US Economic Previews

Unemployment claims - Today's weekly initial unemployment claims report is expected to show a decline of -44,000 to 430,000, reversing last week's increase of +43,000 to 474,000. Last week's big +43,000 increase in initial claims to a 9-month high caused some market concern that the labor market is stalling, although the spike was reportedly due to just temporary distortions tied to a New York holiday, auto plant shut-downs, and a new emergency unemployment benefits program in Oregon. Last Friday's April payroll report was much stronger than expected at +244,000, which suggested that the U.S. labor market is still powering ahead. Still, if initial claims don't fall back quickly, market concern is going to grow that the labor market is indeed slowing as businesses get cold feet about the economy due to sharply higher gasoline prices. Meanwhile, continuing claims are expected to fall -33,000 to 3.700 million, reversing part of last week's rise of +74,000 to 3.733 million.
PPI - Today's April PPI report is expected at +0.6% m/m and the core PPI is expected at +0.2% m/m. Those increases would be slightly less than the March report of +0.7% headline and +0.3% core. On a year-on-year basis, the April PPI is expected to increase to +6.5% y/y from +5.8% y/y in March, thus reaching a new 2-1/2 year high. The April core PPI is expected to edge higher to a new 1-1/3 year high of +2.1% y/y from +1.9% y/y in March, thus exceeding the generally-accepted 2.0% ceiling for inflation. Last week's sharp sell-off in energy and commodity prices takes a little of the heat off the Fed on the inflation front, but a strong PPI report today and CPI report on Friday would keep the market on edge about the inflation outlook with another 1-1/2 months left to go on the Fed's QE2 program.
Retail sales - Today's April retail sales report is expected to show a strong increase of +0.6% for both the headline figure and the ex-auto figure. That would add to the strong gains seen in March of +0.4% headline and +0.8% ex-autos. A strong retail sales report today would be very encouraging for the markets, which are concerned about a dip in consumer spending and the economy due to sharply higher gasoline prices. If today's retail sales report is weaker than expected, however, then market concern about a dip in consumer spending is likely to grow.
Business inventories - Today's March business inventories report is expected to show an increase of +0.9%, adding to the +0.5% increase seen in February. Businesses are boosting inventories in response to strong sales. However, inventories in terms of sales are still tight and are not signaling any problems. The business inventories-to-sales ratio in February remained at 1.24 months, which is just 0.1 month above the record low of 1.23 months posted in spring 2010.
30-year T-bond auction - The Treasury today will sell $16 billion in 30-year T-bonds, concluding this week's $72 billion coupon package. Today's 30-year will be an original issue as opposed to a reopening of a previous issue. The Treasury follows a pattern of selling original issue 30-year T-bonds in February, May, August and November and then following those up with reopenings in each of the following two months. The $16 billion size of today's 30-year T-bond is unchanged from the last six original-issue 10-year T-note auctions.
The 12-auction averages for the 30-year are as follows: 2.83 bid cover, $25 million in non-competitive bids, 5.9 bp tail to the median yield, 15.4 bp tail to the low yield, and 53% taken at the high yield. The 30-year is a little below average in popularity among foreign investors and central banks. Indirect bidders, a category dominated by foreign buyers, have taken an average of 39.8% of the last twelve 30-year auctions, which is mildly below the average of 42.8% across all recent Treasury coupon auctions.


U.S. Stock Market

June S&Ps this morning are trading down -7.00 points. The US stock market yesterday moved steadily lower throughout the day and finished with large losses on concern that an acceleration of global inflation will lead to higher interest rates: Dow Jones -1.02%, S&P 500 -1.11%, Nasdaq Composite -0.93%. Bearish factors for stocks included (1) global inflation concerns after Apr China consumer prices rose more than expected, Apr German CPI was unexpectedly revised up to a 2-1/2 year high and the BOE said in its quarterly inflation report that inflation remains "uncomfortably high," (2) the larger than expected Mar US trade deficit which widened by the most in 9 months and is GDP negative (-$48.2 billion versus expectations of -$47.0 billion), (3) comments from Cleveland Fed President Pianalto who said the US labor market is still a "long way" from healthy, and (4) weakness in energy and commodity producers as a stronger dollar prompted a sell-off in commodities.
Bullish factors included (1) the action by Deutsche Bank AG to raise its 2011 profit estimates for S&P 500 companies to $99 a share, up from an earlier forecast of $96, and to hike its 2012 profit estimate to $106 a share from $102, citing Q1 profit margins and sales that have beaten estimates, and (2) comments from Atlanta Fed President Lockhart who said the economy shows signs of "improving quality" and that he expects 3%-4% GDP growth over the "next couple of years."
Cisco Systems (CSCO) fell 3% in pre-market trading after the company forecast profit and sales that may miss analysts' estimates and after CEO Chambers abandoned a 4-year old forecast for annual sales growth of 12% to 17% as weak demand forced him to cut jobs and exit businesses.


