Tuesday, June 26, 2012

Focusing on Non-Farm Payrolls

By Dean Popplewell

What a performance by Central Banks this week? They are supposed to alleviate some of the market volatility, not add to it. The BoJ is a Central Bank gone rogue and intervening ‘not’ under the multilateral decision process, a decision that has upset the US and ECB. It may be a while before we see any coordinated intervention policy from them. The Swiss, loosening monetary policy and charging foreigns for CHF holdings, and finally Trichet, the Euro-zone’s last line of defense, not capable of a getting a unanimous decision to renew bond purchasing under the SMP program, have all added to this volatile trading environment, a scenario that they are supposed to be downplaying.

Now that the market has licked its wounds somewhat, we get to focus on the grandaddy of fundamentals, NFP. Investors have, to a certain extent, prepared themselves to expect a softer print (+85k and +9.2%). Any positives should be capable of providing a small relief rally amongst the asset classes. However, a disappointing print and the bleeding will begin again.

Next week the market will be wondering, are US rates too low to give us QE3? Perhaps doing nothing could be deemed proactive. It may force many to put some money to ‘real’ work rather than chase an equity windfall.

The US$ was weaker in the O/N trading session. It was higher against 9 of the 16 most actively traded currencies in a ‘subdued’ session ahead of employment.

When Trichet was yapping, domestic markets had to digest US weekly claims and figure how they will stand up to this morning's NFP release. The previous week’s sub 400k print (+398k reported) was an aberration. After revisions, the week was bumped up to +400k, similar to last week’s print of +401k individuals qualifying for unemployment benefits. For seventeen consecutive weeks, the level has yet to consistently break that psychological barrier of +400k and fall back below the late first quarter improvements.

In truth, claims came in better than market expectations. Analysts were afraid that because of budget constraints, ‘stop-work’ orders from the FAA would elevate the headline print. Digging deeper, the four week moving average (a more accurate gauge) fell -6.5k to +407.7k individuals. After holding steady for two weeks, continued claims (+3.72m) advanced +10k to +3.73m. The average also rose, to +3.729m from +3.725m. Sluggish job growth raises the risk that consumer spending (+70% of the economy), will struggle to accelerate this half of the year. The market is bracing itself for a softer jobs number this morning (-85k).

The dollar is lower against the EUR +0.35%, GBP +0.05% and JPY +0.50% and higher against CHF -0.41%. The commodity currencies are mixed this morning, CAD +0.13% and AUD -0.19%.

The loonie is on a roll, and it’s not the positive kind. The CAD has fallen for a fourth consecutive day, as crude prices declined and after Central Bank currency intervention. Another day of equity losses yesterday discouraged demand for higher-yielding assets and pushed the currency to take out the weak short dollar stop-losses that has opened up this new trading range on the topside.

It’s worth noting that from a safer heaven trading perspective, Canada’s 30-year government bond yield has retreated -0.54% over the last twelve months, the most among the G7. Big picture, concern about Euro and US budget deficits is supporting Canadian denominated assets and by default the loonie.

Traders will turn their focus to this morning’s North American employment release and the IVY PMI. Canada is expected to add another +20k new jobs and to keep the unemployment rate unchanged at +7.4%. However, the currency will be at the mercy of the NFP report. The market remains a tentative buyer of CAD on US rallies (0.9838).

The AUD is heading for its biggest weekly decline outright in twelve-months after the RBA cut its forecast for 2011’s economic growth. Output concerns slowing in the Euro-zone and the US has spurred declines in prices of commodities that account for a majority of the country’s exports. The RBA said that economic output will likely grow at an average of +2% this year, down from its May 6 estimate of +3.25%.The AUD continued its slide in the O/N session, for a sixth-consecutive day, as slower growth signs in the region has investors pricing in a cut by the RBA in October. This is the spillover from a poor retail sales print earlier in the week. After keeping rates on hold, Governor Stevens signaled a tightening bias once the world outlook improves. Global data of late is pointing towards the threat of a ‘double-dip’ recession scenario. In the futures market, the pricing of an RBA cut has increased +15bp to +41bp over the next 12-months.

While policy makers have pointed downside risk to the global outlook, they have also added their concern about Australia’s medium term inflation. Last week's inflation data would suggest that there is a greater possibility of an RBA hike rather than an easing in the latter half of this year, of course that all depends on world growth. With commodity prices feeling the pressure, selling of AUD on rallies is preferred (1.0429).

Crude is lower in the O/N session ($86.45 down -$0.18c). Crude prices have plummeted, falling to their lowest level in five-months, easily erasing all of this year's gain amid growing evidence that the US global economic recovery is stalling and sapping demand from the world’s biggest consumer. Disappointing US data this week showed that the consumer continues to spend less in response to a sluggish job market and higher fuel costs.

Last week’s inventory build has helped prices to slide. US gas stockpiles rose sharply and demand over the past four-weeks fell-3.6% compared with a year-ago, adding to concerns about tepid consumption in the midst of the peak summer demand period. Inventories increased by +1m barrels to +355m, and remain above the upper limit of the average range for this time of year. Not to be outdone, gas inventories moved up by +1.70m barrels last week, and are in the upper limit of the average range. Analysts had expected crude stocks to gain by +1.5m barrels and gas inventories to rise by +250k. The commodity sector is expected to remain volatile on the back of weaker fundamentals.

For seven months it’s been a safe bet. Gold surged to another new record high yesterday, as escalating concerns that the global economy is losing momentum spurred demand for the yellow metal as an investment haven. However, with the equity market route, liquidation of the metal to cover margin calls in other asset classes happened to pare some the metal's gains. Moody’s earlier this week, stating that the US credit rating may be downgraded by placing the country on negative outlook, led investors to buy the metal as a ‘store-of-value’.

Year-to-date, the yellow metal has advanced +17%, heading for its eleventh consecutive annual gain. This ‘one directional trade’ is far from over, with speculators continuing to look to buy the metal on pullbacks until proven wrong. There remains a demand for the commodity for insurance purposes as alternative asset classes under perform with many investors receiving margin calls ($1,671 +$12.40c).

The Nikkei closed at 9,300 up +20. The DAX index in Europe was at 6,267 down -149; the FTSE (UK) currently is 5,266 down-121. The early call for the open of key US indices is higher. The US 10-year eased 19bp yesterday (2.42%) and is little changed in the O/N session.

Yield curves have taken a battering from growth nervous investors. In the short end, two-year note yields fell to a record low amid growing concern that a slowing domestic economy and spreading debt problems in Europe will prompt Bernanke to take additional steps to bolster growth (Jackson Hole). Already this week we saw three Cbanks defend their currency and state their case to bolster liquidity.

The 10-year yield happened to fall to its lowest level in ten-months yesterday, as a government report showed jobless claims remained at an elevated level ahead of this morning's NFP release. The US economy is not creating enough jobs to cut the unemployment rate. The market is front running the probability of QE3 being implemented. This will require the Fed to keep rates low for an ‘extended period of time’. The Fed will do this out the curve by buying more longer-maturing Treasuries. Any extra capital will continue to focus on the back-end as speculators try to grab yield. Will this morning’s NFP vindicate their actions?

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