Major Market Movers: Second Stop... Durables

The data flow from the U.S. economy is printing the picture for the 2nd quarter, 'supposedly' the last before the economy picks up pace in the latter half of the year, yet no strong indicative signs are seen! The clue for the day is durables let's see if March's trend prevailed.

Expectations are that durable goods orders in April slipped 1.5% deepening the fall of 0.3% in March which is highly anticipated as the surge in energy prices especially gasoline are highly correlated to transportations and auto sales which are the volatile components in this category, so for that the justification is already anticipated.

Yet, for the orders excluding transportations the volatile component that we have just mentioned, sales are projected to have dropped 0.5% after the recorded unexpected rise of 1.5% in March. Now durables are a very indicative sign to the economic sentiment and performance and I am not indicating here their weight in the growth component.

The theory that correlates confidence and spending is the most applicable on durable goods sales, for they are the long lived assets and are usually pricy and it takes confidence from buyers to be able to commit to just products and feel comfortable that their FINANCES ALLOW IT!

Confidence as the Conference Board showed yesterday has slipped yet to a new 16 year low, energy prices remains highly elevated in April especially gasoline, and Americans struggled to keep up with their living standards as is so the fall in durable goods today will be a very important clue that still consumers are not lured into new shopping sprees and creates more doubt regarding the effects to be for the fiscal stimulus.

Today's Key Points

• The US stock market recovers on sharply lower crude oil prices but sentiment on Asian stock markets is slightly negative. Bond yields are largely unchanged.
• Focus today will be on the release of German May consumer prices and durable goods orders in the US later this afternoon.
• In line with consensus we expect Norges Bank to keep its leading interest rate unchanged at 5.5% and maintain a hawkish tone.

Markets Overnight

The US stock market yesterday evening recovered on the back of a sharp drop in crude oil prices and broad weakness within commodity prices. S&P 500 and Nasdaq yesterday closed up 0.7% and 1.5% respectively. However, the Asian stock markets have been slightly negative this morning with Nikkei and Hang Seng down - 1.3% and -0.3% with weakness mainly in energy and mining stocks.

Bond yields are largely unchanged since market close in Europe yesterday with 2Y and 10Y US bond yields trading largely unchanged at 2.49% and 3.91% respectively.

The crude oil / USD correlation was temporarily re-established yesterday with USD strengthening on the back of lower crude oil prices. EUR/USD this morning is trading at 1.5696. JPY has weakened slightly and USD/JPY and EUR/JPY are trading at 104.02 and 163.26 respectively. Despite some softness in commodity prices there has been no major impact on commodity currencies. EUR/NOK is trading largely unchanged at 7.8682. No major movement in SEK either. EUR/SEK is trading at 9.3033 this morning.

As mentioned above crude oil prices yesterday tumbled from USD 133 to just about USD 128. Crude oil prices have recovered slightly overnight and the July NYMEX crude oil future this morning is trading just below USD 128.

Emerging Markets

In Poland we look forward to the rate decision. We expect unchanged key rate at 5.75 %. We still like PLN very much long term, because Poland is very ambitious about joining the euro as soon as possible (likely in 2012). However short term we could see some profittaking and the central bank could make some dovish comments, which would lead to some pressure on PLN. We consider selling PLN, but stay neutral.

Yesterday South African Q1 GDP-data was published. GDP growth slowed to 4.0 % y/y from 4.6 % i Q4 2007. The figure was slightly below consensus (4.1 %). Despite the weak GDP data, we believe that the central bank will hike by further 50 basis points on 12 June, because inflation is still very high. Today inflation for April is published and the market expect another double digit number (10 % y/y), which will support our view about a hike in June. Despite a high carry (1 year interest rates is about 12 %) we do not like ZAR right now.

