financial momitor, june 4, 2010

www.dundeewealtheconomics.com

Financial Monitorby William Tharp June 4, 2010

THE WEEK IN REVIEWUS RECOVERY CONTINUES: PACE TO WEAKEN

US job creation disappointed in May. While 431,000 jobs were • created, 411,000 of those were part time census jobs. In June of 2000 (the previous census year) 225,000 temporary census jobs were lost, suggesting that next month could see a net loss in jobs, depending on what happens in the private sector. This could further rattle confi dence, though some of those concerns were factored into markets on Friday.The ISM indices showed little change in May. The • manufacturing index slipped a little from 60.4 to a still robust 59.7. The service sector index remained at 55.4.

CANADIAN RECOVERY CONTINUES: PACE TO WEAKEN Canadian economic growth beat expectations, rising by an annualized 6.1% in the fi rst quarter. • Overall building permits rose in April but there were already hints of a weakening in the housing sector, where • permits fell. In May monthly sales of homes fell as buyers reacted to higher prices and tighter mortgage rules. Forecasters are starting to mark down their forecast for house sales, with many predicting falling prices. The harmonized sales tax in Ontario and BC will hit sales prospects after June, primarily higher priced homes.

GLOBAL RECOVERY CONTINUES: PACE TO WEAKENEurope will lose momentum, not that strong to begin with, because of fi scal tightening. Germany is the latest • country to begin paring spending/raise revenues.Chinese growth is also likely to slacken, possibly to 8% or so. Recent measures to curb real estate speculation • are reported to have fl attened the housing market (for a few months at least); the bigger question is to what extent strong sales in recent quarters, when fi nancing was easy, have come at the expense of sales over the next twelve months. As well reduced Chinese importation of commodities has been trimming the price of oil and metals such as copper. Some of this is because of expanding domestic supply following several years of high prices.

-100

0

100

200

300

400

500

Jan-10 Feb-10 Mar-10 Apr-10 May-10

Census 2010

Government (except census)

Private

US EMPLOYMENT DATAThousands, Monthly change

LOOKING FORWARDThe • Bank of Canada raised interest rates by 25 points on June 1 but sounded uncertain when the next hike would come. We are assuming October 19 but it could be sooner. Next week sees new data for the trade balance and new housing prices (Thursday) and capacity utilization (Friday).The• Fed next meets on June 23 to consider interest rates. No change is expected. With core infl ation now under 1.0% it will keep “interest rates low for an extended period”. While the Fed did note improving economic conditions recently, we wouldn’t expect to see the fi rst interest rate hike until November at the earliest. New statistics coming next week include: consumer credit (Monday), trade data and the May fi scal number (Thursday) and retail sales (Friday).Government bond yields• fell last week, as Europe’s fi scal woes were compounded by the suggestion of a Hungarian default, prompting another shift from higher yielding to safer government bonds. This is probably not the time to buy governments, unless you are persuaded that the forces of defl ation will take considerable time and effort to be reversed.The• Canadian Dollar lost ground on the week, following an initial attempt at recovery. We will probably see it move closer to parity as the year progresses.The • US Dollar was generally stronger this week in a fl ight to quality. A shift back to the dollar as prime reserve currency is likely also having an infl uence – something that could prevail for many months.


RECENT CANADIAN ECONOMIC DATA

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

CANADA GROSS DOMESTIC PRODUCT

annualized growth rate Last quarter: 2010 Q1

-150

-125

-100

-75

-50

-25

0

25

50

75

100

125

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

CANADA JOB CREATION

Last month: May 2010

000s monthly change

3-monthmoving average

75

100

125

150

175

200

225

250

275

300

325

350

375

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

CANADA BUILDING PERMITS

Last month: April 2010000s dwelling units

Canadian GDP had its best quarter in a decade, rising by an annualized 6.1% in the fi rst quarter. Consumption rose about 4.5%. Our detailed table will follow at a later date (Statscan now delays releasing some of the data for several weeks).

Building permits rose in value by 5.4% in April, following a strong 12.3% gain in March. However the gain was entirely in the non-residential area, which more than made up for a decline in residential permits.

Canada’s job creation (24,700), though far less than reported for April, was nonetheless quite solid in May. The unemployment rate for May was unchanged at 8.1%.


