Need another reason

Need another reason to like Canadian banks? We all know by now they're profitable and well-capitalized without any government help. TD Newcrest points to another plus: "in our view exposure to residential mortgage lending is a virtue in Canada, not the terrible vice it has become in a number of other major markets." TD says that's because Canadians pay their mortgages, and structural differences from the US makes foreclosures less likely. TD sees CIBC as "one of the better positioned banks" because of its high concentration in residential Canadian mortgages - although that's somewhat offset by its big credit card portfolio.

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financials drives blue

Late surge led by financials drives blue chip to session highs at the close, despite a mixed bag of economic reports, but Intel's guarded outlook drags down chip stocks. DJIA gains 109 to 8030, S&P 500 rises 11 to 852, Nasdaq Comp adds 1 to 1627. It's a choppy day on Wall Street; CPI and industrial production reports both showed declines, but the Fed's Beige Book showed the central bank highlighting those green shoots, even if they're rising in a burned out field. CPI showed the first yearly decline since 1955. Call us naive, but that sounds like deflation.

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NZD/USD off overnight lows

NZD/USD off overnight lows as U.S. equity markets a turn for the better; pair last 0.5821 vs 0.5738 overnight. With dearth of local data until tomorrow's 1Q CPI, focus will remain on global equity markets. CPI tipped to rise 0.3% on quarter and 3.0% on year, according to Dow Jones Newswires poll of 13 economists.

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Canadian bonds are ending lower

Canadian bonds are ending lower, underperforming US Tsys in response to supply pressures in the local market. There was federal, provincial and corporate supply in the Canadian market Wed. There were no significant domestic data releases during the session, but on Thurs, manufacturing data for Feb will be released. The 10-year bond is yielding 2.93% vs 2.90% Tues.

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USD/CAD ending lower

USD/CAD ending lower again after CAD earlier achieved its best intraday levels in over three-months, as positive CAD momentum continued stable equity and commodity prices and generally healthy global risk sentiments. USD/CAD at C$1.2043 from C$1.2133 late Tue, approaching C$1.2000 barrier which has been rough upward limit of CAD rallies since about mid-Nov.

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euro came under pressure

The euro came under pressure Wednesday after ECB governing council member Axel Weber indicated the likelihood of a rate cut and markets took away the expectation of non-standard policy measures. The Federal Reserve's Beige Book helped to boost sentiment slightly, but the verdict remains out on U.S. economic recovery following the mixed bag of data this week. Wednesday afternoon in New York, the euro was at from $1.3199 from $1.3274 late Tuesday. The dollar was at Y99.10 from Y98.83, according to EBS. The euro was at Y130.82 from Y131.20. The U.K. pound was at $1.4980 from $1.4910. The dollar was at CHF1.1436 from CHF1.1369.

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the high-yield bond market

The chips are up for casinos, but you'd never know that from the high stakes bets being placed by bond investors.

Belt-tightening punters maybe staying away from gambling dens, but in the credit markets, casino debt is being snapped up. This says less about the gaming industry than it does about the high-yield bond market.

For the last couple of months, investors seem to have picked the worst-performing categories of the high-yield indexes, and sent them on a barreling run. Last month it was the auto industry, which returned 27% despite worries about bankruptcy; this month it's casinos, which are up 12.5%, according to Merrill Lynch.

That compares with Merrill's U.S. High Yield Master II index, which is up 4.5% this month. Since the beginning of the year, however, casino debt is still down 7.9%, compared with a rise of 9.8% for the broader index.

"There's a strong correlation between what was cheapest at the beginning of the month and what was up the most," said Martin Fridson, chief executive of investment firm Fridson Investment Advisors in New York.

The high-yield universe, made up of corporate bonds that are rated below the triple-B-minus investment grade cutoff point, has enjoyed something of a bounce in March and April, offsetting some of the losses seen in February.

Fridson said the explanation lies in the large amounts of money that have been channeled into high-yield funds so far this year. According to EPFR Global, investors have plowed a net $4.8 billion into high-yield funds so far this year, a sharp reversal from the $4.7 billion net outflows of last year.

Fund managers have to park that cash somewhere, and it seems that, as the market shakes off some of the year-end worries, more than a few are taking riskier punts on poorly performing debt, on the premise that a rising tide lifts all ships. To some extent, they're relying on their peers to do the same, which enhances the effect.

These investors may also be positioning themselves ahead of an expected flood of money which large institutional investors have earmarked for high yield, but haven't yet put to work, according to Fridson. They're most likely waiting for a peak in defaults, which won't come until later this year, he said.

Once they start to invest, goes the thinking, prices could get a nice upward jolt.

Nevertheless, these are risky bets given the uncertainties in the financial system and the economy which could still send high-yield bonds plunging. Corporate defaults are expected to peak at a rate of 14.1% later this year, up from 7.4% at the end of the first quarter.

There's also a steady flow of new issuance coming into the market which should cool some of the high-yield ardor. It could even turn that into reverse if the flow turns into a flood.

