G20 works on huge rescue deal for April

MEXICO CITY  - The world’s leading economies worked on Sunday to line up a deal on a second global rescue package worth nearly $2 trillion to stop the euro-zone sovereign debt crisis from spreading and putting at risk the tentative recovery.

Germany said it would make a decision some time in March on

By combining new and existing resources to create a nearly $2 trillion package, the G20 would strengthening Europe’s bailout fund, a move other Group of 20 countries say is essential to clear the way for throwing extra funds into the International Monetary Fund in April. The IMF would use those funds to strengthen its firepower to handle crises.

The twin proposals, being discussed at a meeting of Group of 20 finance chiefs in Mexico City, would build up massive international resources and aim to convince financial markets that the euro zone’s deep problems can be stemmed. send its boldest message since 2009, when it mustered $1 trillion to help rescue the world economy.

The G20 communique to be issued later on Sunday, a copy of which was seen by Reuters, says Europe’s decision on whether or not to put up more money will represent “essential input” for the separate discussion on whether other countries, like China and Japan, will contribute more funds for the IMF’s war chest.

One official said there had been debate between the United States and Europe over whether the final communique should say an increase in the firewall was “essential” or just “important“ to secure more IMF resources.

The G20 countries will meet again in Washington in late April to take up the issue.

British finance minister George Osborne stood firm on the need for a clear euro-zone commitment.

“We are prepared to consider IMF resources but only once we see the color of the euro-zone money, and we have not seen the color of the euro-zone money,” he told Sky TV. “I think that quid pro quo will be clearly established here in Mexico City.”

Germany, however, has taken a tough public line on limiting public funds used for bailouts. A government official close to Chancellor Angela Merkel insisted on Sunday that there is already enough money pledged for the euro-zone’s rescue fund, known as the European Stability Mechanism. Berlin has said it sees no need to combine the ESM with a temporary fund, the European Financial Stability Fund.

“The German government’s position is unchanged: we see no need to increase the upper limit of the ESM,” said the official in Berlin.

But different signals emerged from G20 negotiators in Mexico City, where Germany appeared more conciliatory behind closed doors.

“Everyone in the euro zone and even in European Union is reasonably happy with combining the ESM and the EFSF, even Germany, but it is too early to say if this will be decided at the EU summit at the beginning of March,” Margrethe Vestager, economy minister of current EU president Denmark said on Saturday.

Other G20 officials, however, were less convinced that Germany would agree to combining the two funds, which would build a $1 trillion firewall to stem contagion.

German Finance Minister Wolfgang Schaeuble said European leaders will tackle the adequacy of the firewall during March. The issue is on the agenda of a European Union summit this week.

PUBLIC OPPOSITION

The German government faces public opposition to a second Greek bailout and has balked at enlarging Europe’s rescue fund on the grounds that it would undermine efforts to impose fiscal discipline on indebted countries.

The second Greek bailout package, recently agreed in principle, needs the approval of Germany’s parliament, the Bundestag. Lawmakers will vote on Monday and it is expected to pass with opposition support. But a poll in the Bild am Sonntag newspaper on Sunday showed 62 percent of Germans oppose further aid for Greece. de

An agreement by Europe to merge its temporary and permanent bailout vehicles for a war chest of about $1 trillion would open the door for other G20 countries to meet the IMF’s request for $500-$600 billion in new resources, on top of its current $385 billion in funds.

Put together, this would total almost $2 trillion in firepower.

But the G20 has no intention of easing its pressure on Europe by giving it a strong signal now that new IMF money is in the bag.

U.S. Treasury Secretary Timothy Geithner said on Saturday that Europe had come a long way in laying the foundations for a “credible” crisis response but could not rest there.

“It’s important not to rest on that progress... That progress is in part based on expectations of more progress to come,” he said.

Regardless of Europe’s decision on its firewall, the United States has said it will not contribute more to the IMF this year, putting the onus on countries such as China and Japan as well as leading European economies.

Others also left no doubt the cash is needed to calm markets and secure economic growth. “In order to overcome the crisis, you have to get ahead of the curve and have a big enough bazooka,” said Olli Rehn, European Commissioner for Economic and Monetary Affairs.

Japan’s Finance Minister, Jun Azumi, said his country stood ready to contribute IMF funds once Europe has acted.

“I expect debate on strengthening of the IMF lending capacity will progress on condition that the problem of Europe’s debt crisis is put to an end by the G20 meeting in Washington in April,” he said.

