Trading has been remarkably robust this week, but not all that surprising given that things kicked off with GM filing for Chapter 11 in largest industrial bankruptcy in US history. On Tuesday morning, the DJIA briefly returned to positive territory for the year. Although it immediately met some resistance at that key level and was lower mid week, the average finished the week within 20 points of unchanged on the year. Optimists hunting for an end to the recession needed look no further than the housing & employment data. On Tuesday the National Association of Realtor's April pending home sales data blew out expectations (6.7% v 0.5%e), making its biggest upwards move since late 2001. The May ADP employment change registered a slightly bigger decline than expected, although the numbers are better than the 600K+ declines seen in the first three months of the year. Friday's May nonfarm payrolls data came in much lower than expected (-345K V -520Ke) and saw the first upward revision of the back month data in nine months. There were rumors that the data had been significantly miscalculated, but Labor Secretary Solis immediately came out with a statement denying such speculation. The May annualized unemployment rate hit 9.4%, putting it above the psychologically-important 9% level. However, officials remain wary of the optimists, and on Friday the NBER said it was "way too early" to call the end of recession in the US, despite the signs of stabilization. US rates broke out to new multi-month highs yet again. Friday saw the 2-year note yield surge more than 30 basis points to finish a full percentage point above the current fed funds rate. For the week, the S&P 500 rose 2.3%, the DJIA gained 3.1% and the Nasdaq Composite climbed 4.2%.
Dollar weakness and tentative signs of an economic recovery helped continue the push higher in energy futures. Bigger than expected builds in US crude oil and natural gas inventories this week put some downward pressure on the energy complex mid-week, but crude could not break below the $65/bbl and found more buyers on Thursday and Friday. Speculation that the dollar weakness would continue helped crude futures finish the week up about 2% at $68 and natural gas finished flat. Copper also ended the week up about 2.5%, despite the Baltic Dry Bulk Index declining for the first time in 24 sessions on Thursday followed by another decline on Friday, dropping about 10% in two days. Precious metals fared worse this week, with silver down over 2% and gold down 2.5%, as traders took profits on Friday's rebound in the Greenback.
On Monday the Fed outlined its requirements for banks wanting to repay TARP funds. Chief among them is that banks have to raise funds for repayment by selling bonds without FDIC guarantees, although the Fed said it will also consider whether subsidiaries can meet funding needs and counterparty obligations. The new demands are said to partly reflect the rally in bank shares, since it has made it easier for financial companies to raise capital. There have been press reports this week claiming that the Fed told JP Morgan, American Express and Morgan Stanley - the companies are at the top of the short list of firms that are expected to be cleared for repayment - to undertake capital raises this week. All three raised substantial amounts of cash via share and debt offerings; note that the moves came less than a month after the government stress tests indicated the firms had enough funding to deal with a deeper economic slump. Official application approvals for TARP redemptions are expected as early as next week. Herb Allison, who has been nominated to oversee the TARP program, told Congress in his confirmation testimony that some repayments would likely be seen next week.
Questions have been raised this week about the government's other big financial bailout instrument, the Public Private Investment Program (PPIP). On Monday Fed Governor Plosser told the FT that the Fed should not be involved in financing toxic assets that date from the bubble era, calling the move a "bridge too far." Various commentators insisted that the PPIP program is unworkable and unlikely to get off the ground, and indeed the FDIC said on Wednesday that it would not proceed with test sales of toxic assets under the program. Some interpreted New York Fed President Dudley's comments that the TALF may or may not be opened to RMBS later this summer as a sign that other key government players were having second thoughts as well (TALF funding is supposed to play a role in funding purchases under the PPIP). The Treasury's Miller countered some of the skepticism by stating that the Treasury is committed to the PPIP toxic asset buying program and would announce the names of PPIP fund managers in one to two weeks.