All this, of course, is at the expense of investors who take a more conservative approach to the market, buying because they believe in the creditworthiness of the company in question. It may be slightly harder for them to explain their approach - until the market hits the next speed bump.

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Tsy futures close with gains

After trading lower on stocks' resilience earlier in the session, Tsy futures close with gains Wednesday as bad economic outlook from Beige Book wins out. June 30-yr bond futures rise 8+/32 at 127-29+, just below one-week highs set Tuesday, according to Optima Investment Research. Anticipated cash yield seen above 3.625%. June 10-yr note futures up 6+/32 at 123-25+, topping Tuesday's high, with yields seen below 2.875%.

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economic history

ome prominent officials have rolled out the slack argument as a reason to be wary about deflation risks.

"If you look at previous periods in our economic history when the level of economic slack...was as large cumulatively as it's likely to be during this recession, you saw periods when the inflation rate fell by four or five percentage points," White House adviser Lawrence Summers said last week.

That was fine in the 1970s or 1980s when the U.S. suffered similarly serious recessions, because inflation was running around double-digits back then, so the declines brought price growth to more acceptable rates. But inflation was running much lower heading into this recession in late 2007, so there isn't as much of a cushion.

"I don't think the concern about deflation in the nearer term is one that can be entirely discounted," Summers said.

He's not alone. In a recent speech, Fed Vice Chairman Donald Kohn said, "significant further decreases in inflation as a result of the substantial slack in resources, lower import prices, and declines in the prices of oil and other commodities could imply an increase in the real federal funds rate."

"Indeed, if such a process continued for some time, we could fall into deflation, much as Japan did for a time in the 1990s and earlier this decade," he said.

Not so fast.

It may instead be the gravity-defying properties of many services - what goes up tends to keep going up, though maybe at a slower rate - that will keep the U.S. from sliding into Japan-style deflation.

Services, excluding energy, are a pretty good proxy for sticky-price sectors. They now make up over 55% of the CPI, and they're running at 2.3% annual growth versus the 0.4% decline for CPI as a whole. In the late 1970s, services less energy only made up a little more than one-third of the CPI.

In contrast, slack-sensitive durable goods made up about one quarter of the CPI thirty years ago. Now they're one-tenth.

"It's a very important phenomenon," said Nariman Behravesh, chief economist at IHS Global Insight. "The biggest hit this time around is in manufacturing, and if you look at the (producer price index), or manufacturing components of inflation, they're either in or near deflation."

However, "if you look at the service sector, we're not even close" to deflation, he said.

"Services tend to be a lot more labor intensive and have a higher degree of stickiness," said Sung Won Sohn, a professor at California State University, "so it might take a bigger slack in the economy to force wages to be actually declining."

Despite some anecdotal reports of wage cuts, hourly earnings are still growing on average, though the rate of increase has weakened along with the rise in unemployment. And long-run inflation expectations, as measured by the Survey of Professional Forecasters, have been stable through inflation's runup early last year and its plunge in recent months.

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America Bonds beginning to flow

Build America Bonds beginning to flow into market ahead of the $3 Bln to $4 Bln California taxable GO deal. A $250 Mln triple-A University of Virginia offering was launched and priced at 250 BPs over 30-year Treasurys, producing a 6.222% rate. Meanwhile, price talk on New Jersey Turnpike's planned BABs is Treasurys plus 400 to 425 BPs, according to a source familiar with the transaction. That would put the taxable deal close to an 8% coupon at par. Deal size was expected to be $650 million but could be increased to $1 billion, according to Street chatter. Other deals in the pipeline include a $250 Mln New York MTA offering.

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survey gauging builders

The National Association of Home Builders' survey gauging builders' thoughts on the market for new, single-family homes surged to 14 in April from nine in March.

The reading of the monthly survey of builders' sentiment on market prospects was the highest in six months. Prices have fallen deeply amid rising foreclosures in the existing home market.

"The reason that the homebuilder survey is pointing to further gains is likely because affordability has increased considerably," said Abiel Reinhart, an analyst for JPMorgan Chase Bank.

NAHB chief economist David Crowe called the surge in the confidence index "a very encouraging sign that we are at, or near, the bottom of the current housing depression."

Perhaps builders' spirits are buoyed about signs of improvement in the economy - and in their business. The latest Commerce Department data on new-home sales, for instance, showed an increase in demand, with sales during February rising 4.7%. Housing starts for the months soared 22.2%.

Prices for new homes kept dropping in February, with the median plunging to $200,900 from $245,300 a year earlier. Borrowing costs have been beaten down by the recession; Freddie Mac (FRE) data show the average rate on a 30-year mortgage was 4.87% last week. A year earlier, the rate averaged 5.88%.

"If you're a potential buyer who's been sitting on the fence waiting for a sign that now is the time to act, this is it," NAHB Chairman Joe Robson said. "Some of the most favorable buying conditions in a lifetime are now in place, and they are drawing more consumers back to the market."

A component within the housing market index that measures current sales conditions rose to 13 during April from eight in March. An index gauging traffic of prospective buyers increased to 14 from nine. An index gauging sales expectations in the next six months jumped to 25 from 15.

