Global Themes

Retail sales disappointed for the 5th straight month as April retail sales were up 0.9 %( Y-on-Y) which is the lowest number since the Financial Crisis in Q4 2009. On a month on month basis headline retail sales were flat over March and excluding the volatile gas and auto segment it was up 0.2% which was below economist expectations at 0.4%. The only positive in this report was the strong upward revision for the March headline number to 1.1% from 0.9% and the core number to 0.7% from 0.5% reported earlier. US import prices contracted for the 10th continuous month, which is emanating from the strong US Dollar, which is also importing deflation into the US. With benign or no inflation pressure the FOMC will be under lesser pressure to move on hiking rates. The US Dollar weakened across the board sending the Euro, GBP, Canadian Dollar and some other currencies surging higher. The biggest gainers were the precious metals group, with gold up more than 2%. Slower growth means that the data dependent FOMC will have to hold off the rate hike for some time more and the prospects of lower rates for a longer period sent precious metal prices zooming higher. Silver prices also rallied closing at its highest level since mid-February. Bond market differentials kept the US Dollar weak again this morning with German Treasury yields heading a few bps higher and US Dollar Treasury yields inching lower. Watch out for Jobless Claims & Inflation data at the producer level today. 

CAD

The Canadian Dollar was another beneficiary of the strong US Dollar trading levels which were last traded in Mid-January this year. Strong Crude Oil prices made it a double whammy for the Canadian Dollar. With WTI trading over $60 a barrel the realizations for the Oil Sand companies will be around the $40-45 range which will cover marginal costs for these companies, which could result in higher production. The forward curve for WTI for one year forward is quoting around $64.5 which makes it viable for some of these companies to lock into forward hedges for a portion of their output which will keep them going for some time.

EUR

The Euro also benefited from the weakness in the US Dollar and surged to highs not traded since middle of February. German Bund yields continued to trade in a volatile range and tested intraday lows yesterday before resuming its upward march. The surge higher in European Bond yields as compared to US Treasury yields is supporting the rally in the Euro. The surge in European bond yields has resulted in most sovereign yields trading in positive range in the 5-year bucket. 5-year German yields are trading higher by 26 bps over the last month. Across the Eurozone most sovereign 2 year yields are trading at above minus 20 bps, which means that the ECB can buy these bonds as part of its Quantitative Easing measures announced earlier this year.

USD

The USD Dollar Index traded a low of 93.133 which is the lowest since 22nd of January this year. It is down 7.8% from the 12 year high of 100.39 traded on March 13 earlier this year. The main driver of this US Dollar move has been weak US economic data. The first estimate of Q1 GDP was at 0.2% and after the massive trade deficit posted for March due to sharp upsurge in imports we could see this number being revised lower to show negative growth, when we see the second revision at the end of this month. Weak retail sales data for April does not bode well for Q2 GDP also and the large contribution that inventory build up had in the first estimate of Q1 GDP means that in Q2 we could see some this inventory buildup drawn down resulting in lower growth. The strength of the US Dollar is importing deflation into the US and has pushed the headline Producer Price Index (PPI) lower to minus 1.3% which is the lowest we have ever seen. The core PPI number which excludes the volatile food & energy component fell back into negative territory (M-on-M). US jobless claims fell further lower to 264,000 which pushed the 4-week average to a 15 year low. This number has been below the key 300,000 level for 10 consecutive weeks and it certainly depicts a scenario in the job market where companies are not shedding jobs. The reasonable quick rebound in crude oil prices has stopped some of the jobs losses in this important segment.

GBP

The weakness in US Dollar sent the Sterling Pound to highs not traded since November last year. The Sterling Pound is now up 8.6% from the low it traded April 13, just a month back. The move was a combination of better than expected data in UK and weak US retail sales data which was another weak data point. The FOMC members continue to talk about a June-September rate hike but the market does not seem to be convinced with only employment data holding up. The Sterling Pound will be driven by the strength or weakness in the US Dollars over the next few days, with elections out of the way and no data releases scheduled till middle of next week when we have inflation data both at the Producer and Consumer level & the Bank of England meeting on Tuesday and Wednesday next week.