U.S. Interest Rate Markets

June 10-year T-notes this morning are up +5 ticks. T-note prices yesterday erased early losses and closed higher as the stock market plunged and after decent demand was seen at the Treasury's $24 billion auction of 10-year T-notes: TYM11 +10/5, FVM11 +7.2, EDU11 +0.5. Bullish factors included (1) increased safe-haven demand for Treasuries as the stock market plummeted, and (2) strong demand for the Treasury's $24 billion auction of 10-year T-notes that were auctioned at a yield of 3.21%, below the 3.22% the market was expecting. Bearish factors included (1) global inflation concerns after Apr China consumer prices rose more than expected, Apr German CPI was unexpectedly revised up to a 2-1/2 year high and the BOE said in its quarterly inflation report that inflation remains "uncomfortably high," and (3) supply pressures ahead of the Treasury's $16 billion auction of 30-year T-bonds on Thursday.


Forex Markets

The dollar index this morning is stronger and at a 3-1/2 week high with the dollar/yen -0.13 yen and the euro/dollar -0.46 cents. The dollar index yesterday climbed to a 3-week high on increased safe-haven demand as the stock market fell on concern that European leaders are balking at providing Greece with additional aid: Dollar Index +0.716, USDJPY +0.169, EURUSD -0.02176. Bullish factors included (1) weakness in the euro which fell to a 3-week low against the dollar after German Chancellor Merkel said Greece needs to stay the course on its budget-cutting program to deserve an extension of the 110 billion-euro ($158 billion) bailout granted last year, which fuels concern that European leaders are hesitating in granting Greece additional aid, which may force Greece to restructure its debt, and (2) increased safe-haven demand for the dollar as the stock market fell. Bearish factors included (1) concern that the ECB may tighten monetary policy further after Apr German consumer prices were unexpectedly revised up to a gain of +2.7% y/y, a 2-1/2 year high, and (2) the larger-than-expected Mar US trade deficit which widened to its most in 9 months (-$48.2 billion) and is dollar negative.


Crude Oil

June crude oil prices this morning are trading down -$2.17 a barrel and June gasoline is -4.68 cents per gallon after the IEA cut its 2011 global oil demand forecast. Crude oil and gasoline prices yesterday tumbled as the dollar strengthened and after US crude supplies rose to a 2-year high: CLM11 -$5.67, RBM11 -25.69. Bearish factors included (1) the rally in the dollar index to a 3-week high, which reduces investment demand in commodities, (2) the larger-than-expected increase in weekly DOE crude inventories to their highest level in 2 years (+3.78 million bbl to 370.3 million bbl versus expectations of +1.5 million bbl), (3) the unexpected increase in weekly gasoline supplies which rose for the first time in 12 weeks (+1.27 million bbl versus expectations of -500,000 bbl), (4) slack demand after total US fuel demand slipped -0.9% w/w to 18.2 million barrels a day, the lowest in 23 months, and (5) concern that Chinese fuel demand may slow on speculation it will further tighten monetary policy to cool price increases after Apr China consumer prices rose more than expected. Bullish factors included (1) the unexpected decrease in weekly distillate inventories (-843,000 bbl versus expectations of no change), and (2) concern that the worst flooding of the Mississippi River in 75 years might limit US gasoline supplies as it may force the closure of 11 refiners between New Orleans and Baton Rouge with a combined capacity of 2.5 million barrels a day, or 13% of US output.


Metals

Metals prices this morning are trading weaker: GCM11 -$19.20, SIN11 -2.935 and HGN11 -0.036. Dollar strength and concern over higher global interest rates sent metal prices cascading yesterday: GCM11 -$15.50, SIN11 -2.971, HGN11 -0.1285. July copper fell to a 5-1/2 month low. Bearish factors included (1) a rally in the dollar index to a 3-week high, and (2) concern that China and the ECB may continue to tighten their monetary policies, which is negative for economic growth and industrial metals demand. Bullish factors included (1) increased demand for gold as an inflation hedge after Apr German CPI was unexpectedly revised up to a 2-1/2 year high and Apr China CPI was stronger than expected, and (2) comments from Barclays Capital that the copper market may have "turned the corner" as inventories in Chinese warehouses may have dropped 50,000 tons to 550,000 tons at the end of April, a sign of increased demand.


