This week is an important one for the US economy based on the employment figures coming out and it started off yesterday with a dud. The ADP employment change figures showed that a measly 38K jobs were added vs. an expected 175K. This has caused analysts to revise their forecasts for Friday’s Non-Farm Payrolls lower.
So I ask again, who’s working? Is anything working? Yesterday’s market sell-off showed that indeed very little is happening to move the US and thus the global economy forward. In the midst of yesterday’s sell-off, Moody’s downgraded Greece to Ca1, which is basically a junk rating and it should be noted that nearly 50% of those with this rating default on their obligations.
So it is going to be much harder for the EU to manage this crisis, as this takes many bond investors out of the game as they can’t invest in stuff with junk status. Nevertheless, Chancellor Merkel of Germany was out in front claiming that that there is no problem with the Euro, but rather a debt problem in certain countries. Germany remains committed to the Euro, and the outlook for growth in Germany is extremely positive.
Meanwhile in the UK, a BOE policy-maker said he would favor further QE if the economy weakened. It appears as though all these guys are ready to double-down on bad policy and that the UK is prepared to stick it to its citizens by way of inflation.
Lastly, Prime Minister Kan in Japan survived the no-confidence vote after signaling that he will resign after Japan appears to resolve the economic crisis that has come about after the natural disasters. This has removed some of the political uncertainty (fear) in the markets, though the Nikkei followed US stocks lower regardless.
So there is some mild risk-taking going on in the US session to start the day, with stock futures and commodities slightly higher to start the morning. Whether this will continue after the initial jobless claims report later this morning that is expected to show a loss of 417K is anyone’s guess.
In the forex market:
Aussie (AUD): The Aussie is mostly higher after retail sales figures came in higher showing a gain of 1.1% vs. an expected .4%. While trade balance figures came in lower than expected, both of these data points can be attributed to the flooding which cost them negative growth.
Kiwi (NZD): The Kiwi is somewhat lower after powdered milk prices fell thereby hurting one of New Zealand’s largest exports. The Kiwi has reached new all-time highs vs. USD, so yesterday’s pullback may be welcome.
Loonie (CAD): The only economy that gets hurt worse than the US when there are problems in the US is the Canadian economy. While the market has read this week’s rate policy statement as hawkish, ultimately it will be the data that drives the decision.
Euro (EUR): The Euro is higher across the board despite the downgrade of Greece yesterday as there is little news that could derail it from a fundamental sense. The anti-Dollar position of the Euro is the true driver of price action, and Merkel’s comments have helped restore confidence. (Click chart to enlarge)
Pound (GBP): The Pound is somewhat higher despite the comments about further monetary easing as a possibility if economic conditions don’t improve. PMI construction data came in better than expected, but pales in comparison to yesterday’s 2-year low of PMI.
Swissie (CHF): The Swissie continues to behave as we would expect from a safe-haven currency. At all-time highs vs. USD, this is the safe-haven currency of choice at the moment, along with gold. (Click chart to enlarge)
Dollar (USD): The threat of QE3 being launched on the US economy due to economic weakness has the US dollar in the crosshairs. Further Dollar weakness could continue to drive markets (and inflation!) higher, but to what end? These employment figures look awful and it is a failure of government on fiscal policy, not that rates aren’t low enough, that has us in this economic malaise.
Yen (JPY): The Yen is somewhat mixed after the no-confidence vote did not oust the Japanese PM, yet there is still significant risk in the market and I’m a bit surprised that the currency market has behaved as it has despite what stocks did overnight.
Initial jobless claims just came in at a loss of 422K, which is largely in-line with expectations. So the markets may react favorably today after yesterday’s massive sell-off. But make no mistake about it, the US and hence the global economy is slowing and all attempts by the Fed to keep growth positive may be misguided.
Yet the QE3 argument will be around for a bit, especially if tomorrow’s NFP report shows an extremely weak number. Don’t forget that the market has already priced in a lower expectation of this figure based upon yesterday’s ADP report, so what may seem like a big miss could essentially be seen as positive.
So at this point, I will take anything over 100K though the initial volatility could be extreme. It is no secret that the global economy is slowing, and it is up to the government to do a better job to manage expectations, rather than continue to lie to keep themselves in power.
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