Growth is declining, inflation is still very high and on the top of that we have seen difficulties in the energy sector. And the latest news about attacks on emigrants from other African countries (56 dead) is of course first of all a human tragedy, and if it is not stopped it will stop investments in ZAR long term. We consider selling ZAR, but stay neutral. Looking at EM in general: After positive returns in April returns have been about zero in May. Looking forward much is depending on the global sentiment. The financial crisis is not in focus any more. Instead focus has turned towards economic data from the US.

The latest economic data from the USA has been better than expected. There is a lot of important USdata in the next couple of weeks (the highlight is obviously the job report on Friday 6th of June). The data could support the markets and start a new period with positive sentiment on EM.

FX & Money Markets Daily: Today We Speak Norwegian…

Majors & Scandies

Well perhaps not… However, our focus will definitely be on Norway today as the central bank is announcing the future deposit rates and as the Governor of the central bank, Svein Gjedrem, speaks about monetary policy rates. Broadly consistent with market expectations, our house view calls for unchanged rates in Norway at today's announcement. The next monetary policy report is due June 25 and Norges Bank may be reluctant to change policy until the report is released. Inflation is on the rise, inflation expectations are high, and the labour market is tight - all conditions that speaks on behalf of a hike at today's announcement.

However, the housing market has weakened, the growth in Norway and globally has decreased, and the high money market rates are doing a bit of the job for Norges Bank in keeping inflation at an acceptable level. Overall, this leads our economists to expect an unchanged rate today. However, the central bank could very well be a bit hawkish in their press release due to the inflation issues. We do, however, prefer not to have any position over today's rate announcement.

CPIs from the German 'Bundesländer' (federal states) are due during the day and the harmonized index is also due 'at some point'. Yesterday US New Home Sales was a bit better than expected (526k vs. 520k), but last months figure was revised downward (526k vs. 509k). In addition, US Consumer Confidence fell in May. Overall, money market rates increased slightly in both the Eurozone, the US, and in the UK.

Currencies: EUR/USD Test 1.56 Rejected

On Monday, EUR/USD trading again showed an erratic trading pattern as a clear trading theme is lacking. In the morning there was some follow-through dollar selling, extending the move at the end of last week that followed poor US consumer confidence. EUR/USD temporary broke above the range top in the 1.56 area, but the gains could not be sustained and the EUR/USD fell already back in the range at the start of the European session. What can't go up, must come down and later in the session the slightly better than expected US leading indicators (usually no market mover) were a good excuse to test the downside and EUR/USD even briefly dropped below the 1.55 mark to close the day at 1.5510 (compared to 1.5578 on Friday).

Today, the calendar contains the US PPI and the ZEW survey on economic sentiment in Germany. Usually these data are not the most important ones for currency trading, but the situation might be different today. Markets will take a close look at this week's European data (ZEW today, IFO tomorrow and PMI's on Friday) to make up their mind on the resilience of the European economy. In theory, the US PPI should be less important for markets as the CPI for the month of April is already available. However, recently less important data were quite often a trigger to hunt intra- day stop-loss levels and with no clear theme for trading available, this pattern might be repeated.

Two weeks ago, EUR/USD tested the downside of the established trading range, but this attack was rejected after the ECB press conference and EUR/USD since trades again above the previous range bottom (1.5340). So, at least for now the consolidation hypothesis can be maintained. Since then US and European eco data and events failed the give the currency markets a clear trading theme. We expect this more or less erratic trading to continue short-term. The euro has lost some of its shine recently, but US data apparently are not strong enough for the dollar to stage a more powerful rebound. We hold on to our view that there is no dominant market theme to guide trading in this pair and we expect more sideways, probably even erratic trading. In a day to day perspective, the focus now shifts to the European business confidence surveys. We tend to put the risk to the downside for the European economic data. If this comes true (and after yesterday's rejected test of the 1.56 area) such an outcome might push EUR/USD lower in the established sideways range. So, in a daily perspective we hold on to a sell-on-up-ticks approach.