Finance chiefs in their communique on Sunday will also cite rising oil prices driven by geopolitical risks as a threat to a tentative world recovery, diplomatic sources said.

The price of oil vaulted over $125 a barrel on Friday, the highest level in nearly 10 months on concerns over Iran’s nuclear ambitions.

Oil-producing members of the G20 said on Saturday they would take measures to avoid a rise in petroleum prices from hurting the world economy, Italy’s deputy economy minister said.

FX TECH LAB: February Month-End Rebalancing Flows

Often you may hear about ‘month end’ flows having a positive or negative effect on a currency during the last few days of the month. Thus, I’ve decided to take a look at asset market capitalizations in the major market economies to help us try to determine which direction these ‘flows’  may move. Typically, the largest impact is seen into the 11am ET fix as hedge fund and mutual fund portfolio managers scramble to rebalance their remaining currency exposure in order hedge their overall portfolio.

Market capitalizations for the month of February have been positive across the board, however the largest gain is seen in the United States which sees a rise of over 600B on the month (as of 2/23 close). So how do we make sense of this? Typically, the more severe a change of the principal assets (primarily equities and bonds), then the more likely portfolio managers are either under or over-exposed to certain currencies. Our model suggests they may be under hedged, consequently they may need to further diversify away from USD’s. Therefore, I believe the buck may continue to suffer as we head into Wednesday’s fixing.

In the chart below I have outlined the expected directional movement broken down pair by pair based upon our proprietary month-end model. Customarily, a reading of +/- 400B on the month produces a stronger bullish or bearish signal. With that said, all of the pairs besides EUR/USD see signals which satisfy the aforementioned+/- 400B  reading: USD/CAD, USD/CHF, USD/JPY (bearish) and AUD/USD, GBP/USD (bullish), while EUR/USD sees a slightly more moderate bullish signal.

Source: Bloomberg, FOREX.com

The Week Ahead--Week of February 26, 2012

Greek debt swap—It’s on

On Friday, Greece issued the formal invitation to bondholders to exchange their Greek debt for new bonds and take an approximately 75% loss in the process. Without getting into all the nitty-gritty details, the key for us is the rate of creditor participation and what it implies for the risk of a credit default, which would trigger CDS (credit default swaps—insurance on Greek government debt) payouts, potentially rattling global markets’ nerves.

Beginning with the most benign scenario, if 90% of bondholders sign on, the exchange will be considered voluntary and CDS will not be triggered. In a darker scenario, if between 75% and 90% of creditors participate, collective action clauses (CAC’s) will be used to force the exchange on all bondholders, which would make the exchange involuntary and likely trigger CDS payouts. In the worst case, if less than 75% sign up, the entire debt swap will be scrapped, leaving the second Greek bailout in doubt and increasing the risk of a disorderly Greek default in a matter of weeks.

We have no way of knowing the extent of creditor participation, which makes this an extremely difficult event to call. For what’s it’s worth, the lead IIF negotiator indicated on Friday he was ‘quite optimistic’ about a majority of bondholders approving the deal, leaving it open whether it reaches the 75% minimum threshold. In terms of timing, the Greek plan calls for creditors to accept the swap by March 11, or potentially be subject to CAC’s.

If the Greek debt exchange triggers CDS payouts, we think there is potential for another wave of financial sector turmoil. The net amount of Greek CDS outstanding (firms who have bought minus firms who sold Greek CDS) is small at around EUR 3.2 bio. But that figure masks the gross amount of Greek CDS obligations outstanding, which is around EUR 70 bio. The risk is that financial sector players react with counterparty panic, unsure of which institutions are on the hook and for how much, possibly leading to a wider market seizure. Stay tuned to the headlines and watch for the participation rates (the total amount of Greek debt open for exchange is EUR 206 bio).

G-20 meeting, ECB LTRO, and month-end ahead

This weekend will see G-20 finance officials gather in Mexico to discuss global issues and expectations are relatively low for any meaningful initiatives. The focus for markets will be on getting new capital commitments for the IMF to strengthen its capacity to support Europe. The IMF has indicated it’s seeking an additional USD 500 bio in lending capacity, while the 17 euro-area nations have committed to around USD 200 bio in new capital.

