Source: Associated Press

Japan first struggled with deflation following the collapse of the housing market in the late 1980s. This triggered a collapse in the stock market and an overall devaluation of consumer prices. It took years for the economy to recover and the 1990s has long been referred to as the “lost decade”.

Source: BBC News

Jobless Recovery

Economists pointed out that while the initial results show progress has been made on the employment front, there are still many people out of work. Jeegar Kakkad, senior economist at EEF, the manufacturers’ organisation, said: “Although the figures show that job losses in manufacturing are at their lowest since the recession began, the fall in employment increases the likelihood of a jobless recovery.”

Source: BBC News

The US$ is weaker in the O/N trading session. Currently it is lower against 11 of the 16 most actively traded currencies in ‘whippy’ trading range.

Yesterday’s US housing construction deteriorated further in Feb. offsetting much of the gains witnessed in Jan. The housing construction starts (+575k vs. +611k) remain at the lower end of the range (-70% below its peak of four years ago). The immediate horizon remains bleak, with Mar.’s weaker than expected homebuilders confidence, weak sales and another below par building permits print (+612k vs. +622k) does not bode well for a strong rebound. Expect the Fed to continue to focus on this. Again, its interesting that was no mention of weather distortions. Perhaps, we will be surprised in the next reading. Digging deeper into the reports, both single (-0.6%) and multi-family (-30.3%) starts contributed to the decline in Feb., although condos remain ‘behind’ the decline. Not to be left behind, building permits fell a further -1.6%, m/m, as homebuilders ‘remain on the sidelines until housing demand strengthens’. With both single and multi-family permits down on the month, this marks the second consecutive monthly decline in overall permits. Not the prettiest of pictures just yet.

No surprises from the Fed in hindsight. They pledged to keep O/N funds on hold for an ‘extended period’ and confirmed that emergency measures to prop up the housing market will end as planned later this month. In one statement they were able to paint the whole landscape. While the economy has ‘continued to strengthen’, Bernanke and his fellow policy makers noted that ‘housing starts have been flat at depressed levels’ and ‘employers remain reluctant to add to payrolls’. Recovery remains on track, but struggling at best. The time horizon has now been extended to when policy makers are expected to tighten, later this year perhaps. However, they did manage to make one change of note. They re-inserted ‘one’ sentence that was omitted when they began to withdraw emergency support to capital markets and that’s the Fed’s commitment to do ‘whatever it takes’ to stem the crisis’. It seems a tad more dovish than expected and it suggests that the Fed still sees downside risks, and is not yet comfortable enough with the recovery to fully commit to ending quantitative or credit easing.

As expected, the BOJ announced the expansion of its fixed-rate-fund-supplying operation last night. However it’s interesting that their monetary stance has not become more ‘accommodative’. Reading between the lines of their announcement, they will probably take no further steps unless either USD/JPY or the Nikkei fall significantly or both, thus leaving the currency to trade within a tight range for the time being.

The USD$ is lower against the EUR +0.14%, CHF +0.10 % and higher against GBP -0.08% and JPY -0.25%. The commodity currencies are stronger this morning, CAD +0.04% and AUD +0.19%. Yesterday’s Canadian data gave the St. Patrick’s Day green light to want to ‘own’ some of this saturated long loonie trade. The Canadian manufacturing shipments (+2.4% vs. +1.9%) and labor productivity (+1.4% vs. -0.25) were much stronger than expected. The shipments rose four-times more than anticipated in Jan., with most of the gains in volumes, adding a huge lift to real GDP. The pipeline pressures we are experiencing suggest we could see further growth in Feb. as new-orders continue to rise. Not to be out done, Canadian labor productivity rose by almost double that expected in the 4th Q. and putting the annualized growth rate at +5.6%, q/q (the strongest in 12-years). Technically and fundamentally, the loonie is ‘piggy-backing’ on parity after last week’s surprisingly strong employment numbers (+21k). Traders are now betting that the BOC will be hiking sooner rather than later because of the potential ‘upward’ pressure on core-inflation supported by a faster than expected pace of industrial capacity’ (70.9%). Trader’s opinions vary on the timing of a hike, consensus is probably July. Despite the trend remaining your friend and the Canadian Government throwing its support behind a ‘competitive currency’, the market should be looking for better levels to own the domestic currency, as this lofty heights are a tad rich. There is natural CAD resistance to be expected first time around parity.

