MAJOR HEADLINES – PREVIOUS SESSION

• Australia Apr. NAB Business Confidence fell to -14 from -13 in Mar.
• China Apr. PPI fell -6.6% YoY vs. -6.3% expected.
• China Apr. CPI fell -1.5% YoY vs. -1.4% expected and -1.2% in Mar.
• Norway Apr. CPI out at +0.2% MoM as expected and underlying CPI out at 0.3% as expected
• Canada New Housing Price Index out at % MoM vs. -0.5% expected

THEMES TO WATCH THIS WEEK

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  • UK Apr. RICS House Price Balance (2301)
  • US Fed’s Bernanke to Speak about Stress Tests (2330)

Market Comment:

Last week ended in a blow-off rally in risk appetite, with equities making a comeback back toward recent highs, US treasury yields bolting to new highs in yield, and the commodity currencies snapping to strong new highs to end the week and EURUSD bursting above its 200-day moving average. All of these developments came after a marginally less bad than expected US payrolls number, which was hardly a game changing factor in the fundamental outlook. Our best guess is that much of this rally has been driven by what nearly all bear market rallies are driven by: exhaustion of supply that has driven risky asset selling pressure as the market had become too heavily positioned for more risk aversion. In this situation it is easy for a change of sentiment by some (even a small minority of those sitting on all of their piles of cash) and an opportunistic understanding of the skewed positioning by sharp operators with deep pockets, and then you have the stuff for a rally: a bear squeeze aggravated in the later phases by those who are desperately afraid that “this is the one” and feel compelled to pile in – just in case – or are forced to in case their benchmarks outperform their own performance.

The rally in risk has reached enormous proportions and some time ago we felt that it was already getting long in the tooth – at this point, as the UK Telegraph’s Ambrose Evans-Pritchard puts it in today’s great opinion piece, “even the hard-bitten bears are starting to throw in the towel…”. And it is tempting to throw in the towel after the Friday flourish to the recent rally in risk. But we need to keep our conviction that a return in risk aversion is still the greatest risk in the medium term even as the short term has thrown us a curve. There is nothing in the structure of the Western economies that will allow a recovery beyond a weak uptick that has been fed by money printing and a mild inventory refresh cycle. And China needs more time for its transformation to a more balanced economy, a transformation that will most likely require sweeping changes in the social safety net and property laws. With the last major batch of event risks behind us and earnings season now out of the way, it may soon be time for the market to begin to reassess its convictions, a process that could start already this week. There may be enough momentum in the market to carry us another percent higher in EURUSD, for example, or another surge in AUDUSD, but signs are likely to emerge of faltering conviction soon. As the saying goes, of course, the challenge to all of us with these convictions, of course, is that the “markets can stay irrational longer than you can stay liquid.” (from Keynes). Still, there are signs of weakness in conviction already in Monday’s European session, as the JPY is fighting back and US treasuries look strongly bid.

Tuesday

• Japan Apr. Machine Tool Orders – this is the number that really proves the point that during a downturn, capital spending on production-related expenses experiences the worst hit. This number showed a -85.2% drop in March.
• Sweden Apr. CPI – headline inflation dipped into negative territory in March for year-on-year comparisons, but the core numbers are still showing a 1.5% increase. The trend is very steeply negative, however, considering that it was 3.0% as recently as October of last year.
• UK Mar. Visible Trade Balance – the UK terms of trade are only showing tentative signs of improvement despite the vastly weaker sterling. This trend needs to improve sharply as does the situation in capital flows for the pound to turn up sustainably.
• UK Mar. Industrial/Manufacturing Production – UK industrial activity is off some 13% from last year, and so far faring much better than Germany, where production is off over 20%. The weak pound has offered at least some support, it seems.
• UK Mar. DCLG House Prices – there was a great deal of hubbub over recent numbers that showed an uptick in UK house prices. This was likely simply due to the UK housing market transitioning from “clinically dead” to going back on life support from virtual nationalization of mortgage related activity. It is premature to look for a meaningful recovery in UK house prices.
• Canada Mar. International Merchandise Trade – dipped into negative territory at the turn of the year for the first time since the mid 1970’s and could turn negative again if the worl recession resumes apace.
• US Mar. Trade Balance – this is the monthly reminder that the new world order is arriving as the old global imbalances continue to unwind. The Feb. While the coming months may show an uptick in the trade deficit if US business decide to rebuild inventories and due to stable to higher oil prices, if the US recession redeepens, we could see a month in the next 12 months with a US trade surplus, certainly on an ex Petroleum basis, where the trade deficit was a mere -12.3 billion USD, down from more than -40 billion in 2006.
• UK Apr. NIESR GDP Estimate