We think there is room for some disappointment coming out of the G20 if significant fresh capital is not committed to the IMF. US, Chinese and Japanese officials, among others, have indicated they want to see further measures from the Europeans themselves before committing additional support. For the US, in particular, providing further aid to the IMF to support Europe is political suicide, so we would certainly not expect any US capital commitments. If the G20 balks and no major capital commitments are made, risk sentiment may get off to a rocky start to the week, but if incoming economic data continues positively, risk appetite should ultimately rebound.

On Wednesday at 0515ET/1015GMT, the results of the ECB’s second (and, for now, final) Long-Term Refinance Operation (LTRO) will be announced. Markets are expecting Euro-area banks to draw around EUR450 bio in fresh 3-year financing, slightly less than the EUR 489 bio taken up at the Dec. 22 LTRO. Should banks take up less than EUR 400 bio, we think European government bond markets may be disappointed and we could see yields start to move higher again, which might take some of the wind out of the euro’s sails.

If bank demand is as expected, EU debt markets should remain resilient. But there, too, is the risk of a buy-the-rumor/sell-the-fact reaction, where bonds have rallied in advance of the LTRO and are now ripe for profit-taking. As well, following approval of the second Greek bailout and the LTRO, what’s the next source of good news to look forward to out of the EU debt crisis, again setting up the potential for a EUR reversal.

Next week also sees the usual month-end portfolio rebalancing flows and we expect to see a bias toward further USD-selling, typically culminating each day in the hours leading up to the 1600GMT/1100ET London fixing. The strongest dollar-sell indications are against the commodity currencies (AUD, CAD and NZD), but also against GBP, CHF and JPY. For the JPY, however, as we discuss below, we would not look to sell USD/JPY.

EUR short squeeze continues; JPY reversal extends

EUR continued to push higher across the board, as the large short-EUR position continues to be squeezed out. CFTC data indicate the EUR/USD net-short position was further reduced to 142K from 148K in the prior week, but the data only covers up to last Tuesday, and undoubtedly shorts were further reduced into the end of the past week. However, the net-short reduction is only down from recent all-time highs of around 170K, so it looks like there is still plenty of room to go.

Additionally, the EUR has been supported by more positive developments in the EU debt crisis, anticipation of the LTRO, and some not so bleak data. Still, we find it difficult to enthusiastically embrace the single currency in light of stagnant growth prospects, especially at levels just below 1.3500. Instead, our preference would be to use pullbacks into the 1.3250/1.3300 (just above the top of the daily cloud) area as a potential long-entry zone, and we remain mindful of the headline risks facing EUR. On the upside, beyond the 1.3500/10 psychological/option resistance/38.2% Fibonacci retracement of the 1.4940-1.2626 decline, the weekly Kijun line comes in at 1.3586.

Last week, we cautioned that JPY-weakness was likely to continue, but the desired pullback in USD/JPY or JPY-crosses never materialized. We think there is still more room to go, but we’re also finishing the week around key resistance levels. In USD/JPY, the top of the weekly Ichimoku cloud is at 80.95, and we’re still reluctant to chase the pair higher into this key resistance. As well, the US/Japanese 2-year interest rate spread still suggests a USD/JPY rate closer to 78.60/70, so we would suggest patience and continue to look to enter USD/JPY longs on pullbacks into the 78.50/79.50 area.

THE CORRELATIONS CORNER (90-day): Falling USD and cross-asset relationships…

A number of tight cross-asset correlations seen in the second half of 2011 have continued to unravel throughout 2012. Perhaps the most obvious is the breakdown in the positive EUR/USD: S&P 500 relationship (see chart below). A glaring example of this can be seen in price action just this past Friday – EUR/USD ended the day about +0.64% higher while U.S. equities ended mostly flat.

Commodity currencies, however, have maintained better relations with U.S. stocks although they’ve shown some signs of stress. While still firm, the positive correlation between AUD/USD & the S&P 500 is well off levels seen late-2011 and earlier this year.

Oil prices remain best correlated in FX with USD/CAD (see matrix below) but were also decently correlated with the South African Rand in the latter part of 2011. This relationship has also weakened recently as evidenced in the current 90-d coefficient of -0.40 compared to -0.50 in January (see chart below).

Weakening US equity market: FX relationships can also be seen in the softer inverse S&P 500: USD/CAD relationship, also well off levels seen earlier this year.