Similar to all growth currencies, it seems all the variables are lining up for a stronger AUD. This morning it has managed to print a 2-month high as the price of gold, the nation’s third most valuable commodity export, advanced. With global bourses rallying after Cbank announcements continues to support higher yielding currencies. Expectations for low interest rates in the US and Japan are fueling risk appetite again. In retrospect, the AUD advance has ‘underperformed’ other currencies gains vs. the dollar as traders reflect ‘a paring in expectations for an Apr. interest rate hike following yesterday’s RBA board meeting minutes’. Last week the RBA hiked rates by +25bp to +4%. Governor Stevens said ‘rates should be closer to average’, which policy makers have indicated may be 75bp higher than the current +4%. The market expects the RBA to hike with a ‘gradual approach’. Continue to expect better buying on deeper pull backs (0.9210).

Crude is higher in the O/N session ($82.09 up +39c). Crude began to rise for the first time in three days yesterday, as the dollar weakened, boosting demand for commodities as an alternative investment. Also, aiding the black-stuff is rhetoric by OPEC ministers indicating that they would refrain from increasing production at this morning meeting in Vienna. Iran, the second-biggest producer in the group, wants to keep output unchanged because there is no sign of growing demand. Oil managed to appreciate 2% after the Saudis indicated that oil prices were in the ‘right range’. Fundamentally last week’s EIA reports support the ‘bull’ story. The weekly report showed a decline in supplies of gas and distillate fuels. Gas stocks dropped -2.96m barrels to +229m vs. an expected ‘little change’ scenario. Distillate supplies (heating oil and diesel) decreased -2.22m barrels to +149.6m. On the flip side, crude inventories rose +1.43m barrels to +343m vs. an expected climb of +2m barrels. It’s expected that the members need to be pumping +28.94m barrels a day to satisfy this years global demand. That’s an increase of +190k barrels over last year’s projections. It’s anticipated that today’s inventory report will show a headline print rise of +1.1m barrels. A belief that the economic situation will not get much worse should support commodities on pull-backs.

We had expected the yellow metal to find traction and it has delivered, advancing the most in a month, as a weaker dollar boosted the demand for alternative investments. Technically, yesterday’s levels again provided good support for the bulls despite having a rough go of it so far this month. The interest to own gold may gain as the prospect of credit tightening in China persuades investors to seek a ‘haven in precious metals’. It seems that Europe investors want to continue to buy gold as an alternative to holding the EUR. However, the dollar’s direction remains the strongest indicator to wanting the metal or not ($1,129).

The Nikkei closed at 10,846 up +125. The DAX index in Europe was at 6,000 up +30; the FTSE (UK) currently is 5,638 up +18. The early call for the open of key US indices is higher. The US 10-year eased 6bp yesterday (3.65%) and is little changed in the O/N session. The Fed’s comments and actions managed to push the US yield curve lower and force Treasuries to print new high prices for this month. The Fed reiterated that the recovery will be slow and that rates will remain low for an extended period of time. Their comments certainly have taken some pressure off the front end. They had been pricing in a move sooner rather than later in the year. Before the announcement, Money-market interest rates managed to print a five-month high, as the market had believed that the Fed was laying the groundwork for its own exit strategy. This thought too can be kept on hold. Expect better buying on pull backs in the short term.

The Euro Zone is comprised of EU countries that use the euro as their official currency and several financial obligations must be met in order to gain membership. These include limiting yearly deficits to 3 percent of the country’s GDP, while ensuring that accumulated debt remains equal to or less than 60 percent of GDP. EU policy also states that individual countries are responsible for their own economic fate, and the EU as an entity will not provide emergency funding to individual countries.

As the true seriousness of Greece’s economic crisis becomes known however, there is growing evidence that, even as part of the first-wave of Euro Zone countries back in 1999, Greece was never in compliance with the debt and deficit requirements. What was initially passed off as a little “creative accounting”, is now being seen as deliberate fraud and corruption. Needless to say, the thought of using taxpayer money to rescue Greece in light of these revelations, is not being well received in other EU countries – several of which have already tightened their own belts to get their financial houses in order.