The Sunrise Headlines

• US equities ended narrowly mixed on Monday, as earlier gains evaporated later in the session after Sandisk said record energy prices hurt sales, pushing tech stocks down.
• Asian equities fall overnight after a six day winning streak.
• Reserve Bank of Australia considered raising rates earlier this month, according to Minutes, sending the Australian dollar to 24 year high (versus US dollar).
• BOJ keeps rates unchanged, as uncertainties about global growth and energy thrive
• US Senate agrees on housing bill and looks now for compromise with House bill.
• Crude (127.26 $) remains well supported and close to highs on supply fears and OPEC's reluctance to raise output at its next meeting.
• IMF still sees serious risks to global financial stability
• German ZEW indicator and US PPI highlights for trading today

Sunrise Market Commentary

• US Treasuries eke out modest gains in lacklustre session
  Equities and technicals were the drivers in yesterday’s thinly traded session that left Treasuries with some, albeit technically insignificant, gains. Today, the calendar remains fairly light which might result in more range trading.
• European bonds lower ahead of sentiments data
  The recent sell-off on the European bond market has brought bond prices close to important support levels, which if sustained broken may result in another down-leg. In 2-year yields, the 4% level should remain difficult to break above.
• EUR/USD test of 1.56 range top rejected
  The dollar started the week on a poor footing, but managed to recoup the losses later in the session in technically inspired trading. Today (and later this week) the European data should set the tone for trading. Poor data might cause the euro cross rates to drift lower in the established ranges.

Danske Daily - Markets Overnight

After a strong opening the US stock market lost steam in late trading and closed mixed with S&P 500 slightly up 0.1% and Nasdaq down 0.5%. Strength was mainly within energy companies on the back of new highs for crude oil prices while weakness was mainly within technology and financials. Because of the negative close on the US stock market most Asian stock markets are in negative territory this morning with Nikkei and Hang Seng down 0.8% and 1.9% respectively.

With the turnaround on stock markets, bond yields are lower since the close of European markets yesterday. 2Y and 10Y US bond yields are down 6bp and 4bp to 2.37% and 3.82% respectively.

In the FX market the main move has been some strengthening of funding currencies JPY and CHF on the back of weaker stock markets. USD/JPY and EUR/JPY this morning are trading at 104.18 and 161.59 respectively. EUR/USD is trading largely unchanged since the European close yesterday at 1.5512. No major moves in Scandinavian currencies overnight. This morning EUR/NOK is trading at 7.8066 and EUR/SEK is trading at 9.2853.

Crude oil prices continue to set new record highs as both Saudi Arabia and OPEC indicate that they currently see no need to increase crude oil production further. This morning the NYMEX June crude oil future is trading slightly higher at USD 127.3.

This morning Bank of Japan as expected left its leading interest rate unchanged at 0.5% in a unanimous decision. There has been no market reaction on the decision. We are waiting for board governor Shirakawa's press briefing later today.

Major Market Movers: Producer Fire!

As we stroll delicately into the US fundamentals this week, we are to stumble upon prices that producers are burdening with the depreciating dollar and the surge seen in commodity prices, as all combined have offset the perception for the Feds to withhold their easing policy…

Producer Prices Index probably rose 0.4% from March after a 1.1% surge recorded while on the year expected at 6.6% also easing from the level seen the previous month at 6.9%, nevertheless on the core level excluding those volatile factors it's expected to remain unchanged from the previous months at 0.2% while rising on the year to 2.9% after 2.7%.

Profit margins for producers are slimming more and more as they aim to achieve the utmost balance among the diversity of downside pressures facing their businesses. Whether it was from sluggish demand, or from tight credit markets, or from the ghosts of slowing global growth, all combined are pressuring producers to expand their horizons and already are we witnessing the shaping of a new agricultural commodity driven boom!!!

Basically the dollar remains fragile and battered, though many want to believe that the worst have passed for the US economy and that the dollar is now among its longing days. Just seemingly too early to break into the Chicken Dance! The dollar lost grounds as jitters once more are surrounding the credit market conditions, after MR. Trichet commented that worst of the credit freeze is not over yet which was also in harmony with what the IMF said that the US housing slump that yet is to find a bottom may cripple further growth and deteriorate conditions and extend the financial turmoil.