Overall, global markets remain extremely sensitive to Eurozone news-flow with the next main events being the G-20 meeting this weekend and the ECB’s second LTRO on February 29^th. Street whispers suggest an allotment closer to the €600bln mark, much higher than the €489bln in December which could be setting the stage for disappointment. While cross asset correlations have fallen off cyclical highs, we think the heavy amount of data/event risks in the week ahead may see relationships tighten somewhat considering significant market shocks in the past have had such an effect.  

Support and resistence for 23 february

EURUSD

The pair has risen to the resistance level at 1.33143. Support is at 1.31674.

Resistance:  1.33143, 1.34882, 1.35984

Support:  1.31674, 1.30277, 1.28630

GBPUSD

The pair has rolled back to 1.56722.  

Resistance:  1.58543, 1.60322, 1.62050

Support:  1.56722, 1.54842, 1.53482

USDCHF

The pair will try to decline to the Moving Average (200) at 0.90565.

Resistance:  0.92026, 0.93069, 0.93949

Support:  0.91079, 0.89635, 0.88418

USDJPY

The pair has risen to 80.438.

Resistance: 80.438, 81.399, 82.219

Support:  79.707, 79.070, 78.345

AUDUSD

The pair has declined to 1.06164 and may break this level and decline to 1.05332.

Resistance: 1.07005, 1.07739, 1.08413

Support: 1.06164, 1.05332, 1.04407

Asian and European trading sessions:

Asian and European trading sessions:

Euro: The EUR / USD pair remained within the $ 1.3212 -$ 1.3263 range. The publication of weak PMI in France, Germany and the EU as a whole had the negative effect on euro trading dynamics and pressured the currency during both sessions. Also, the announcement of the Fitch credit rating agency, which reduced the credit rating of Greece to the "C" from “CCC " did not provide any support.

US Dollar: The dollar grew to a six-month high against the yen to the level of Y80.35 showing the clear evidence that the U.S. economic is about to recovery in the nearest future. These positive expectations might reduce the possibility of starting of the 3d round of quantitative easing program by the Fed.

British Pound: The pound fell to lows of $1.5661against the U.S. dollar after the publication of the protocol of the last meeting of the Bank of England. In the published minutes of the meeting was noted that the Committee of the Bank of England expects the decline in inflation in 2012.

Australian and New Zealand dollars: The Australian and New Zealand dollars dropped after the publication of the preliminary value of the HSBC Flash China Manufacturing PMI index. An indicator of manufacturing activity in the country in February rose to 49.7 against the previous 48.8 in January.

American trading session:

Japanese Yen: The yen weakened above the level of Y80.35 against the dollar. The representative of the Ministry of Finance of Japan said that the yen is falling due to the easing of monetary policy by Bank of Japan and the Greek agreement.

Gold: The Gold reached the new highs of 1781 dollars per ounce and closed its day at the level of $1775.

Oil: The WTI oil futures on NYMEX grew to the highs of 106.6 dollars per barrel against the background of the situation around Iran.

The pound declined against the euro and the Swiss currency in early European trading on Wednesday.

The pound declined against the euro and the Swiss currency in early European trading on Wednesday.

The pound that closed yesterday's deals at 0.8390 against the euro and 1.4400 against the franc fell to a 12-day low of 0.8408 and a new multi-week low of 1.4370, respectively. On the downside, the pound may target 0.85 against the euro and 1.42 against the franc.

-Metal markets were mixed in the past week, with base metal prices falling while precious metals rose modestly. Greece finally secured its latest bailout package, which helped to weaken the US dollar (USD),

-Metal markets were mixed in the past week, with base metal prices falling while precious metals rose modestly. Greece finally secured its latest bailout package, which helped to weaken the US dollar (USD), although equity markets were little changed as most of the good news had already been priced in.
-High base metal inventories in China also constrained prices, offsetting some bullish news when the People,s Bank of China announced a 50bps cut in its required reserve ratio (RRR) over the weekend. The move was widely regarded as a signal for further loosening.   

-The USD index is trading softer and has done since it got rejected around the 81.44 level last month.

-The USD index is trading softer and has done since it got rejected around the 81.44 level last month. Reversals that occur in January should be respected as it has been a key reversal month over the last 11 years.
-The overall bias is for circa a 3 - 4% decline in the USD down to the significant low back in November 2010 at 75.63, potentially onto the 2011 low at 72.70 as targets for Q2 and Q3 of this year. This view would need to be reconsidered on monthly closes above 81.44.