Despite these public grumblings, and even official EU policy preventing the bailing-out of individual countries, EU finance ministers put the finishing touches on a plan to save Greece earlier this week. In truth, this is not just about Greece – it is really about preserving the currency. The euro has suffered a decline in the past two months of nearly 5.5 percent as questions linger over Greece’s solvency.

“We clarified the technical arrangements that would enable us to take coordinated action which could be swiftly put into place in the event it is necessary,” Luxembourg Prime Minister Jean-Claude Juncker reported following a meeting of EU finance ministers.

There is a fine distinction to be made here – “in the event” the rescue is needed. The official EU line is that Greece is still responsible for implementing the changes necessary to balance the books herself and an EU-led rescue is a last resort. To date, Greece has agreed to a series of tax increases and spending cuts expected to total €4.8 billion (US$6.6 billion).

The EU finance ministers fully intend to hold Greece’s feet to the fire before sending any publically-funded relief. Many officials believe this crisis is entirely of Greece’s own making and is the result of a long history of government and corporate corruption.

“The objective would not be to provide financing at average Euro Zone interest rates, but to safeguard financial stability in the euro as a whole,” read a statement issued by the EU financial ministers.

Currency Blackmail

And there you have it. The ministers feel they have no choice but to support Greece in order to protect the euro itself. Blackmail may not be the polite term to describe the proceedings, but it remains the most apt depiction nonetheless.

Nowhere is the backlash against a taxpayer-funded bail-out more acute than in the Euro Zone’s largest economy. The German populace is decidedly against providing funds to Greece, and is in no mood to play the role of the benevolent financier to a country it feels is incapable, or worse still, unwilling, to manage its own economy.

This sentiment was succinctly captured in the words of Germany’s Finance Minister Wolfgang Schaeuble. In a veiled warning to the other “PIIGs” countries (Portugal, Italy, Ireland, and Spain), Schaeuble last week called for the “expulsion” of heavily-indebted countries from the Euro Zone.

Source: Reuters

“We clarified the technical arrangements that would enable us to take coordinated action which could be swiftly put into place in the event it is necessary,” Luxembourg Prime Minister Jean-Claude Juncker told reporters late yesterday after leading a meeting of euro-area finance officials in Brussels.

Source: Bloomberg

Pundits will be watching closely however, for any signals from the Fed for when they expect to increase rates as growth returns to the economy. The Fed continues to say that inflation is not an immediate concern, but once growth reaches a certain threshold, most market watchers expect the Fed to act quickly to move interest rates higher.

Source: Associated Press

Source: Associated Press

The US$ is mixed in the O/N trading session. Currently it is higher against 10 of the 16 most actively traded currencies in ‘whippy’ trading range.

Yesterday, the NY Fed’s Empire Manufacturing Index eased slightly (22.9 vs. 24.9 in Feb.). Analysts will have us believe, that despite the declining headline, the sub-components improved across the board. The new-orders index surged to 25.4 from 8.8 in Feb. Shipments advanced to 25.6 from 15.1 last month and order backlogs rose for the third-consecutive month to 4.9 from 2.8 (the highest print in four-years). Surprisingly, even the delivery times managed to swing back into positive territory. Technically a good sign, as ‘times’ normally increase when ‘factories have trouble moving product out the door because orders are coming in strong’. So, in other words, the demand backdrop remains firm and suggests the recovery in industrial activity has legs. The employment component index rose to 12.4 from 5.6, while the workweek measure improved to 12.4 from 8.3 last month. This will surely give a boost to Mar.’s NFP predictions. Finally, pricing power is returning modestly. Prices received rose to 8.6 from 4.2, while prices paid fell to 26.9 from 31.9 last month. More importantly the data does not raise any concerns over the outlook for inflation. The robust components surely will lead to a stronger ISM this month. Other data showed that US Industrial production beat expectations (+0.1% vs. +0.0%), keeping optimists ‘V’ shape scenario intact. It’s interesting that the severe weather conditions that we have experienced this year have had little impact on any of the data. Capacity utilization continues to improve at a rapid pace (72.5% vs. 72.7%), which can only be positive for the 1st Q GDP number and adding to the evidence that the Fed will likely hike rates in the second half of this year.