"With the prime home buying season now under way, builders report that more buyers are responding to the pull of much-improved affordability measures, including low home prices, extremely favorable mortgage rates and the introduction of the $8,000 first-time home buyer tax credit," Crowe said.

The NAHB's overall housing market index for April was based on a survey of 360 home builders, who answer questions about sales prospects now and in the near term. When the Housing Market Index exceeds 50, it means the number of builders who see "good" sales outnumber the number who see "poor" sales. The numbers used in compiling the index are adjusted for seasonal variations.

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The Fed's Beige book

The Fed's Beige book seemed to signal a nascent, slight, small hope for housing. The Book said housing markets remained "depressed," but "there were some signs that conditions may be stabilizing." The report said the homebuyer tax credits, lower mortgage rates and lower prices have attracted buyers.

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Manufacturing showed a mixed

Manufacturing showed a mixed performance in April, according to the Fed's Beige Book. The Boston, Philadelphia, Richmond, Atlanta, St. Louis, Minneapolis and San Francisco bank districts reporting decreases in production. But "manufacturers' assessments of future factory activity improved marginally over the survey period as well, with contacts in the Boston, New York, Philadelphia, Atlanta, and Kansas City Districts noting a slight upturn in the outlook for production and sales," said the Fed.

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USD/JPY currency options were lower

Volatilities implied by USD/JPY currency options were lower Wed in NY after the dollar rose against the yen. One-month at-the-money USD/JPY options implied volatilities were at 14.70%/16.95%, down from 14.90%/17.15% in Tokyo and from 15.40%/16.30% Tue in NY. One-month EUR/USD implied vols were at 13.90%/15.40%, from 14.30%/15.80% in Tokyo and 14.90%/15.30% Tue in NY. One-month EUR/JPY implied vols were at 20.20%/23.20%, from 20.50%/23.50% in Tokyo and from 20.50%/23.0% Tue in NY.

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USD/JPY rose after the release of the Fed's Beige Book

USD/JPY rose after the release of the Fed's Beige Book, along with U.S. stocks. The report was slightly more optimistic than last month, showing that the pace of economic decline may be starting to moderate in some parts of the country. Recently, Wed afternoon in NY, EUR/USD was at 1.3196 from 1.3274 late Tue. USD/JPY was at 99.23 from 98.83, according to EBS. DJIA up 46.

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The Federal Reserve's Beige Book

The Federal Reserve's Beige Book was slightly more optimistic than last month, showing that the pace of economic decline may be starting to moderate in some parts of the country. To be sure, reports from the 12 regional Fed banks show that, in general, the recession deepened further through early April. However, five of the 12 districts reported some hopeful signs that activity in some sectors was starting to stabilize.

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Chilean peso closed practically unchanged

The Chilean peso closed practically unchanged against the U.S. dollar Wednesday as gains in international copper prices offset the early tumble in U.S. markets.

The peso ended the session at CLP578.50 to the dollar, compared with CLP578.20 the previous session, after moving in a narrow CLP578.70-CLP580.80 range.

Spot copper on the London Metal Exchange jumped 3.7% to $2.15456 a pound, according to state copper commission Cochilco's daily market data. Chile is the world's largest copper producer and exporter, so currency traders often look at copper prices to gauge the country's terms of trade.

The gains in spot copper offset the early tumble in U.S. markets, when the Dow Jones Industrial Average and Nasdaq both lost ground. The foreign currency market has been taking direction from U.S. stock markets in recent sessions, with local investors using it as an indicator of the duration of the global financial crisis, traders said.

In its daily dollar sale on behalf of the Finance Ministry, the central bank auctioned off $50 million at a weighted average rate of CLP578.79. The bank doesn't release information on which banks bid on the dollars or in what amounts.

The Finance Ministry is selling $50 million a day for a total of $3 billion to partially finance programs in its $4 billion fiscal-stimulus package. The funds to be sold are drawn from one of the country's two sovereign wealth funds.

In the local bond market, yields on Chilean central bank bonds ended mixed, with most investors' attention centered on a corporate bond issue, traders said.

Telecommunications firm Telefonica CTC Chile, a unit of Spain's Telefonica, issued $180 million in five-year bonds.

The yield on inflation-indexed, five-year BCUs ended at 1.86%, up from 1.84% Tuesday, while the yield on 10-year BCUs ended at 2.69%, from 2.70% Tuesday.

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Treasury futures prices bounce off

Long-end Treasury futures prices bounce off session lows ahead of Fed's Beige Book release for the April 28-29 FOMC meeting, putting traders on watch for positive indicators, or "green shoots" in the parlance of recent Fedspeak. June 30-yr bond futures recently down 10+/32 at 127-10+, climbing above 30-day avg price, while June 10-yr note futures down 2/32 for the day at 123-16+.

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Builder confidence is improving

Builder confidence is improving, with the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) rising to 14 in April from 9 in March. It's the highest scale the index has hit in the past six months. "This is encouraging sign that we are at or near the bottom of the current housing depression," said NAHB chief economist David Crowe. (This is a sentiment index. Item timed 1707 GMT misstated the index type

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