Against the Grain

This is what the Fed said as it left rate unchanged at a record low - “Information received since the Federal Open Market Committee met in June suggests that economic activity is levelling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability. The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for sometime”. This is a sample press and market take on the Fed, “Fed views recession as near an end”, Washington – Almost exactly two years after it embarked on what was the biggest financial rescue in American history, the Federal Reserve said on Wed that the recession is ending and it would take a step back towards normal policy. This was the same day US foreclosures in Jul hit another record of over 360 k houses.

The metal ballooned higher in Asian trading, these markets take a lot to pull them back and nothing to take them back up. The Chinese Industry minister again called on steelmakers to refrain from further expansion for three years stating that capacity at 660 mtpa is more than demand of 470 mtpa. The LME stocks saw al fall and as we head into third Wed it will be interesting to see if we get the now usual flood of inflow. A weaker US$, stronger oil and equities supported metals, well that is hogwash really, metals do not need any support, look at how the markets have performed since the start of the year, cu +110%, al 35%, pb 99%, ni 74% against oil 71%, gold 9%, DJI 8% and € -2.5% (Since Jul 1 cu & al 27%, ni 37%, oil 1.7%, gold 3%, DJI 12% and € -1.6%), so who needs friends. It is interesting that the only thing that has come near the metals is oil which also benefits from financing stock.

In Europe the COGS are turning faster than expected with very good Q2 GDP numbers Germany and France both posting gains of 0.3% well above expectations and respective Q1 of -3.5% and -1.3% leaving yoy growth at -5.9% and -2.6%. The Euroland Q2 GDP fell as less than expected 0.1% (Q1 -2.5%) and yoy -4.5%. Jne Brazilian retail sales rose 1.7% mom (+0.8%) and 5.6% yoy boosted by jobs growth and consumer credit. The South African central bank cut rate 0.5% to 7%. In India a weak monsoon season that provides 70% of annual rainfall could limit the country’s GDP to 3.5% the lowest in 11 years.

Just after 13:00 the € gained strongly testing 1.43 and oil jumped while metals lagged. The US weekly jobless claims rose 4 k to 558 k. The Jul retail sales fell 0.1% (Jne +0.8%) as cash for clunkers boosted auto sales 2.4% (+1.9%), it seems everyone wants a “gift horse looking them in the face” but apart from that the consumer is not shopping, ex auto declined 0.6% (+0.5%), yet they account for 70% of the economy (NB see Fed above). On the trade front Jul import prices fell 0.7% (Jne +2.6%) yoy -19.3% (prices for good from China fell 0.2% and off 3.3% yoy the largest on record), ex petroleum -0.2% (+0.2%) and petroleum -2.8% (+16.2%) yoy -50%, the export prices fell -0.3% (+1%) yoy -8%. That is the end of the data for today and the metals began equity surfing the afternoon away. Helping the sentiment in metals was a Ford announcement they are increasing factory output of small vehicles by 26% in 2H to meet demand from the “cash for clunkers” program, not sure what happens when the money runs out or does government just keep throwing money at it.