104

110

116

122

128

134

140

146

02 03 04 05 06 07 08 09 10-40

-30

-20

-10

0

10

20

30ECRI

Percent changeYear-over-year

ECRI LEADING INDICATOR

US recession

Source: Economic Cycle Research Institute

250

300

350

400

450

500

550

600

650

700

02 03 04 05 06 07 08 09 10

UNEMPLOYMENT CLAIMS

52-weekmovingaverage

US recession

Source: US Department of Labour

0

50

100

150

200

250

300

350

400

450

02 03 04 05 06 07 08 09 10

COPPER

US recession

Source: Thomson Datastream

0

1

2

3

4

5

6

06 07 08 09 10

LIBOR-OIS AND TED SPREAD

TEDspread

LIBOR-OISspread

OIS (overnight indexed swap)Ted Spread (3-month eurodollar deposit –US T-bill)


0

10

20

30

40

50

60

70

80

90

06 07 08 09 10

VOLATILITYVIX (Chicago Board Options Exchange S&P 500 Volatility Index)


800

1600

2400

3200

4000

4800

5600

6400

06 07 08 09 105000

7500

10000

12500

15000

17500

20000

22500STOCK MARKETS

BSE(India)

ShanghaiComposite


36

39

42

45

48

51

54

06 07 08 09 101.25

1.50

1.75

2.00

2.25

2.50

2.75RUPEE AND REAL

BrazilianReal

Indian Rupee


CURRENT STATE OF AFFAIRS by Martin Murenbeeld

The top three charts suggest the recovery in the US and elsewhere is “pausing”.

The middle two charts point to extreme nervousness in fi nancial markets, but much less so than in 2008-2009.

The bottom two charts suggest key emerging markets are volatile, with tendencies to weakness.


POLICY INTEREST RATES

0

2

4

6

8

10

12

14

90 92 94 96 98 00 02 04 06 08 10

Canada

US

SHORT-TERM INTEREST RATES

Weekly Last date: June 4, 2010

Percent, 3-month Treasury Bills

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

02 03 04 05 06 07 08 09 10

BANK OF CANADA TARGET RATE


Percent

0

1

2

3

4

5

6

02 03 04 05 06 07 08 09 10

US FED TARGET RATE


Percent

0

1

2

3

4

5

6

7

Jul-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10

3-MONTH LIBOR

Daily Last date: June 3, 2010

Percent

The Bank of Canada raised interest rates by 25 points (0.25%) on June 1 as its fi rst step toward normalization. Will July 20 see a follow-up move? It could come that soon, though the Bank itself sounded fairly cautious in announcing the June 1 move. It will want to see the next month’s worth of data, particularly the housing market and domestic infl ation, but also get a sense of what is happening in the US and abroad. At the moment, a delay for several months is a possibility, especially if infl ation comes in below forecast. However, barring a major change in the economy, headline infl ation appears headed for 2% in September (after fi rst falling to 1% or less in June). At this point we look for another 25 point rate hike not later than October 19. While nothing is set in cement we expect the Bank of Canada to raise rates by 0.25% per quarter for the next fi ve or six quarters, bringing the overnight target to about 2.00% from the current 0.50%. We might see more but at present we continue to have a cautious eye on defl ationary pressures in the US, much of Europe, and Japan. If slower global growth ahead means that oil prices fail to rise appreciably, or fall further, and the steam continues to come out of Canada’s housing market then worries about infl ation in Canada will evaporate, putting a lower ceiling on domestic policy rates than many expect.


LONGER TERM BOND YIELDS

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jun-10

30-year

10-year

US TREASURY YIELDS

Daily, Last date: June 4, 2010

Percent

4.55.05.56.06.57.07.58.08.59.09.5

10.010.5

Jul-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-100.31.01.72.43.13.84.55.25.96.67.38.08.7

BBB – US 10-year rate spreadBBB Yield

BBB CORPORATE BOND YIELDS

Daily, Last date: June 3, 2010Percent

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jun-10

30-year

10-year

CANADA GOVERNMENT BOND YIELDS

Daily, Last date: June 4, 2010

Percent

2

4

6

8

10

12

14

16

18

20

22

24

Jul-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-100

2

4

6

8

10

12

14

16

18

20

22

Merrill Lynch High Yielding Corporate –US 10-year rate spread

Merrill Lynch High-Yielding Corporate Yield

US HIGH-YIELD BONDS

Daily, Last date: June 3, 2010Percent

Jun 4 Apr 30 ChangeUS 3.20 3.66 -0.46UK 3.51 3.86 -0.35

Canada 3.28 3.65 -0.37Germany 2.57 3.02 -0.45

Japan 1.28 1.29 -0.01

10-year Government Bond Yields (%)

In the US the 10-year maturity yield fell to 3.20% from 3.29%, while the 30-year yield dropped to 4.13% from 4.21%. The Canadian 10-year yield slipped to 3.28% from 3.31%. The main mover of markets continued to be concerns about sovereign European debt and a related continuing slump in the Euro. Or so it appeared. But one could also compose a reasonable story around the continuing slippage in core American CPI (now down to 0.9% and still falling), stagnation (if not worse) in oil prices, and the prospects for somewhat weaker North American, if not global, growth in the second half of 2010. While yields don’t look especially attractive at the moment, it could be some months before something more appetizing appears – and there are no guarantees. A new 10 and 30-year auction next week may raise yields temporarily.

