Need To Know News

The dollar index fell to 80.841 today after bouncing off an all time low of 80.016 on Tuesday. Treasuries are flat in the face of continued credit and subprime concerns with no economic data on the day. The 30-yr is holding steady under 5% at 4.948%, the 10-yr at 4.78% offers a 48 BPS yield advantage over the 10-yr Euribor. The USD/EUR is trading lower by 53 pips at 1.3688.

The GBP is weaker across the board; trading down 243 pips vs. the EUR. Cable is marginally lower on the day after reversing its upward trend last week at 2.06. The Centre for Economic & Business Research in the UK is reporting that recent flooding in the South may add up to .5% to inflation. This would result in the highest pace of inflation in ten years, though the current forecast shows a decrease. Mortgage approvals for June were better than expected at 114k. These developments gives the BOE cause to hike rates, though its benchmark is expected to be unchanged at 5.75% when its meets Aug 2nd. December interest rate futures in the UK now show an implied rate of 6.15%, where last Monday rate futures indicated two full rate hikes before year’s end.

The EUR is higher on the day, gaining 129 pips vs. the GBP at 1.4638. French Minister for European Affairs Jean-Pierre Jouyet stated today that France was not calling the ECB’s independence into question; rather he wants the EU to respect the EU treaty and engage in dialogue with its member states. Jouyet desires a “solid” Euro that ensures monetary stability. France has been an opponent of Euro strength, believing it will hurt exports; though recent Eurozone data has proven otherwise.

Industrial production in Japan showed a 1.2% increase beating the 1% estimate. This data may indicate the end to a long slump in Japanese manufacturing; likely aided by an inexpensive yen. Growth coupled with deflationary pressure may leave the BOJ in no position to hike its benchmark when it meets at the end of August. Traders are uncertain at the moment as to how the BOJ will act, factoring under a 50% chance of a rate hike. The BOJ policy will likely be dependent on incoming data. The USD/JPY is marginally higher on the day at 118.69

US sells $20 billion in 3-month bills @ high 4.825%, awarding 8.89% @ high; bid-to-cover: 2.30

US sells $17 billion in 6-month bills @ high 4.800, awarding 91.34% @ high; bid-to-cover: 2.03

Choppy trading in equities early as traders try to digest last week’s plunge. With no economic releases today uncertainty ruled the markets sending treasuries higher, then lower, and now flat on the day. European equities were all trading lower, before taking a cue from an encouraging American open and turning positive. The FTSE 100 is up 14 points to 6229; the DAX is up 15 points to 7476.

Subprime and credit jitters still remain, however, do not appear to have much of an affect on markets today. The dollar was mixed overnight, and is now lower vs. most of the majors dipping 50 pips vs. the EUR. Dow futures picked up some strength approaching lunch up 38 points to 13322.
Energies are lower across the board except for natural gas, crude breached $77/barrel and is now down 74 cents to 76.26. Natural gas is higher by almost 4.25% as August futures expire today.

Metals are higher across the board expect for Platinum. Gold is up $2.10 to $674.30, silver is up 14 cents to $12.85, copper is up 1.75 cents to $3.65.
Last week’s volatility increased the likelihood of a FED rate cut built into FED funds. The Dec contract shows an implied rate of 5.05%, factoring in an 80% probability of a rate cut before year’s end.

Freddie Mac sells $1.5 bln in 3-month bills @ 5.116% stop-out-rate

Freddie Mac sells $1.0 bln in 6-month bills @ 5.017% stop-out-rate

The Japanese LDP/New Komeito lost its majority in the Upper House, taking 46 seats; they needed 64 to keep their majority. Abe vowed to stay in power and said he would not hold Lower House elections. Markets pretty much ignored this, as the yen strengthened, and the NIKKEI was up very slightly. Still, expectations are that reform will slow.

After briefly stabilizing at the Asian open the dollar resumed its slide this morning, declining broadly against the majors. More signs of unwinding carry trades were apparent, with the yen up sharply and high-yielders generally softer. Sterling was flat to slightly higher against the dollar, however, slipping against the firming euro.

The Peoples Bank of China again raised reserve requirements by 50 basis points, to 12%, effective August 15th, freezing about 180 billion yuan in the banking system. This move was expected. This may be the last of the liquidity mopping-up measures from higher reserve requirements as they are at levels beyond which there could be some distress in the banking system — this is the 6th hike in reserve requirements this year, along with three rate hikes.

Equities were slightly higher in Asia this morning, but have weakened in Europe in the course of the morning as credit concerns resurfaced. Rising credit costs are taking the steam out of deal making, eroding one of the forces boosting equity prices in major markets. The DAX was down about 0.5% at 8:00am est.

Risk aversion continues, boosting bond prices in Europe, with 10-year Bunds down 3bp to 4.287% and 2-year Schatz off 3bp as well, at 4.231%. The European iTraxx Crossover index, a measure of credit spreads, rose 55bp this morning. Bond prices slipped slightly in Japan, in part on a stabilizing NIKKEI.

Oil prices eased, but remain high, as concern about supply and the higher US growth rate announced last week raised expectations of a continued supply shortfall. The US light crude contract fell 41 cents, to $76.61/bbl, with Brent down 36 cents, to $75.90/bbl.

On the data front, Japanese industrial production rose 1.2% in June, after a 0.3% decline in May. After falling at a 4.8% annual rate in Q1 production stabilized in Q2, rising at a 0.4% annual rate as the inventory correction eased. The outlook is for another rise in July, projected at +1.8%.