Japanese fin min Sr. official said that recent weakness is not unusual and its due to timely action taken by BoJ and EU's approval of Greece second bailout

Japanese fin min Sr. official said that recent weakness is not unusual and its due to timely action taken by BoJ and EU's approval of Greece second bailout
 However he said that speculators which leads to yes's strength in recent times are still strong
 He also said "one sided bets" have halted in recent times but authorities will continue to monitor currency movements "very closely" and respond appropriately

India's economy is likely to expand in the range of 7.5 percent to 8 percent in the financial year ending March 2013,

India's economy is likely to expand in the range of 7.5 percent to 8 percent in the financial year ending March 2013, Chakravarthy Rangarajan, Chairman of Economic Advisory Council to the Prime Minister said Wednesday.

The rate of growth in 2011-12 is estimated at 7.1 percent, marginally higher than the government's prior projection of 6.9 percent, which was the weakest in three years, according to 'Review of the Economy 2011-12', released today. The estimates of the council is better than the Advance Estimates published on February 7 due to the higher growth forecast for agriculture and construction.

The overall farm sector GDP growth for 2011/12 will average 3 percent, it said. Meanwhile, mining and quarrying output is forecast to log negative growth for the year as a whole.

The manufacturing sector will grow 3.9 percent and construction at a much faster pace of 6.2 percent. The council projects the service sector growth to continue to be strong, and to close the year with 9.4 percent expansion.

For the year 2011/12, the BoP position will be tight and the current account deficit will be 3.6 percent of the GDP, the council said.

Further, the council said that the current account deficit should be limited to 2.0 and 2.5 percent of GDP over the medium term. In the 2012/13 financial year, the deficit will be 3 percent.

The economic adviser said the monetary policy seems to have had its desired effect on inflation. Inflationary pressure will continue to ease through 2012/13 and will remain around 5-6 per cent for the year.

The government's fiscal balance is set to expand beyond its budgeted estimate of 4.6 percent of GDP, primarily due to much higher than budgeted subsidies, he added.

FX Snapshot: February 21, 2012

Major News this Week

The Greek saga is looking more and more like a soap opera that is a bit long in the tooth. Last week’s news fluctuated, with one day bringing us closer to solving the deadlock between the Eurogroup and the people of Greece, and the next informing us that there had been a setback. The Eurogroup meeting planned for Monday, February 13 (when Greece was supposed to receive €130 billion that the ministers of finance of the eurozone had promised if it would agree to their requirements) was postponed to today. The market has lost all sense of where this story line is heading, and the USD/CAD responds to each piece of news coming over the news wires. We also received inflation data on Friday that was in line with analysts’ expectations. Here are some highlights of the economic news expected this week.

Canada
Canadian economic news will be sparse this week. The only significant indicator expected is Retail Sales for December. This data will be known Tuesday and analysts expect the figure to be -0.2%, which would be down from its last reading at 0.5%. Mark Carney, Governor of the Bank of Canada, will deliver a speech in New York this Friday.

United States 
The release of economic data will begin on Wednesday with figures on Existing Home Sales in January. Given the most recent U.S. data have been encouraging; economists are expecting homes sales to have increased by 400,000 since the last announcement. On Friday, we will know the University of Michigan Consumer Sentiment Index. This important U.S. measure is expected at 73, compared to 72.5 last month.

International 
The week will be filled with international economic news. On Tuesday, Australia will release its report on the latest meeting of its central bank. It should be recalled that the bank decided to stop reducing rates, leaving them unchanged on the heels of two consecutive reductions. The report will provide an indication of expected future movements. Also on Tuesday, we will know the Consumer Confidence indicator for the eurozone. On Wednesday, the eurozone will release its Manufacturing Purchasing Managers’ Index, which is expected to be 50.5, and England will release a report on the latest meeting of its central bank. On Friday morning Germany will release annualized GDP data for the fourth quarter. Analysts believe that the figure will be unchanged, at 1.5%. Naturally, we will continue to monitor the Greek soap opera very closely, as in previous weeks. Have a good week!

The Loonie

The only function of economic forecasting is to make astrology look respectable.

The following graph, which illustrates annualized quarterly changes in economic growth in the U.S., demonstrates how volatility in GDP growth has diminished over the years. It appears that a better understanding of economic drivers and the larger reliance on services has dampened swings in economic activity. Unfortunately, this improved economic stability has not reflected itself in financial market activity. As can be seen in the second graph, fluctuations in the currency market seem instead to have grown over the years. This phenomenon can also be seen in the stock markets, whose plunge in 2008 was the worst correction in the last 50 years.