BBB yields ended at 5.05% on Thursday, not much changed from a week earlier. High yielder yields rose further, ending at 9.21% from 9.14% a week before. In an environment where growth is apt to slow at least somewhat, and bank lending in Europe has become somewhat constrained, riskier issues are being avoided by some investors. That might be a buying opportunity, but yields had fallen rather a lot a few weeks ago.


0

3

6

9

12

15

85 87 89 91 93 95 97 99 01 03 05 07 09-6

-3

0

3

6

9FRANCE

Weekly, Last Date : June 3, 2010

10-year government bond yield

France 10-year minus US 10-year

ITALY

0

3

6

9

12

15

85 87 89 91 93 95 97 99 01 03 05 07 09-6

-3

0

3

6

9



Italy 10-year minus US 10-year

0

3

6

9

12

15

85 87 89 91 93 95 97 99 01 03 05 07 09-6

-3

0

3

6

9IRELAND



Ireland 10-year minus US 10-year

GREECE

0

3

6

9

12

15

85 87 89 91 93 95 97 99 01 03 05 07 09-6

-3

0

3

6

9



Greece 10-year minus US 10-year

0

3

6

9

12

15

85 87 89 91 93 95 97 99 01 03 05 07 09-6

-3

0

3

6

9PORTUGAL



Portugal 10-year minus US 10-year

GERMANY

0

3

6

9

12

15

85 87 89 91 93 95 97 99 01 03 05 07 09-6

-3

0

3

6

9



Germany 10-year minus US 10-year

0

3

6

9

12

15

85 87 89 91 93 95 97 99 01 03 05 07 09-6

-3

0

3

6

9UK



UK 10-year minus US 10-year

SPAIN

0

3

6

9

12

15

85 87 89 91 93 95 97 99 01 03 05 07 09-6

-3

0

3

6

9



Spain 10-year minus US 10-year

10-YEAR BOND YIELDS AND SPREADS


STOCK MARKETS

600

700

800

900

1000

1100

1200

1300

1400

1500

1600

02 03 04 05 06 07 08 09 10

S&P 50050-Day Moving Average200-Day Moving Average

S&P 500

Last Date: June 4, 2010

6000

7000

8000

9000

10000

11000

12000

13000

14000

15000

02 03 04 05 06 07 08 09 10

DJIA50-Day Moving Average200-Day Moving Average

DOW JONES INDUSTRIALS


5000

6000

7000

8000

9000

10000

11000

12000

13000

14000

15000

16000

02 03 04 05 06 07 08 09 10

S&P/TSX50-Day Moving Average200-Day Moving Average

S&P/TSX COMPOSITE


Equity markets tumbled on Friday, pushing the TSX down 101.83 points for the week to close at 11569.61. The DJI declined 204.66 points to close at 9931.97 The S&P 500 closed at 1064.88, a 24.53 point decline, and the NASDAQ declined 37.87 points to close at 2219.17.

Equity markets declined on Friday as disappointment over a weaker than expected US job report and new worries about the sovereign debt of Europe sent investors to the safety of the US dollar. Late Thursday a Hungarian offi cial rattled markets by suggesting that it wouldn’t be out of the question to talk about a default. Any hint of default from a government offi cial plays into the market’s greatest fear at the moment. And in this case the comment opened a new front - Hungary and Eastern Europe. With international banking regulators pondering a move to require large banks to have even more capital to cushion any future losses, banks received an added jolt.

Note that the 200-day moving average has been broken by all markets for the fi rst time since 2007-2008!

1-week 4-week 52-weekTSX -0.9 -1.1 8.7DJI -2.0 -4.3 12.9S&P 500 -2.3 -4.1 12.5NASDAQ -1.7 -2.1 19.4

Percent changes

1000

1250

1500

1750

2000

2250

2500

2750

3000

02 03 04 05 06 07 08 09 10

Nasdaq50-Day Moving Average200-Day Moving Average

NASDAQ


by William Tharp and Chantelle Schieven


60

65

70

75

80

85

90

95

100

105

110

03 04 05 06 07 08 09 10

Last date: June 4, 2010

CANADIAN DOLLAR

Daily

US cents/Cdn$

DOLLAR CURRENCIES

50

55

60

65

70

75

80

85

90

95

100

105

03 04 05 06 07 08 09 10

AUSTRALIAN DOLLAR


US cents/Aus$

The Canadian Dollar ended at 94.27, down from 95.07 the previous week. Both oil and copper prices tumbled on concerns that global growth would slow – as well as on concerns that China was importing less in the commodity area as domestic production ramped up, particularly in the case of metals. As well Chinese policy is shifting increasingly to fuel effi ciency/conservation. And being a Communist government, switching from gasoline to electrical cars is apt to proceed much more rapidly than in democratic countries which have the luxury of debating for years.

