FMX | Connect – www.fmxconnect.com - (Reported 9/01/2010)
Excerpt from MARKET MUSINGS & DATA DECIPHERING
MARKET COMMENT
Quite the session yesterday with lots of bobbing and weaving, and in the final analysis, no recovery in the equity market and this followed a day when there was no follow-through from the ridiculously-dubbed “Bernanke rally” from last Friday. Treasuries retained their solid bid as deflationary pressures morph into reality and the latest on this score is what’s now happening in the steel market, which is a glut of supply forcing iron price prices down. After doubling last year, there looks to be a 10% reversal through to year-end.)
FOMC MINUTES REVIEW
As for the FOMC minutes from the July meeting, all we really learned was that there was less dissent on the Fed than was generally assumed, and if anything, there was general acceptance of the Fed trying to provide more experimental stimulus if the economy fell short of expectations — as it is destined to do since the central bank remains too hopeful over a more discernible growth pattern in 2011 after acknowledging that conditions have surprised policymakers to the downside in recent months. Take a look at the underlined comments — the ones that are bolded and underlined provide the reasons why it makes perfect sense to expect yields out the Treasury curve to remain on a downward trajectory over the intermediate term) The staff and the Committee continue to set themselves up for disappointment.
FRUGALITY AT ITS BEST
As we have asserted time and again, the scars from the trauma that hit the U.S. household balance sheet have not fully healed. The asset deflation and credit contraction have radically altered consumer spending behaviour — perhaps for a generation.
HOUSING AND JOBS
The FT runs with Construction Holds Key to Rebuilding Jobs Market. We wonder if the causation doesn’t run in the other direction – housing needs a better labour market. I mean, how is it possible, with 10 construction workers employed for every housing start versus the long-run average of three that we can rely on the construction industry to embark on a hiring spree?
IT’S NOT JAPAN ALL OVER AGAIN?
We hear (or used to hear anyway) how the U.S.A. is not Japan due to its flexibility and better demographics. Meanwhile, government policy (see Barro in Monday’s op-ed section of the WSJ) and the record number of people upside-down on their mortgage have seriously impaired the flexibility of the labour market. And, what is this about demographics? The birth rate has declined for two consecutive years in the U.S. and is at its lowest level in a century (the number of births fell 2.6% last year; the rate dropped to 13.5% from 14.3% in 2008), Visa applications are declining and the labour force has contracted 0.5% over the past year.
U.S. CONSUMERS DRAWDOWN SAVINGS RATE TO SPEND; DISINFLATION TREND STILL INTACT
U.S. personal consumption rose a slightly better-than-expected 0.4% MoM pace in July, and in real terms, it was up 0.2% MoM. Spending on durables rose 1.0% in July, the best reading in three months, spending on non-durables up 0.3% MoM, the best result in four months, and spending on services rose 0.4%.
Since spending outpaced income, consumers had to once again dip into their personal savings to pay for their purchases. As a result, the savings rate fell to 5.9% in July from 6.2% in June. However, with the U.S. household still in the deleveraging process and given the current state of the labour market, it is highly unlikely that the consumer will continue to drawdown their savings further.
CANADA: NO LONGER GOLDEN
It’s official, Canada’s spectacular economic performance that spanned two quarters has ended. Second quarter GDP moderated to just 2.0% QoQ SAAR (only four tenths higher than U.S. Q2 GDP growth!), missing our and the consensus estimate for a 2.5% increase. It turns out that the BoC’s downgraded 3.0% estimate was too lofty as well (although, the Bank is probably thinking thank goodness they took their original 3.8% forecast from April down.) While still impressive, Q1 GDP was taken down a few notches to 5.8% from 6.1%, adding to the overall negative tone of the release.
MORE EVIDENCE THAT THE CAD IS OVERVALUED
Canada’s current account deficit widened to $44.1 billion annualized in the second quarter. We think this is significant, especially as it relates to the Canadian dollar.
While we are long-term CAD bulls, we think this is yet more evidence that the CAD is overvalued from a short-term perspective. Our in-house model (which relies on commodity prices and short-term Canada/U.S. interest rate spreads) pegs fair value at around 91/92 cents. Given the current account deficit and our model, we are inclined to believe that the Canadian dollar is about 2.5-5.0% overvalued or about 2-4 cents.
David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
Source: Market Musings & Data Deciphering
http://www.fmxconnect.com/
-----
About FMX: FMX Connect is an information, data, and analytics portal for Commodities. The portal provides an all-in-one package including essential market data, independent third party research, industry news, and commodity trading tools. FMX Connect provides efficient, effective, and thorough data that bridges all aspects of commodities onto one screen. The Result; A user friendly application for hedge fund traders, OTC brokers, individual investors, and industry participants
-----
Note: The information presented, while from sources generally believed to be reliable, is not guaranteed and may not be complete. FMX | Connect makes no representations or warranties regarding the correctness of any opinions or information. Past results are not necessarily indicative of future results. Nothing in this report should be construed as a representation to buy or sell shares, futures or options, which contain considerable risks. For internal client distribution only. Any reproduction, re-transmission, or distribution of this report without permission is prohibited. Media correspondents or reporters may not quote any one page or section in its entirety and must attribute all quotes, ideas or concepts herein. Copyright FMX | Connect, ©2009-2010. All rights reserved.