Against the Grain

The FT reported a day of breaking records y/day in the world 10 year bond area, UK 10 year gilts registered it lowest yield since it was introduced in 1962 and last seen in 1947, record lows in US bonds and German gilts of that maturity and Japan the yields are back to 2003 levels. What the writer points out that such levels are being blamed on a growing view the renewed slowdown will result in recession. However, in the past this has been signalled by a structural change in the yield curve in that 10 year yields fall below 2 year yields, but this is not occurring in fact the curve is very positive. The only country where a recession has occurred and the curve has remained positive is Japan. What are the prospects the world is following Japan into a protracted period of slow deflationary growth? Well not so in Germany where the Aug IFO business climate index rose against expectations to 106.7 (Jul 106.2), current assessment 108.2 (106.8) but expectations slipped 105.2 (105.5).

The metals were steady in Asia then London attempted an early rally after the recent sell off and helped by the German data. It stuttered after the LME stocks saw cu and al down the others up or unchanged. The weaker US$ helped support the metals and have we have seen on recent pullbacks there is a good defence of al just above US$ 2000, if this gives way expect an increase in physical EFT chatter. The ICSG estimated the world refined cu market was in a deficit of 190 kt in the first five months of this year. While the ILZSG saw the zn market in a 176 kt surplus in H1 and pb a 50 kt surplus. By mid morning the mood had swung 180 degrees and metals were under pressure. The US durable goods kicked the longs hard then the housing data did not help but after that quickly into DJI surfing and the longs caught the best wave. At the close cu had tested and held the 100 dma support at US$ 7050.

In Japan the Jul trade surplus rose as imports slowed faster than exports. Overnight the US weekly ABC consumer sentiment recovered to -44 from previous -45, then the weekly MBA mortgage applications 4.9% mostly remortgaging (13%). Jul durable goods rose 0.3% well below estimates (Jne -1%) and ex transportation a very poor -3.8% (-0.6%). Then at 15:00 Jul new home sales fell 12.4% to 276 k units per annum (Jne revised to 12.1% from 23.6% at 315 k units per annum). In an interesting commentary an analyst at PIMCO opined that “the addition by the elimination of subtractions” meant that the downside to GDP was falling as the recent poor run of US data meant the worst could be over even if recovery does not appear. They see the chances of a double dip at 25-30%. This was before the volatile weekly DoE crude oil and other stocks. In the US the Kansas City Fed is hosting its annual Jackson Hole symposium on the economy for central bankers and the economic glitter arty so what out for breaking news from the papers being given.