 Chart 1

What is the cause of this situation?

First, it is becoming increasingly easy (and inexpensive) to buy and sell financial products. This improved liquidity allows investors to react to the smallest changes in economic outlook. Since it is often difficult to determine a “value” for a financial asset, investors tend to trade on the basis of foreseeable changes in its price (its direction), without considering the asset’s actual value. This is why we are seeing more and more financial bubbles. In this context, forecasting prices of a financial asset has become even more difficult. In addition, the current economic environment makes forecasting even more complicated. Not only do we need to anticipate changes in the major macro-economic variables (GDP, inflation, the trade balance, etc.), we also need to forecast the actions (or inaction) of various political leaders. While a financial crisis rages on in most of the West, political leaders must make important (and unpopular) decisions on what comes next. As if this was not already difficult enough, we also need to predict the public’s reactions to such decisions.

In this environment, the surest prediction is that we will continue to see considerable volatility in the prices of financial assets. As seen in 2008, the sheer amplitude of these movements may catch us off guard, while events considered improbable based on the statistical record are occurring with increasing regularity. It has therefore become even more important to seek protection from the moods swings of the financial markets. Have a great week!

Technical Analysis:

USD/CAD: The expected rebound occurred, but failed to go above 1.0051, only reaching the start of the 1.0052-1.0072 range. In short, nothing much has happened to the USD/CAD, which has remained in the 0.9920-1.0072 range since January 25.

EUR/USD: The following graph provides daily data. Complete indecision, which can be summarized as follow: an inability to move above the 100-day moving average (the green line), an inability to return to the medium-term bearish channel (in pink), and closing right on its 20-day moving average (the red line), the crossing of which in mid- January (the red line) spurred a 450-point surge. The EUR/USD remains in a long-term bearish channel (in blue).

Volatility: We know that many FX pairs are experiencing extremely low volatility, and this represents a great opportunity to buy options at very reasonable prices, to cover rising or dropping levels, depending on whether you are a buyer or seller. Contact your dealer for more information.

 Daily QEUR

Fixed Income

Canadian swap and government yields ended the week unchanged for most maturities, as domestic inflation numbers temper the effects of weaker US economic data, and the overall nervousness caused by European markets.

Yields dropped last Tuesday, as weaker-than-expected U.S. retail sales data and a series of downgrades in Europe by credit rating agency Moody's fuelled demand for Canadian government bonds.

Market sentiment shifted on Thursday on encouraging news for the US housing and labor markets and signs of progress on the Greek debt crisis.

The move continued Friday morning after the release of higher inflation numbers in Canada. The total inflation rate climbed 2.5%, outpacing the 2.3% anticipated by most economists. Although the number was still in line with the central bank's forecasts, traders reduced their bets for a rate cut in the second half of 2012.

This week, we will watch a series of corporate earnings releases from blue chip companies (Walmart, Home Depot, Kraft, Dell …), and a few key economic indicators. Tuesday will see the release of Canadian retail sales; the German GDP is scheduled for Thursday, while US housing market statistics are expected on Friday morning. Enjoy your week.

 Canada & United States

Commodities

In response to the oil embargo set by the European Union (EU), Iran will increase its deliveries of crude oil to China. It now seems clear that the Chinese government will not adhere to the sanctions imposed by the U.S. The tug-of-war between the West and Iran is far from over, and the countries of Europe, already hard hit by the financial crisis, will be the next victims of this confrontation. The price of a barrel of light sweet crude (WTI) for delivery in March surged during the week, closing 5% higher. The price of heating oil, the main index used to hedge the price of diesel, was stable for the week, following a very strong increase earlier in the month. Setting aside the fears raised by the situation in Iran, the possibility of an agreement on the Greek sovereign debt problem is good news for markets, which expect conditions in Europe to stabilize. Combined with better data announced in the U.S., this good news could also support the price of oil over the coming months.