Grains

Grain prices this morning are lower: CN1 -10-1/4 cents, SN1 -12 cents, and WN1 -13-1/4 cents. The grain markets yesterday closed lower after the dollar strengthened and after the USDA said US grain inventories will be bigger than expected: CN1 -30 cents limit-down, SN1 -6-1/4 cents, WN1 -39-3/4 cents. Jul corn slumped to a 1-1/4 month low. Bearish factors included (1) the rally in the dollar index to a 3-week high, which reduces investment demand in commodities and may also curd US grain export prospects, (2) weakness in gasoline, which undercuts ethanol prices and corn demand, (3) the USDA's estimate that US corn carry-over will climb to 900 million bushels from 730 million bushels this year as US corn exports drop to 9-year low of 1.8 billion bushels, (4) the USDA's hike in its US soybean carry-over estimate to 170 million bushels in the year ending Aug 31 from an Apr estimate of 140 million bushels, and (5) the USDA's estimate for US wheat carry-over next year of 702 million bushels, more than market expectations of 683 million bushels. Bullish factors included (1) USDA's hike in its corn use for ethanol production to a record 5.05 billion bushels, and (2) speculation that USDA estimates for US grain production and carry-over are too optimistic due to late planting of crops and uncertain weather conditions that may limit yield potential.


Meats & Softs

Meat prices yesterday closed lower as a plunge in corn prices may prompt feedlot owners into increasing animal herds: LCM1 -1.25, LHM1 -2.50. Jun hogs posted a 1-week high before shedding their gains and closing lower. Softs yesterday finished mostly lower as dollar strength fueled overall commodity weakness with Jul coffee falling to a 1-month low on hedge fund liquidation due to better-than-expected coffee production in Brazil: SBN1 -0.93, KCN1 -9.45, CCN1 +13, CTN1 -1.10.


Global Financial Calendar

Thursday 5/12/11
US 0830 ET Weekly initial unemployment claims expected -44,000 to 430,000, previous +43,000 to 474,000. Weekly continuing claims expected -33,000 to 3.700 million, previous +74,000 to 3.733 million.
0830 ET Apr PPI expected +0.6% m/m and +6.5% y/y, Mar +0.7% m/m and +5.8% y/y. Apr PPI ex food & energy expected +0.2% m/m and +2.1% y/y, Mar +0.3% m/m and +1.9% y/y.
0830 ET Apr retail sales expected +0.6% and +0.6% less autos, Mar +0.4% and +0.8% less autos.
0830 ET Philadelphia Fed President Charles Plosser speaks on the economic outlook at the New Jersey Bankers Association “Opportunities in the New Decade” event in Aventura, FL.
1000 ET Mar business inventories expected +0.9%, Feb +0.5%.
1000 ET Fed Chairman Ben Bernanke testifies at a Senate Banking Committee hearing on “Oversight of Dodd-Frank Implementation: Monitoring Systemic Risk and Promoting Financial Stability”
1100 ET Treasury announces amount of 10-year TIPS to be auctioned May 19.
1300 ET Treasury auctions $16 billion 30-year T-bonds.
1630 ET Weekly money supply report and Fed balance sheet.
2000 ET Fed Chairman Ben Bernanke delivers brief remarks at an award ceremony in Washington D,C, (prepared text-no Q&A).
JPN 0100 ET Apr Japan Eco Watchers survey current, Mar 27.7. Apr Eco Watchers survey outlook, Mar 26.6.
0200 ET Preliminary Apr Japan machine tool orders, Mar +49.6% y/y.
FRA 0130 ET Apr French CPI (EU harmonized) expected +0.4% m/m and +2.3% y/y, Mar +0.9% m/m and +2.2% y/y.
EUR 0400 ET ECB publishes monthly report for May.
0500 ET Mar Euro-Zone industrial production expected +0.3% m/m and +6.3% y/y, Feb +0.5% m/m and +7.5% y/y.
0530 ET ECB Executive Board member Jose Manuel Gonzalez-Paramo speaks at a conference on “The European Union and Lessons from the Crisis-The Way Forward.”
UK 0430 ET Mar UK industrial production expected +0.7% m/m and +1.1% y/y, Feb -1.2% m/m and +2.4% y/y.
0430 ET Mar UK manufacturing production expected +0.3% m/m and +2.8% y/y, Feb unchanged m/m and +4.9% y/y.
CAN 0830 ET Mar Canada new housing price index, Feb +0.4% m/m and +2.1% y/y.