The extent of damage upon economies is yet to be exactly seen though we are seeing the frontlines reserved for the UK so far which was once thought to be Japan the first to go, though still the new governor of the BoJ is holding upon Fukui's legacy as he continued to hold rates steady as they announced today withstanding the hawkish stance as the decade long of deflation is finally changed imposed by the pipeline pressures across the globe.

The scenario is as follows, as long as woes are back to surround the US economies capabilities of rising soon from their dooms and that the housing market and the credit crisis is to continue, then basic methodologies are to be locked in once more, which are if inflation on the producer side which is less of an impact like the seen CPI which was surprisingly SUBDUED then markets will actually resume to the conception that the Feds actually have room to take rates down below the current 2.0% to stimulate growth as they said they will act as needed to promote economic growth as long as inflation is not a threat to them, which with spare capacity and jittery businesses that are scared to scrap off sluggish demand from customers then now its early to worry about price stability…

Dollar fell after Friday data on lower chances for a rate hike

The Dollar fell on Friday as US consumer confidence raised concerns about an economic contraction in the second quarter and trimmed the chances the Federal Reserve will raise interest rates this year.

The unexpectedly sharp drop in a consumer sentiment index to a 28-year low in May eclipsed a report showing a rebound in building permits and construction starts for new US homes, which briefly triggered some Dollar buying.

EurUsd raced to a Friday 1.5601 peak. It was last trading at 1.5577, up 0.76%. UsdJpy tumbled to a session 103.53 low and was last quoted at 104.05 down 0.65%. UsdChf was 0.84% lower at 1.0476. GbpUsd rose 0.51% at 1.9576.

Speculation that April's non-farm payrolls report would be revised to show deeper job losses than the initially reported 20k contraction probably added to the Dollar's slide, but analysts were skeptical. Data on Friday showed combined figures from the country's various states indicated job losses of 151,000 in April.

The dollar has rallied in recent weeks on views that the Fed's cycle of interest rate cuts was nearing an end. A pause by the US central bank after slashing its fed funds rates target by 325bp to 2% since mid-September would support the Dollar, which has lost its yield appeal to the Euro. Euro-zone interest rates have remained at 4% since June, but analysts recall slower economic growth could force the ECB to move towards an easing path later this year. US interest rate futures were pricing an 88% chance that the central bank would leave its benchmark rate steady in June.

The University of Michigan Survey said its preliminary index of confidence fell more sharply than economists had expected in May to its lowest since June 1980. Housing starts in April ran at a 1032k, up from a revised 954k unit rate in March, while permits gained 4.9% to 978k a year from a revised 932k in March

Dollar On A Downturn On Worsening Housing Data

The greenback traded near the lowest levels in more than two weeks against the euro on speculation an industry report on Friday will signal the worst housing slump in a quarter century thus weighing on the U.S. economy. The currency was also close to a one-week low versus the pound before a report May 23 that economists say will show existing home sales fell for a second month. 'Negative data on the housing market is likely to pull the dollar lower,' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. 'Sentiment will remain weak as there are ample reasons to believe the U.S. economy will slow.'

The dollar is currently trading at $1.5578 per euro at 7:35 am, GMT from $1.5577 late in New York on May the 16th, when it fell to $1.5601, the lowest since May 1. Against the pound, the dollar is currently trading at $1.9558 from $1.9571 at the end of last week when it reached a one-week low of $1.9598. The U.S. currency will currently buy 104.14 yen from 104.04. The euro is at 162.24 yen from 162.27. The dollar may fall to $1.5650 per euro and 103 yen this week, Soma said.

Asking prices for property in England and Wales hit a record high in May and house price inflation accelerated as a survey from property website Rightmove showed, despite expectations for a much weaker housing market this year. Economists are predicting falls in house prices of about 10 percent this year and Bank of England policymaker David Blanchflower has warned prices could dive by about one-third unless aggressive, immediate action is taken. At the same time, interest rates are unlikely to come down fast given worries over inflation after a decade in which house prices nearly trebled. As growth slows and inflation rises, the pound has suffered from expectations of economic misery ahead, falling to three-month lows versus the dollar last week and hovering near record lows against the euro.