 Natural Gas & Crude Oil

Last Week at a Glance

Canada – In January, the year-on-year inflation rate sprang to 2.5%. On a month-over-month basis, the CPI rose 0.5% in seasonally adjusted terms. The movement was driven mostly by the transportation component (+1.3%). Six of the eight broad CPI categories saw monthly advances. Health/personal care and recreation/education were flat on a seasonally adjusted basis. The Bank of Canada core CPI, which shocked with its softness in December, bounced back 0.2% (0.3% seasonally adjusted). This nudged the year-on-year rate two ticks higher to 2.1%. Still, over the past three months, core inflation has remained subdued, progressing only 1.0% annualized. In December, Canadian factory shipments jumped 0.6%, well short of the 2% gain expected by consensus. Twelve of the 21 industries rolled forward. The main thrust was provided by transportation equipment (+3.7%), with autos the main contributor. These increases more than offset decreases in petroleum and coal products and machinery. In volume terms, shipments grew 1.2%. Elsewhere, Canadian securities transactions data for December revealed that foreigners added C$7.4 billion in Canadian assets to their portfolios. These included a mix of bonds (+C$2.1 billion), money market instruments (+C$3.5 billion) and stocks (+C$1.7 billion).

United States – In January, the consumer price index rose 0.2% over the prior month. Both energy and food prices were up 0.2%. The annual inflation rate dropped a tick to 2.9%. Excluding food and energy, prices climbed a consensus-matching 0.2% on impulse from higher medical care, tobacco and apparel prices, among others. These increases more than offset declines in other segments, including vehicles where prices pursued their downward slant for a fifth month running. The year-on-year core CPI ticked up to 2.3%. On a three-month annualized basis, core CPI stood at 2.2%, a five-month high.

Still in January, retail sales swelled 0.4%, half as much as expected by consensus. The prior month was revised down one tick to flat. The downside surprise to the headline results was due to autos. It should be noted that while unit auto sales were actually very strong in the month, dollar revenues slipped 1.1% on the back of discounts at auto dealerships and of rental car purchases, which are accounted for under business fixed investment. Excluding autos, sales were much stronger, rising 0.7% after sinking a downwardly revised 0.5% in December. The ex-autos increase was fuelled by a rebound in gasoline (+1.4%), sporting goods (+1.1%) and food/beverages (+1.3%) sales. These more than offset declines elsewhere, including in health/personal care (-0.3%). Discretionary spending (i.e., retail sales excluding gasoline, groceries, and health/personal care) notched up 0.1% after rising 0.5% the month before. With January’s gains, real retail spending has now risen at more than 7% annualized since consumer confidence struck bottom back in August. This is the greatest five-month increase in retail sales since December 2010. After expanding at an annualized rate of 8.7% in 2011Q4, real retail spending growth is presently tracking at 1.9% annualized in 2012Q1, which is consistent with moderating yet still healthy GDP growth on the quarter. Again in January, U.S. industrial production held level instead of climbing 0.7% as per consensus expectations. However, the prior month was revised up six ticks to +1.0%. Capacity utilization fell one tick to 78.5% (from an upwardly revised 78.6%). Manufacturing production expanded 0.7% after swelling an upwardly revised 1.5% in December, thanks primarily to auto production, which ramped up 6.8%. Mining output sank 1.8% after posting robust gains in the prior three months. After showing unexpected weakness in December, utilities contracted sharply once again (-2.5%), probably due to unseasonably warmer winter temperatures. In February, the Philadelphia Fed index of manufacturing activity rose to a four-month high of 10.2. The new-orders component reached 11.7, its highest point since last April. The shipments index soared to 15, also a high mark since April. The New York Fed’s Empire Index of manufacturing activity flew to 19.53 in the month, its highest level since June 2010. The two activity indices point to increased factory activity in February consistent with Q1 GDP growth of about 2% annualized. Back in January, U.S. housing starts bounced back sharply to 699K, topping consensus expectations for 675K units. Single starts fell after three straight months of solid growth, while multi-unit starts rebounded slightly after a disappointing December. Building permits rose to 676K (from a downwardly revised 671K), roughly in line with consensus expectations. Single and multi-unit permits were up 0.9% and 0.4%, respectively. Hence, the January drop in single starts is not likely the start of a downtrend.

Euro area – The eurozone economy shrank less than expected in Q4. According to the Eurostat flash estimate, GDP fell 0.3% (non-annualized) after gaining 0.3% the previous quarter. France saw its economy grow 0.2%, providing some offset to the weakness in other member countries, including Germany (-0.2%), Italy (-0.7%) and the Netherlands (-0.7%). Of the countries that have reported GDP estimates, Portugal recorded the weakest economic activity (-1.3%). In comparison, the economy of the United States grew 0.7% in Q42011, while those of Japan and the United Kingdom contracted 0.6% and 0.2%, respectively.