Deutsche Bank and Moody's both made bearish comments on the big banks. In a note, DB insisted that banks aren't done raising capital, while Moody's sees many banks as continuing to be unprofitable in 2009 and likely needing to continue making capital raises. Regional banks have kept up the capital raising efforts, with Zions Bancorp and SunTrust launching fresh debt and equity offerings, while Fifth Third and KeyCorp sold $1B worth of common stock apiece. Morgan Stanley and Citigroup have closed early on the launch of their joint venture, which combines Morgan Stanley's wealth management unit with Citi's Smith Barney division in a new unit called Morgan Stanley Smith Barney. Morgan holds a 51% stake in the venture, which is expected to generate about $14B in net revenue a year.
May same-store sales were not pretty, with many retailers reporting steeper declines than expected as consumers continue to hold back on spending. The usual suspects did manage to sustain positive gains, with discount chains FRED and ROST offering low single-digit gains, while teen-oriented mall chain ARO notably outperformed estimates by a wide margin. Discount apparel retailer TJX also managed to outperform expectations. Warehouse retailer COST slipped back into negative comps after April's unchanged reading, while BJ continued its slide into negative single-digit SSS. TGT also slipped back into negative single digits, after April's strong positive comp. All the major apparel and luxury retailers reported yet another month of abysmal negative sales. Note that WMT has discontinued monthly same-store sales reports.
In tech news, Intel said it would acquire Wind River Systems for $884M. Commentators noted the transaction is a game changer with broad implications for the tech sector; the company makes software for mobile phones and in-car entertainment systems, a growth area Intel covets given the stagnation in PC and server markets. Chip giant Applied Materials CEO told the Commercial Times that there are no signs of a stable recovery in demand in the global chip market. Press reports later in the week discussed Apple's plans to launch a cheaper version of the iPhone at its developers conference on June 8th. In addition, the WSJ wrote that Steve Jobs is likely to return to work this month. Rival Palm got a strong WSJ review of its new Pre smartphone; the Journal's Walt Mossberg called the model the "strongest rival to the iPhone to date."
Despite some give back early on, Treasury prices remained on the defensive throughout the week, keeping upward pressure on US rates. The debate continued to rage as to whether this is driven by a healthy recalibration ahead of economic recovery or rather concerns over the profligacy of the US government and attempts to monetize its way out of liabilities. The latter notion picked up some steam on Tuesday when the 10-year TIPS breakeven rate rose above 200 basis points for the first time since last September, although people were quick to point out it still remains below its five-year average. Friday's May US non-farm payrolls report sent short term yields soaring: the two-year yield popped more than 30 basis points while selling at the long end of the curve was much less subdued. The benchmark spread narrowed a noticeable 20 basis points from all time highs of around 280 basis points preceding the data. Fed fund futures for the out months have taken a hit, with the December contract now fully pricing in a 25 basis point hike by the end of the year. Though the Fed's Lockhart indicated they could consider raising rates while maintaining expansionist quantitative easing measures, most believe any move on rates is a ways off. PIMCO's Bill Gross may have summed it up best saying unemployment likely will not peak until the end of the year and thus rates should remain on hold for some time.
Looking ahead to next week much attention will be given to the $64B in 3-, 10- and 30-year auctions on Thursday. Any signs investors, particularly foreign, are beginning to step back from US paper; could cause yields to spike to levels that will hamper an economic recovery. Early Friday a Chinese regulator noted they were actively considering purchasing up to $50B of IMF bonds, leaving investors wondering where the demand would come from. With very little in terms of tier-one US economic data expected next week, more focus will certainly surround Fed commentary. Recent comments have indicated the Fed is somewhat reluctant to increase the size of their Treasury purchases given that they view recent curve steepening a sign of improving economic outlook more than anything else. Regardless, tensions in the mortgage market are reverberating throughout the rest of the interest rate complex as investors look to unwind treasury-related hedges and adjust the convexity of their portfolios. Both Freddie Mac and the Mortgage Bankers Association reported that average rates on 30-year mortgages moved above 5% this week, while MBA mortgage applications and refi both declined.