Industrial Output Stalls Out in April

Industrial production fell a weaker-than-expected 0.7 percent in April. Manufacturing was pressured lower by lower motor vehicle assemblies. Utilities registered a small gain while mining output fell. With expectations of reduced consumer & business capital spending, industrial production should continue to trend lower in coming months.

Manufacturing Output Continues to Fall

* Manufacturing output fell 0.8 percent. Half of this decline was attributable to the 8.2 percent drop in motor vehicle and parts. Anticipated slower vehicle production is likely to pressure manufacturing output lower in the coming months.
* Consumer durable goods output continues to show significant weakness, down 9.5 percent year-over year.

USD Shrugs off Soft Data

The dollar was initially softer against the euro and yen in the Thursday session following soft US economic reports earlier in the morning. Weekly jobless claims increased to 371k, versus 365k in the previous week. The NY Fed manufacturing survey deteriorated to a reading of minus 3.23 in May, versus 0.63 in April. Meanwhile, industrial output in April declined by more than expected, posting a 0.7% decline versus a 0.3% increase while capacity utilization fell to 79.7% from 80.5% a month earlier. The May Philadelphia Fed business index improved to -15.6, better than estimates for an improvement to -19.0 from -24.9 from April.

The economic calendar for Friday consists of April building permits, housing starts, and the May University of Michigan sentiment survey.

Euro Initially Higher on Growth Data

The euro climbed above the 1.55-level overnight, rising to 1.5546 against the greenback. The catalyst for the move higher was better than expected economic reports from the Eurozone. Germany¡¯s economy expanded at its strongest pace in 12-years, with Q1 GDP sharply exceeding consensus estimates at 1.5%, up from 0.3% in the previous quarter while expanding at 1.8% versus 1.6% a year earlier. Inflationary pressures in Germany also eased. The final reading for April CPI declined by 0.2% versus a 0.5% increase in March and down to 2.6% from 3.1% in the previous year. The April HICP declined by 0.3% from 0.5% a month earlier and lower to 2.6% versus 3.3% a year earlier.

Data also revealed the Eurozone economy expanded by 0.7% in Q1, beating calls for a slight increase to 0.5% from 0.4% in the prior quarter, while the annualized growth rate held steady at 2.2%, defying calls for a decline to 1.9%. The reports reinforce sentiment that the ECB will likely keep interest rates unchanged for the remainder of the year while maintaining its tightening bias.

EURUSD relinquished its earlier gains by the New York afternoon, pulling off to 1.5420. Support begins at 1.54, followed by 1.5360 and 1.5330. Additional floors will emerge at 1.53, backed by 1.5270 and 1.5240. On the upside, resistance starts at 1.5450, followed by 1.55 and 1.5540. Subsequent ceilings are seen at 1.5570 and 1.56.

Dollar DOWN!

The US session is fundamental free as market participants are locking on their expectations to the scenario the US economy and the European counterparts are to address this week, especially that they take the stand on rates.

Fannie Mea announced plans to raise new capital, and as well regulators required capital is to be lowered from 20% to 15% after losses on the back of the ailing housing sector. Seemingly the news were not as upbeat as they are to the dollar as the economy still has to prove that they are to make it thought the recession fears.

The euro continued to gain against the dollar recording as high as 1.5570s inclining above the strong level at 1.5558 yet the euro has to at least consolidate above that level, the low was left intact at early levels of 1.5452.

The pound also shed its early losses on the back of a weak dollar despite the poor performance the services sector posted which dragged the pound to as low as 1.9635 where is managed to find good demand to as high as the currently seen levels at 19770s and the pound must continue trading above 1.9750s at least to confirm the bullish headings.