The USD$ is higher against the EUR -0.07%, GBP -0.30% and lower against the CHF +0.04 % and JPY +0.22%. The commodity currencies are weaker this morning, CAD -0.01% and AUD -0.02%. It’s not a surprise that the loonie would come under some pressure yesterday as global equities and commodity prices softened on monetary tightening speculation from both China and India. In fact, the market is happy that the currency has been able to pare some of this year’s record gains. It makes it more desirable to add to long CAD positions and at better levels too. Technically and fundamentally, the loonie is ‘piggy-backing’ on parity after last week’s surprisingly strong employment numbers (+21k). Traders are now betting that the BOC will be hiking sooner rather than later because of the potential ‘upward’ pressure on core-inflation supported by a faster than expected pace of industrial capacity’ (70.9%). Trader’s opinions vary on the timing of a hike, consensus is probably July. Despite the trend remaining your friend. The market should be expecting better levels to own the domestic currency in the short term, as record IMM long growth currency positions and softer commodity prices pressurize these ‘weaker longs’.

Rating agencies questioning the stability of various sovereign debt coupled with trader speculation that China may want to implement monetary tightening measures has pressurized higher yielding growth currencies thus far this week. To date the AUD has managed to retreat from its two-month high. Demand for the Australian currency has also lost traction on concerns that the global economy has not recovered enough to let RBA to raise interest rates again. Of late, robust Chinese export numbers have had investors demanding higher yielding growth currencies. Last week the RBA hiked rates by +25bp to +4%. Governor Stevens said ‘rates should be closer to average’, which policy makers have indicated may be 75bp higher than the current +4%. The market expects the RBA to hike with a ‘gradual approach’. Continue to expect better buying on deeper pull backs (0.9154).

Crude is lower in the O/N session ($79.52 down -28c). The ‘black-stuff’ found it difficult to maintain its sea-legs yesterday, a second consecutive trading session, as the dollar gained, curbing demand for most commodities as a currency hedge, before this week’s OPEC meeting. Risk aversion trading strategies combined with global bourses finding it difficult to gain traction on China and India monetary tightening rumors had the bears happily adding to their positions. With OPEC meeting tomorrow, Iran, the second-biggest producer in the group, wants to keep output unchanged because there is no sign of growing demand. Fundamentally, it’s not all bad news for the bulls. Last week’s EIA reports supported the ‘bull’ story. The weekly report showed a decline in supplies of gas and distillate fuels. Gas stocks dropped -2.96m barrels to +229m vs. an expected ‘little change’ scenario. Distillate supplies (heating oil and diesel) decreased -2.22m barrels to +149.6m. It was expected that stockpiles were to fall by only -1m barrels. On the flip side, crude inventories rose +1.43m barrels to +343m vs. an expected climb of +2m barrels. There was even an OPEC report stating that member states will need to produce more oil than previously estimated. It’s expected that the members need to be pumping +28.94m barrels a day to satisfy this years global demand. That’s an increase of +190k barrels a day over last year’s projections. A belief that the economic situation will not get much worse should support commodities on deeper pull-backs.

The yellow metal was little changed yesterday. However, be wary, we could be entering a ‘new safe heaven phase’. Technically, these levels are providing good support for the bulls despite having a rough go of it so far this month. The interest to own gold may gain as debt rating concerns and the prospect of credit tightening in China persuade investors to seek a ‘haven in precious metals’. Currently, it’s all about the performance of the dollar, any signs of weakness and we will have buyers happily entering the market ($1,112).

The Nikkei closed at 10,721 down -30. The DAX index in Europe was at 5,943 up +40; the FTSE (UK) currently is 5,632 up +39. The early call for the open of key US indices is higher. The US 10-year eased 1bp yesterday (3.71%) and is little changed in the O/N session. Prices remained close to home despite strong readings from yesterday’s US data. Money-market interest rates, at a five-month high, are providing strong proof that the market believes that the Fed is laying the groundwork for its own exit strategy. The treasury bears want to take control with growing confidence that the economic recovery is gaining traction. However, with other asset classes underperforming and a degree of risk aversion occurring may temporarily hinder their strategies. Let’s see what the Fed has to say this afternoon after the FOMC announcement.