Wednesday

• Japan Mar. Current Account Total – the incredibly shrinking current account surplus of Japan is another of the global imbalances that is unwinding in this downcycle as Japan’s export markets are in ruins. Could we see a small uptick for a few months on an inventory building cycle, however?
• China Apr. Retail Sales – the Chinese consumer is supposed to save the world, but will they? The year-on-year rates are dropping fast, though still at a +14.5%, but even that level has been helped out by a massive loosening of credit markets by the Chinese authorities and partial payment of, for example, appliance for rural people with modest incomes.
• China Apr. Industrial Production  – expected above 8% for YoY comparisons and well above the  5.4% nadir from last November. But electricity production is still down year-on-year. Is this number for real?
• UK Apr. Jobless Claims Change  – claims are rising at a worrying pace, but the rate is not likely to ever surge again above Feb’s 136.6k number – an all time high.
• EuroZone Mar. Industrial Production
• UK Bank of England Quarterly Inflation Report – this is not likely to prove upbeat reading, as the Bank obviously holds a dour view on the economy after the last BoE meeting saw another 50 billion sterling of QE announced. But sterling is already very weak, so can it add fuel to the fire?
• US Apr. Advance Retail Sales – the month on month figures have stabilized at an astounding -7% for year-on-year comparisons as the mighty US consumer has neither the interest nor the means to expand credit in this economy. Any recovery in spending will be brief and passing for the next year at least.

Thursday

• New Zealand Apr. Business PMI – the NZD has seen a tremendous bounce, the fate of which will be determined by global risk appetite and food commodity prices more than sentiment surveys for now.
• New Zealand Apr. Non-resident Bond Holdings  – the foreign percentage of NZ holdings has remained remarkably steady – and will need to remain this way if NZD is to avoid the abyss…
  EuroZone ECB to publish Monthly Report
• US Apr. PPI – Houston, we have a conundrum. Normally, PPI leads CPI, but the core PPI has fallen less and fallen later than the core CPI – what gives? We would expect a softer than expected number.
• US Weekly Initial Jobless Claims – last week’s number was the lowest since January – a sub-600k reading will get tongues wagging about falling second derivatives, though the build in momentum in claims virtually guarantees 10%+ unemployment in the US

Friday

• New Zealand Mar. Retail Sales
• Japan Mar. Machine Orders
• Japan Apr. Domestic CGPI
• Germany Q1 GDP – expected to show worse the -6% annualized growth, thus matching the poor US number. This number could even surprise to the downside.
• Switzerland Mar. Retail Sales
• Norway Apr. Trade Balance
• EuroZone Apr. CPI – the ECB seems confident that deflation risks are minimal – the coming several months will tell us whether that view is justified, especially once we get on the other side of the year-on-year comparisons that are distorted by the oil spike of last summer.
• EuroZone Q1 GDP
• Canada Mar. Manufacturing Shipments – it’s tough to get bullish on this number with the US car industry in tatters and rapidly downsizing.
• US Apr. CPI – note the PPI note for Thursday above – the coming months are vital for the inflation/deflation debate. Thus far, the core CPI is still at 1.8% YoY vs. the 1.1% trough in the 2001 mini-recession, but what are the effects of the slowing wage growth and the threat of outright wage deflation that is already evident for many? More than half of the Mar. CPI increase was due to an 11.0% increase in alcohol and tobacco products – could we see a downside surprise with this month’s number? Bloomberg consensus is for a 0.1% reading. The core has only showed a 0.0% reading five times in modern memory and no negative readings have been seen since the volatility early 1980’s, when year-on-year inflation was still in the high single digits
• US May Empire Manufacturing – the first of the regional manufacturing surveys.
• US Mar. TIC Flows – ancient history, as usual
• US Apr. Industrial Production and Capacity Utilization – the capacity utilization number is simply amazing and a better indication of the status quo of manufacturing lately than the surveys. The early 1980’s lows were long ago surpassed and are still expected in at sub 70%.
• US May preliminary University of Michigan Confidence – sentiment has likely improved somewhat, but is it sustainable or just a byproduct of the uptick in hope and equities and the downtick in bank bailout news?