Gains against the dollar are strongly seen for the yen as it dragged the pair thought a bearish wave to as low as 104.10s which needs to be breached to offset the ranges the pair was trading within especially after the 105.70s was strong for the pair to breach higher. The yen is also gaining against the euro and the pound as the pairs recorded the lows at 161.98 and 205.53 respectively.

USD/JPY At Important Resistance

The dollar fell against major currencies as crude oil prices rose above $122 a barrel Tuesday. Stronger-thanexpected eurozone producer price inflation supported the euro, making any easing by the European Central Bank more distant. The dollar block currencies advanced on rising commodity prices. The low-yielding yen and Swiss franc rose on increased risk aversion but pared most of their gains as US stocks reversed early losses.

The USD/JPY fell the most in more than three weeks after Fannie Mae reported a larger-than-expected $2.19 billion loss. However, the pair pared losses after US stocks gained in late trading. The pair is overbought, close to crucial resistance, and strongly correlated with the US equity market. The stock market looks likely to continue its rally, making the USD/JPY likely to penetrate the resistance from its long-term downtrend. There are major resistances in the 105.50 and 107.50 areas

Greenback at Important Resistance

The dollar rose against most major currencies on Friday after April US non-farm payrolls fell less than expected and the unemployment rate unexpectedly declined. Sterling fell following new signs of weakness in the UK housing market. The yen declined as risk appetite increased demand for carry trades. Today's US equity gains supported the dollar but pressured the yen. The dollar block currencies gained modestly on strength in the commodity market.

The Australian dollar was supported by higher-than-expected Australian retail sales. After two weeks of gains, the dollar is now at important resistance against most key currencies. It is possible the dollar's rally will continue; however, the market may need to consolidate gains. The Reserve Bank of Australia is expected to keep its cash target rate unchanged at 7.25% next week.

The EUR/USD made a new 5-week low on better-than-expected US data and weak European data; however, unable to penetrate the important 1.54-area support. The RSI indicator shows the pair is getting oversold likely requiring more time before breaking support. A break of the 1.54 support would be an important development, possibly setting a test of the support from the uptrend at 1.49.

USA: ISM Goes Sideways

The ISM manufacturing index was unchanged in April at 48.6. Although contracting moderately, the recent months of data suggest that the manufacturing sector continues to hold up quite well compared to other parts of the economy. Again the survey sent a message of continued significant price pressures in the production pipeline.

While the composite was unchanged, some reshuffling took place among the sub indexes. Generally a much weaker 'employment' index (45.4 vs. 49.2) was counterbalanced by a higher 'inventory' index (48.1 vs 44.9), a marginally higher 'production' index (49.1 vs. 48.7), and a marginally higher 'supplier delivery ' index (54.0 vs. 53.6). The 'new orders' index remained unchanged at 46.5 - the lowest level since 2001.

Overall, the forward-looking parts of the report had something for both the optimists and the pessimists. On the pessimist's side, the differential between 'new orders' and 'inventories' deteriorated (-1.6 vs 1.6) as the inventory index rose. This differential is now consistent with a production index a little above 45. On the optimist 's side, the customers' inventory situation showed a favourable development, as the 'customers' inventory ' index declined to 45.0 (previously: 51). Hence, when applying the differential between 'new orders' and 'customers' inventories' (1.5 vs -4.5), a more optimistic signal consistent with a production index at around 50 arises.

Elsewhere the orders backlog index jumped back into expansive territory (51.5 vs. 47.5) and the exports index remains robust (57.5 vs. 56.5) - both of which are positive developments.

Further, the survey continues to signal increasing headline and core price pressures, with both the 'price' index (84.5 vs. 83.5) and the 'supplier delivery' index (54.0 vs. 53.6) drifting higher. Usually the supplier delivery index is a reliable indication of core price pressures, but it is not very common for the index to drift higher in a period with contraction in the manufacturing sector. We are mostly inclined to attribute this o the significant pressures on global raw materials markets from robust growth elsewhere on the globe and not as a sign of domestic strength.