Economic Highlights

Day          CST        Report                                     Expected                  Last                                          Comment

Mon.        8:00a        St. Louis Fed’s Poole – Housing & Macro Economy – OFHEO Conference – Washington D.C.

                N/A         U.S. to seek UN vote on March 17 mandate for Iraq.

Tue.          8:30a        Tsy Secretary Snow – Economic Initiatives – Community Bankers Conf. – Washington D.C.            

Wed.      7:30a        Jan Merch. Trade Deficit        $43.5bn                    $44.2bn   Risk of better # - but still well above previous record of $40bn.

Thu.        7:30a        Feb Retail Sales                        -.5%                         -.9%        Bad weather hurt both chain store sales & auto sales.
  
                                Ex-Autos                                  Unch                        +1.3%     Higher Gas price and Food sales (stocking) offset overall weakness.    
             7:30a       Jobless Claims (3-08)              417k                         430k        Correction expected after 3 straight sharp rises-trend has deteriorated.

                7:30a       Feb Import Price Index           +1.0%                      +1.5%     Ex-Oil exp. +.1% (risk is higher) vs. +.9% trend up-perhaps on weak $.

Overview

Economic data is concentrated near the end of the week. Treasury Secretary Snow speaks Tuesday and, following his comments last week regarding lack of concern of recent dollar weakness, ideas might heighten that perhaps a weaker dollar is desired. Given the Trade data due out this week it may be of little surprise that a weaker dollar may be greeted with silent approval. That is of course unless it inhibits funding of the Current Account Deficit, which is 5.3% of GDP. Greenspan and many market pundits (typically the same ones who coined the phrase “new era” to describe the stock market bubble) believe the Current Account Deficit is transitory.  However, evidence from Capital Flows data show that financing is becoming more difficult as short-term flows, rather than FDI and Portfolio, are being relied upon to bridge the gap. Retail Sales will be the first major release on Thursday and are expected to come in soft following weak auto sales and bad weather. Ex-Autos, Sales are expected to come in flat, largely due to higher Gas prices and higher Food sales. The catch 22 is that higher energy prices are actually reducing real disposable incomes that could easily lead to continued weakness in Sales. All of this comes amid clear signs of Inventory building with Business Inventories (as well as Whole Sales Inventories) seen rising in January. Thus, it might be important to begin watching I/S ratios to gauge whether Inventory building is voluntary or not!  Inflation data this week will also be of interest given the sharp rise seen last month in PPI. Once again, another sharp rise is the risk. However, the Core PPI is seen flat, and mild on a YOY comparison, largely due to the fact that Auto prices are seen weakening sharply. Another surprise this week could be the Industrial Production data. Auto and Utility output are expected to have dropped sharply and the ISM Production data, as well as week Manufacturing payrolls (very weak indeed) and sharply lower Aggregate Hours Worked (-1.0%) heighten risk of a negative figure. The Preliminary Michigan Sentiment is also seen weakening to a new low on war concerns, as well as poor economic data, job losses, and weak equity prices. In sum the economic data is unlikely to give the markets much to cheer about this week.

Technical Levels

The SPH contract once again bent, but could not break; despite the fact it closed lower for the second straight week. The mid-Feb low, and year low, of 805 stayed intact as prices put in the low of 809 on Friday. Prices turned up sharply but stopped at 830 (return of the upward sloping down trend line that was broken last week). Key support this week should be 825/819, and 809. Another challenge of 809 and 805 might not be the year low for long. Below is support at 790 and then the October level of 767. Strong support, should we take out those lows, would come in at the 730 level (.618 of the 1987 low to the 2000 high). Resistance this week should be seen at 830/32, 840, and 855 (.382% of the 936 to 805 down move this year). A held move above 830 could set sights on the 853 level, which has stopped the past two short covering rallies cold in its tracks and therefore is a significant level. Above is resistance at the December 31 low of 868 and then yearly settlement near 880. Above would set sights back near the 925/35 area. This is an equal opportunity market and has paid those who remained cognizant of key levels, and disciplined to take appropriate action.