In currencies, the week began with a crop of mildly positive PMI data out of China, India and Europe, whetting the appetite for risk. However, data that would sustain this optimism and confirm the reality of economic stabilization was scarce. Euro Zone unemployment hit 10-year highs at 9.2%, Q1 Euro Zone GDP hit another record low and China's Commerce Ministry said foreign trade was facing "unprecedented difficulties." There was a positive Australian GDP reading and the US payroll numbers were strong, but the confusion over the latter blunted its impact on FX. There was plenty of verbal intervention from G20 central bankers and other officials. On his trip to China, US Treasury Geithner dutifully reiterated his belief in a strong USD and sought to calm fears among his Chinese counterparts about their investments in US Treasuries. For its part the PBoC acknowledged that it saw its treasury holdings in terms of a partnership with the US. South African Reserve Bank Chief Mboweni said the current level in the rand could mitigate inflation but warned its strength was unwelcome for economic balance. The Russian Central Bank's Ignatiev said there has been excessive strengthening of the ruble.
The greenback maintained a soft tone and continued to hit multi-month lows against the European pairs thanks to growing concerns about central banks diversifying reserves away from the greenback. Russian President Medvedev again brought up the idea of replacing USD as reserve currency with a basket of currencies, an idea that first made the round ahead of the London G20 summit back late March. The comment was evidently preparing the way for the upcoming summit of BRIC nations (Brazil, Russia, India and China), which are gathering to discuss common issues. Dealers are keenly aware of comments from a Brazilian minister in late May, to the effect that BRIC nations would discuss the USD and might take actions to lessen dependence on the dollar (most likely by developing a currency basket). Chatter emerged from a China/Malaysia trade meeting that the countries are considering ending trade denominated in dollars. EUR/USD hit fresh 2009 highs at 1.4340, although dealer chatter that the Bank of International Settlements (BIS) was selling euros at 1.4330 area capped the week's gains.
As the week drew to a close, a flurry of rumors, data and central bank decisions made for highly volatile price action, led by the GBP-related pairs. Sterling was knocked around by rumors that Prime Minister Brown would resign due the growing expense account scandal, which was quickly squelched by the PM's office. Dealers also noted that a number of big banks executed lots of G10 currency trades at the same time, with sources attributing the volatility to rumors (later proved true) that Rio Tinto and Chinalco would walk away from a $19.5B investment deal, provoking the massive unwinding related hedges.
Central banks around the world kept key rates, already at record low levels, on hold. The Bank of England, the ECB, the Bank of Canada and the Reserve bank of Australia (RBA) all left rates unchanged; in each case, the pauses were entirely expected. Russia was the only major rate surprise, cutting its refi rate by 50bps to 11.50%. ECB Chief Jean-Claude Trichet delivered the usual comments about staff projections, reiterating that the current interest rate level of 1% was appropriate although not necessarily the lowest possible rate. Trichet also noted that prior rate cuts were still passing through to the economy. But with rates on the floor, markets were really waiting for details on the ECB's covered bond purchase program. Trichet said the ECB did not consider the cover bond program "quantitative easing" and reiterated that the maximum amount would remain at €60B, disappointing hopes for larger purchases.
In Asia, Australia remained at the forefront of the recovery story, not only on the macroeconomic but also on the corporate front. On Wednesday, first quarter GDP for the Aussie economy surprised the markets on the upside, registering a +0.4% against estimates of -0.1%, thus dodging the technical definition of a recession by avoiding a second consecutive quarter of contraction. Then on Friday, Rio Tinto dropped its unpopular $19.5B tie-up with Chinalco in favor of a joint venture with BHP, collecting $5.8B from the deal and also announcing a $15.1B rights issue. Rio shareholders had been vehemently opposed to the deal, voicing concerns that it represented a fire sale of valuable assets during a period of unprecedented market turmoil, not to mention the overall uneasiness over a loss-making arm of the company's biggest client (China) having access to the company's board and pricing agreements. The offering is the second largest of the year and signals a radical change in perception of demand in the commodities space as well as the overall risk investment appetite.
Trade The News Staff Trade The News, Inc.
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