The Australian Dollar closed at 82.20, down quite sharply from last week’s 84.75. Australia’s commodity exports to China stand to be hurt more than Canada’s by rising Chinese commodity production. First quarter Australian growth slipped to 0.5% from 1.1% in the previous quarter (fi gures are not annualized).

65

70

75

80

85

90

95

100

105

110

03 04 05 06 07 08 09 10

January 1999 = 100

US DOLLAR INDEXDaily

Last date: June 4, 2010

US Dollar Index – EFXR0(Yen, Pound, Euro, Cdn$)

92

93

94

95

96

97

98

99

100

101

04/30 05/07 05/14 05/21 05/28

Daily: April 30, 2010 to June 4, 2010

CANADIAN DOLLARUS Cents/Cdn$

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

03 04 05 06 07 08 09 10

AUS/CDN


Aus$/Cdn$


EUROPEAN CURRENCIES

130

140

150

160

170

180

190

200

210

220

03 04 05 06 07 08 09 10

POUND STERLING


US Cents/Pound

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

03 04 05 06 07 08 09 10

EURO


US$/Euro

142143144145146147148149150151152153154155156

04/30 05/07 05/14 05/21 05/28

POUND STERLING


US Cents/Pound

1.18

1.20

1.22

1.24

1.26

1.28

1.30

1.32

1.34

1.36

04/30 05/07 05/14 05/21 05/28

EURO


US$/Euro

0.9

1.0

1.1

1.2

1.3

1.4

1.503 04 05 06 07 08 09 10

SWISS FRANC


Swiss Franc/US$

The Pound rose marginally, while the Euro suffered another signifi cant fall. The euro is likely to slip further against the US dollar in the months ahead, but the pound is gaining some support from an improving longer term yield spread.

The euro looks set for continuing declines fromincreased central bank liquidity• ongoing worries about eventual sovereign default• weak domestic consumer spending aggravated • by fi scal tighteningcentral bank reserve currency shifts •

The latest signifi cant worries to materialize were (1) Spain’s large $38 billion debt refi nancing coming in July, (2) A Hungarian offi cial’s musing about a possible Hungarian default, and (3) a report that Iran’s central bank was shifting out of euros and back to US dollars, something that must be tempting for many.


80

85

90

95

100

105

110

115

120

125

13003 04 05 06 07 08 09 10

JAPANESE YEN


Yen/US$

ASIAN CURRENCIES

38

40

42

44

46

48

50

52

5403 04 05 06 07 08 09 10

RUPEE


Rupee/US$

The Yen closed on Friday at 91.7, weaker than last week’s 90.9, the return of risk aversion on Friday notwithstanding. The presumed new Prime Minister, Naoto Kan, is said to favor a weaker yen.

The Renminbi continues to trade above 6.83 for the occasional hour or two before reverting to sub 6.83. It closed this week at 6.829, marginally stronger than last week’s 6.831. The moves hint that the renminbi is not set to be revalued in the immediate future. Both of China’s purchasing managers’ indices fell in May but this might not portend future economic growth weakness as the pattern normally occurs in May (even though the data are supposed to be seasonally adjusted).

The Indian Rupee closed weaker at 46.88, down from 46.32, despite fi rst quarter economic growth coming in at a robust 8.6%.

6.6

6.8

7.0

7.2

7.4

7.6

7.8

8.0

8.2

8.403 04 05 06 07 08 09 10

RENMINBI (YUAN)


RMB/US$6.822

6.824

6.826

6.828

6.830

6.832

6.834

6.83604/30 05/07 05/14 05/21 05/28

RENMINBI (YUAN)


RMB/US$

89

90

91

92

93

94

95

9604/30 05/07 05/14 05/21 05/28

JAPANESE YEN


Yen/US$

Views contained in this report regarding a particular company, security, industry or market sector are the views of the writer and do not necessarily represent the views of DundeeWealth Inc., its affi liates and subsidiaries. Views expressed should not be considered a recommendation to buy or sell nor should they be relied upon as investment advice. Information contained in this report is current as of the date of publication and has been obtained from third party sources believed to be reliable. DundeeWealth Inc., its affi liates and subsidiaries does not warrant or make any representations regarding the use or the results of the information contained herein in terms of its correctness, accuracy, timeliness, reliability, or otherwise, and does not accept any responsibility for any loss or damage that results from its use.

financial momitor, june 4, 2010

Economy & Finance