The USM made new contract highs again at 115-10 last week, which is near the top of an upward sloping channel line. Profit taking set in which sent prices back towards the 114-04/10 level. Resistance this week should be seen at 115-04/115-16/115-25, with major resistance at 116-00. Support should be seen at 114-16/10/114-00. Below 114-00 and the annual pivot of 112-20 (A) could come into focus. The TYM saw a new contract high at 116-175 before profit taking set in. Resistance this week should be seen at 116-10/16/24 with major resistance seen at 117-00. Support should be seen at 116-00/115-24/115-16. Below 115-16 and sights could be set on 115-02 (Q) and then trend line support near 114-00. The pivot for the week should center on the FVM quarterly pivot of 113-30 (Q). In other words, cheaper indicates risk to aforementioned support levels whereas richer indicates risk to resistance levels.

The treasury cash curve saw new cycle highs (low in yield) of 2yr 1.35, 5yr 2.50, 10yr 3.54, and 30yr 4.60. Arguably, real yields are decisively negative out to the 5yr sector! Pivotal levels to watch this week are quarterly pivots of 5yr 2.69 (Q), 10yr 3.70 (Q), and 30yr 4.86 (Q). Closes cheaper may warn of risk to higher yield levels. The curve steepened to new cycle wide levels. Keys to further widening are the ability to hold richer than 2/5/30 86 (A), 2/10/30 117 (S), and 10/30 105 (Q). Key resistance to watch is 10/30 116 (Q), and 5/10/30 0 (A). Key support on flattening is 2/10 204 (S).

The EUR saw a new move high near 1.1060 Friday. The next major resistance level comes in at 1.1160 (50% retracement level of the synthetic 1991 high to the 2000 low). Support should be 1.0970/40 and 1.0900. Below and trend line support comes in at 1.0800. The $/Yen found support just beneath 117.00 and the key annual pivot of 117.17 (A). A close cheaper would target a run toward the last July low of 115.42 and then the 113.00 level. Resistance should be seen at 118.50/119.00/119.40. Above is potential to annual resistance of 121.55 (A). The EUR/YEN found support at the old November high of 126.13 and then bounced sharply back to 129.00. Richer and there is potential for a run back to the 131.00 level. This cross might still be the best way to play the long EUR, as Japanese year-end repatriation nears an end.

Comment

Fed Chairman Greenspan said last week “servicing big Current Account deficits can be destabilizing. Growing capital flows may cause temporary imbalances, not necessarily a sign of systemic problem.” This was an interesting thought coming from the Fed Chairman when the U.S. Current Account deficit is running at a rate of over 5% of GDP, a record. His opinion is valued; however, it reminds me of his comments during the stock mania about the “new era”!

There appears to be evidence mounting that the U.S. Current Account shortfall might have implications that the market is not contemplating, given the complacency over the willingness of foreigners to fund this gap. The complacency is rooted in the thought that there is no where else for foreigners to go (very reminiscent of the excuse to invest in stocks at the height of the bubble…”where else is there to put your money?”). Recent evidence gathered from Capital Flows data shows foreigners have found other choices.   Specifically, during the month of December, the U.S. was unable to meet this external obligation from portfolio flows of FDI flows (foreign direct investment). Rather, the shortfall was met with short-term capital. Treasury and Agency flows were the greatest, amounting to $88bn in the second half of the year whereas they were 0 during the first half. Equity flows into the U.S. where virtually nil and U.S. flows into foreign bonds were $5.4bn. Euroland, on the other hand, witnessed a Current Account surplus of EUR 101bn vs. a deficit of EUR 61bn the previous year.

What this says is that short-term flows into treasury securities were most likely a result of the risk aversion (flight to quality) given the current geopolitical environment.  Longer term, and more stable portfolio and FDI flows have clearly shifted away from the U.S.. Referring back to last week’s comment, the only kind of portfolio flows into the U.S. are coming from central banks, mostly from Asia, in recycling of their trade surplus. Given the sharp dollar down turn, it is questionable as to how long these CB’s are willing to hold on to losses!