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Key News

  • US apartment vacancy rates rose to an almost 30 year high of 8 percent in the fourth quarter of 2009. This may again be a reflection of renters becoming purchasers and taking advantage of Obama’s first-time buyer subsidy. But it has a real effect. Landlords are reacting by lowering rents. Given that apartment rents are a major constituent of U.S. CPI, this phenomenon is disinflationary. Fed doves will see this fall in rents as justification for continued policy accommodation. (Reuters)
  • As we all await the NFP print, traders are noting the overnight announcement that Obama will make a statement on the economy at 1940 GMT. Some traders feel this supports the idea of a strong payroll release on the assumption that the President would not schedule a statement if the data was going to be poor. (Reuters)
  • Jobless Rate in Europe Rises to 10%, Highest Level in More Than 11 Years (Bloomberg)
  • Contrarian Investor Sees Economic Crash in China As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China’s hyper-stimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like “Dubai times 1,000 — or worse,” he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent. (New York Times)


“We think that the labour market correction has a long way to go. Employment has still not fully adjusted to the fall in output during the recession reflecting institutional rigidities in the euro zone labour market as well as government-sponsored short-time working schemes.

“This is consistent with past experience, when the euro zone labour market has tended to adjust much more slowly than in the U.S. On average during past business cycles, the unemployment rate tends to peak five quarters after the trough in GDP in the euro zone, compared to around one quarter in the U.S.

“What is more, following the trough in output, the unemployment rate does not start to decline until 10 quarters later in the euro zone, compared to four quarters in the U.S.

“We think that the unemployment rate will continue to rise until around the third quarter of this year before remaining at these higher levels through 2011. The upshot is that consumer spending will remain weak for a protracted period and that the overall economic recovery will be slow.”

                             Nick Kounis

FX Trading – Another Episode of “Do the Fundamentals Matter?”
We’ve paid some attention lately to the fact that the US dollar is reacting positively to fundamentals, i.e. negative data is negative for the buck, positive data is positive for the buck. That’s a far cry from their tightly negative correlation at the height of risk-appetite-dominated markets.

Over the years, especially in the bubble era, a common question to ask is: Do the fundamentals matter?

Well, right now I can point to two instances where current, EXISTING fundamentals don’t seem to matter. First, let’s look at a chart sent to us earlier in the week from a friend of ours.

What this shows is a dramatic change in correlation between the price of copper and copper inventories. Current prices are near the $3.40 mark, which represents a range of congestion as copper put in three topping patterns south of the $4 mark. Notice how much greater inventories are now than the other instance where copper traded for around $3.40 or more.

Don’t forgot, the global economy is at the tail-end of a recession (at best) where trade collapsed.

Perhaps less dramatic than copper, but worth noting, the price of crude oil relative to supply is a bit out of kilter.

Again, notice the days of supply (current and forecast) relative to, say, 2007 where prices were mostly comparable to current prices.

Perhaps a better look at the dynamic is this chart of crude oil (purple line) overlaid against EIA crude stocks (black). The comparison of each between now and Q3 2007 is fairly similar.

But notice how quickly EIA stocks dropped off the map in Q4 2007 … and then again a couple quarters later. Are we in for such a powerful recovery that demand will wipe out available crude stocks?

It’s believed that high crude prices were the straw that broke the consumers’ back … and sent the US economy and the global economy into a tail spin. Sure, we might be seeing the beginning of a jobs comeback, though it’s still early. Either way, will the expected recovery allow demand to resume to an extent that drives oil prices much higher?

I made a call last year – maybe summertime-ish – that crude oil wouldn’t get above $90 per barrel for the remainder of the year. Seems I eked that one out by the skin of my teeth. And a new year brings a new forecast right? Well, speculation is as rampant in crude oil prices as any market, so from current levels $90 could easily be taken out regardless of fundamentals. But I don’t see crude prices breaking $100 in the first half of 2010 … without all the cards – US jobs recovery and China growth expectations, among others – falling into place.

And speaking of US jobs, there’s a report or something out this morning, isn’t there? A lot of people are expecting this Nonfarm payrolls report (and the last one) will be the foundation from which a jobs recovery happens. What’s that mean for the buck?

Well, as I started off, the buck’s been reacting positively to good economic news. A lot of it rests on the fact that the US growth differential is improving … relative to its counterparts on the other side of the Atlantic, anyway.

Maybe optimism is growing that the global economy is really on the mend, and the US is going to participate in this recovery. Since mid-October, crude oil and the US dollar have generally been moving together.

It’s not a perfect positive correlation, but it’s a departure from what we’ve gotten used to.