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Trading was back and forth this week as investors retrenched positions in the wake of dueling economic forecasts out of the IMF, World Bank, and OECD. A lack of clarity caused markets to move largely sideways this week. Another round of Treasury auctions was absorbed without a hitch, keeping bond skeptics and yields at bay for another week. Wednesday's FOMC decision was unremarkable, with the Fed making a few minor changes to the statement and leaving its asset purchase plans unrevised. Congress had a busy week, spending hours on Thursday grilling Fed Chairman Ben Bernanke over paper-thin allegations he had pressured Bank of America Chief ken Lewis into buying Merrill Lynch at the beginning of 2009. And as of late Friday afternoon, the House is still debating the Climate Bill which is expected to face a very close vote. The greenback weakened slightly on the week's events, but crude oil was unable to gain any new ground on the dollar weakness. Equity markets were mixed in a sideways move: for the week, the Nasdaq Composite eked out a 0.6% gain, the S&P 500 slipped 0.3%, and the DJIA fell 1.3%, posting its first two week losing streak since March 6.
- On the data front, housing market numbers showed absolute sales down and prices ticking up a bit. Tuesday's April Housing price index was a bit better than expected while the NAR's May existing home sales slightly lower than expected. The NAR's chief economist warned that sales were less than expected because poor appraisals were stalling transactions, noting that contracts are falling through from faulty valuations that keep buyers from getting a loan. Wednesday's May new home sales data was mixed, with the total numbers down on a sequential basis but median sale prices up a bit. The April RPX Composite housing market report later on in the week was up by 1.2%, for the first such increase since the composite peaked in June 2007. Home prices increased on a month-over-month basis in 18 of the 25 metropolitan statistical areas (MSAs) covered by the report. The May Durables reading was a big factor on Thursday, helping equities lose some of the weight seen earlier in the week after the Commerce Department said demand for manufactured products rose for a second month in a row in May, sustaining the positive growth seen in April. Note that non-defense capital goods orders (ex-aircraft) rose by +4.8%, for the largest rise since September, 2004.
- Quarterly results from Lennar and KB Home provided encouraging news for the homebuilders and the overall housing market. Earnings results from both defied expectations (Lennar's loss was a fraction of the expected amount while KB's loss was nearly twice estimates), but the really impressive data was in the firms' metrics. Both showed impressive sequential gains in new home orders and deliveries, with KB's new orders +60% over last quarter. Executives from both companies citied fresh lows in home prices, more confident homebuyers, low interest rates and government stimulus programs for their improved business.
- The banks were notably quiet this week, with little news in the sector and volatility in the share values of the national banks settling down noticeably. Goldman Sachs was a standout, possibly due to a report in the New York Observer on Monday that Goldman staff have been told to expect large bonuses based on estimates of substantial earnings growth in the first half of the year. Bank of America priced its 200M depositary share exchange offer as the bank wrapped up its extensive capital raising process stemming from the government stress tests last month. Fitch cut its ratings on Keycorp and Fifth Third Bancorp, adding to weight in shares of the regional banks.
- Boeing surprised markets with another postponement of the first flight of the 787 Dreamliner due to the discovery of a weak body joint, although a company played down the fix as being inexpensive and assured customers that it believes the production schedule will not be affected. Australia's Qantas, which said it would cancel or defer orders for up to 30 787s scheduled for delivery in 2014-15. The news of the first flight delay led to several analyst downgrades of the DJIA component.
- Uneasiness surrounding government borrowing abated this week as solid demand emerged for newly issued US short- and medium-term debt. Treasury markets digested another $104B in fresh 2-, 5-, and 7-year note supply with an effortlessness that would have seemed next to impossible just a few weeks ago. The benchmark 10-year note is set to post a weekly price gain for the first time since the second week of May, and has seen its yield test the 3.5% level for the first time this month. The lightly revised FOMC statement had little effect on overall direction, and expectations for a rate hike anytime soon continue to diminish from the elevated level of expectations seen in the fed fund futures market that were seen following the May unemployment data three weeks ago
- Various explanations for the strong auction results have abounded, ranging from index buying into quarter's end to above-average sponsorship by the Swiss National Bank (whose purchases of USD to halt CHF appreciation have to be deposited somewhere). The huge increases in indirect bids supports the latter theory, although a lot of attention has also been paid to reports outlining changes to the Treasury's customer classification. Whatever the reason, significant leveraged positions were on the wrong side of the move and an unwinding of shorts exacerbated the higher prices and lower yields leading to some curve flattening. The benchmark spread narrowed towards 240 basis points by week's end.