The French quarterly manufacturing survey was stronger than expected, with the outlook for both foreign and domestic demand firmer in July than April. The Bloomberg Eurozone retail PMI softened in July, falling to 46.2 from 48.2.

UK net lending on dwellings rose slightly in June, remaining at a relatively high level, another red flag for the Bank of England hawks.

Taking a look at the Asian markets, the Nikkei was up 5.5 points to 17289 last night after hitting a 4-month low earlier in the trading session. Exporters including Canon continue to be hit by the strengthening yen, but earnings for several companies came in better than expected. The Hang Seng was up 169.5 points to 22739; the rise was lead by property stocks ahead of what is expected to be strong demand from real estate developers at the government land auction tomorrow.

In Europe, Bloomberg came out with Eurozone Retail PMI for July which came in at 46.2 vs. 48.2 prior. Bloomberg’s retail PMI for July showed a drop from prior reading in Italy, Germany, and France. French President Sarkozy an opponent of the Euro’s recent appreciation feels a strong Euro will hurt exports; though Eurozone shipments have showed a net increase of just under 10% in the last five months. The EUR is currently up 161 pips vs. the GBP and up 34 pips on the dollar. European equities are currently down across the board.

Mortgage approvals for June came in marginally higher than expected in the UK. M4 lending for June came in higher than the previous period, and the GBP is weaker across the board. December interest rate futures in the UK have recently reduced their bets in favor of multiple BOE rate hikes before years end. The BOE will announce its rate policy on Thursday and is expected to hold its benchmark steady at 5.75%. The FSTE 100 is down 15 points to 6199.

Treasuries are higher across the board, as the 30-yr continues to be held below the 5% level at 4.921%. The US-10yr currently offers a 47 BPS yield advantage over the European ten year note. The dollar is mixed on the day, weaker against the JPY, CHF, and EUR.

In energy news, Santos was forced to shut down its Moonie-Brisbane pipeline over the weekend after the news that over 100,000 liters of oil had leaked into the surrounding area, forcing the evacuation of over 500 homes. The same pipeline had also sprung a major leak in March 2003. BP announced that its Central Area Transmission System North Sea pipeline would be offline until September. The link which carries gas from the North Sea to the UK has been shut since July 1st after being damaged by a ship’s anchor.

Equity markets taking it on the chin as trade closes for the week with the DOW down over 200 points just after 4pm.  An upside surprise on GDP data this morning spurred a rally in oil that may be extended by the shutdown of a unit at Conoco’s Linden, N.J. refinery.  The spike in OIL bled over into equities with selling accelerating into the close.

Q2 GDP data came in higher than expected at 3.4% versus consensus estimate of 3.2% and against a revised 0.6% Q2 figure.  Much of GDP’s gains come from exports which are higher amid a very strong downtrend in the USD.  The downtrend, while not reversed, in undergoing a bit of a retracement today with USD/JPY pulling out of a nosedive overnight to end the day down 8 pips at 118.61.  USD also reversed against CABLE hitting it’s best in 2 weeks due primarily to STG/JPY and STG/CHF carrry trade unwinds.

The yield curve ended the day little changed with 30yr up 3 ticks, 10 yr up 2 ticks, 5 yr up 3 ticks and the 2 yr up just 2 ticks on the day.  The curve lower earlier in the day came back to settle nearly unchanged from y/day closing level.   FED FUNDS futures contracts are implying 84% chance of a single rate cut by DEC 2007; the SEPT future is showing half a cut at 5.14%.

Metals came under pressure a bit today with gold off 1.60, silver off 20 cents and platinum losing 39.3 behind lower car production figures out of Germany and France which seemed to re-spark last week’s JPN production cut fears.  Copper was up 2.35.

Across the board strength for the USD on the day as the USD Index is approaching 81 after hitting a record low 80.016 two days prior. The GDP data appears to have lent a hand to the buck although it is clear from the data that exports – due to a cheap dollar – are responsible for GDP performance in Q2. USD/JPY is only a few pips higher at this writing after having fallen to 118 the figure overnight. The pair is without significant support until the 116 area but that may well depend on how much money is left to invest in the carry trade after institutions and funds unwind what they can of their mortgage exposure.
CABLE is giving back better than 2 weeks of gains in the last couple of days though no significant data can be said to be the cause. Recent rate hikes in the U.K. appear fully factored into CABLE. July nationwide House Prices in the U.K. fell below consensus estimates with the m-o-m figure at 0.1% versus 0.5% consensus and the y-o-y increase at 9.9% versus consensus estimate of 10.6%. As well, the credit/subprime mess in the U.S. is making traders a bit more risk averse and it appears GBP carry trades against JPY and CHF are being unwound at a remarkable pace.
EUR/USD is trading in the mid 1.36s, off 100 or so pips and will likely find a bit of support in and around 1.36. German CPI came in higher than expected with the EU- Harmonized m-o-m data at 0.7% vs. 04% consensus and the y-o-y at 2.2% versus the consensus of 1.9%. EUR/GBP has reversed the downtrend – for today.
While Paulson appeared to trying to jawbone the equity and fixed income markets, he gave the hollow nod to the buck –“strong dollar in the U.S. interest”. So today’s stronger dollar is likely due to the market pulling back from risk in general but it is unlikely the end of bear market for the buck.