Across the Atlantic, one of the more high-profile "unconventional" arrows in the ECB's policy armory got its first use with the inaugural 12-month refinancing operation on Wednesday. Banks took advantage of one-year funds at 1% with unbridled enthusiasm, borrowing â‚¬442B and leading many to question the wisdom of the bond-buying/money-printing policies adopted by other central banks.
- In currency trading, the reserve currency issue continued to be the main factor in the USD price action. The dollar tried to establish a stable, consolidating tone early in the week, but took a softer tone as word of reserve management adjustments circulated among dealing desks. Assistant Treasury Secretary Karthik Ramanathan addressed the topic of higher bond yields, noting that the Treasury "did not read much" into rising yields given that issuance was "completely blind" to quantitative easing and that higher yields might not only be due to greater supply. Russia Deputy PM Shuvalov used the opportunity to comment that while US Treasuries may be among his country's top investments, the Russian Central Bank could quickly adjust its reserves policy if necessary. Later in the week, Li Lianzhong, a senior researcher for the Chinese Communist Party, recommended China buy gold given expectations of a declining dollar and the growing need to back Yuan's international role. Naturally this recommendation advised lower levels of US Treasuries in exchange for more gold. China's PBoC piled on the commentary, reiterating in its annual financial stability report its call for a "supra sovereign" currency.
- The other predominant issue in forex was the continuing struggle between risk appetite and risk aversion. The reduced 2009 and 2010 GDP forecasts from the World Bank early on in the week added to the growing sense of caution regarding "green shoots" talk. The World Bank Chief Economist Lin said the World Bank expects a deeper global recession in 2009, with the global economy -2.9% (versus the bank's prior -1.7% estimate). ECB Governor Provopoulos commented that green shoots were not necessarily a sign of a rapid return to growth and that a great deal of uncertainty remains about the European and worldwide economic outlook. Provopolis did admit that there have been signs of stabilization in the US and in Europe. In a monetary policy report, the PBoC said China's economy was recovering but insisted it was not yet on solid footing.
- Rising unemployment and a substantially higher saving rate have emerged as the crabgrass among all the green shoots. Last week the BoE warned that consumer spending faced risks from a pronounced increase in the domestic UK savings rate. The US personal spending data on Friday bore out these comments, as the gain in US income was larger than the increase personal spending. But it was the stunning rise in the savings rate (up to 6.9%, the highest level since late 1993) that really rammed home analysts' fears about consumer spending.
- ECB rhetoric regarding fiscal balance and the Maastrict Stability Pact initially helped the USD creep toward the 1.3800 neighborhood this week. With Euro Zone finances under pressure, ECB officials have really begun preaching the gospel of budgetary responsibility now that the outlines of stabilization have begun to take shape in economic data. ECB Chief Trichet commented that fiscal credibility was necessary for confidence and stressed that governments must remain prudent. The ECB's Weber noted that Germany needed to keep an eye on state and national budget deficits. Also note that the ECB's Nowotny commented that the central bank would likely keep interest rates steady into 2010.
- There was a flurry of SNB indirect currency intervention via the Bank for International Settlements (BIS), which sold CHF against both the euro and dollar pairs several times this week (the SNB and BIS declined comment on intervention). EUR/CHF has risen from 1.5010 toward the 1.5400 level, while USD/CHF soared from 1.0665 to over the 1.10 hurdle. Dealers are more confident now that the 1.5000 level in EUR/CHF is the clear "line in the sand" for SNB intervention. Last week, the SNB reiterated that it would continue to fight Swiss Franc strength, especially against the euro, to counter deflationary forces in its economy. The moves had an additional twist (and more market impact) compared to the initial March 12th intervention and suspected April, May and earlier June moves given the use of the USD/CHF vector, opposed to only EUR/CHF.
- The week in Asia was generally a mixed bag of forward-looking optimism from local and external sources juxtaposed against questionable economic data demanding continued caution over a sustainable and protracted recovery. On Monday, both Chinese Premiere Wen and investor George Soros suggested there was evidence of a bottom in China, highlighting the impact of fiscal stimulus and limited regional exposure to the financial crisis haunting the Western world. Subsequently later in the week, IMF raised its GDP estimates for developing Asian markets (excluding China and India) for both 2009 and 2010 by 1%, while the OECD upgraded its growth view for China, Australia and New Zealand. However, Asian economic figures on Friday, while somewhat retrospective, were notably more sobering. New Zealand posted its worst GDP decline in at least 15 years, with Q1 growth falling 2.7% y/y and 1.0% q/q. Over in Japan, the economy saw its April national CPI slide further down the slippery slope of deflation, posting the worst drop on record at -1.1% and prompting renewed calls for government action by Cabinet chief economist Saito and Finance Minister Yosano.
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