After all the data we have seen this week, this morning’s NFP results could end up being rather anticlimactic. As we head into a long weekend, market anticipates a Census driven weaker headline print (-125k) and an unemployment rate edging up a notch (+9.8%). Thus far, weaker US data has led to a weaker dollar and not to risk aversion ‘buck’ rallies. Why now? Maybe it’s the classic risk aversion deleverage process where investors sell commodities, sell equities and in turn are required to sell the dollar’s as positions are reduced. Or, is the interest rate expectation theory in play? With such weak data, Bernanke’s ‘extended period’ is looking further off into the sunset. This theory has the bond traders aggressively flattening the US yield curve as investors sell all the other asset classes. Can the expected ‘weaker’ NFP print continue either of these theories ahead of a long weekend with questionable liquidity by mid morning?
The US$ is mixed in the O/N trading session. Currently it is higher against 10 of the 16 most actively traded currencies in another ‘volatile’ trading range.
. Applications for jobless benefits have been struck in a range of +440k to +490k per week this year, and yesterday was no exception with a w/w rise of an extra +13k to +472k print. With a US unemployment rate of +9.7% (likely to edge up this morning to +9.8%), the economy needs to be producing in excess of +150k new jobs each month to change the unemployment topography. While layoffs have slowed sharply from early last year, businesses remain skeptical of the strength of the US recovery and continue to stay cautious on hiring, by default keeping claims for unemployment benefits at these lofty levels. Yesterday’s claims data will have no bearing on this mornings payroll print as it falls outside the survey window.
Everyone knows that US manufacturing has led, somewhat, their recovery from ‘the’ recession. That being said, softer fundamentals ranging from retail to home sales has many questioning the strength of the ‘growth’ traction. The last thing that the fragile investor market wanted to hear yesterday was a weaker ISM manufacturing index (56.2 vs. 59.7) in the States to go along with China’s and the Euro-zone’s worries. Market consensus had been prepared for a weaker number by the PMI’s, however the headline print was much weaker that the anticipated 59.0. The decline was broadly based, but, noted by analysts was that key sub-categories remain at high levels (new-orders-58.5, employment-57.8). On the flip side, there was a sharp fall in the prices paid component (77.5 to 57.0) because of much weaker oil prices. The steeper ISM decline is trying to be explained away by the European debt crisis. If that was so, surely European PMI would have been much harder hit (55.8 vs. 55.6)? Or are we just backing off from serious lofty prints of late? Worse case scenario has us preparing for a more serious slide.
Finally and more of a by-note, was the slumping of pending home sales by -30% in May. The print provides further compounding evidence of ‘a collapse in activity following the expiry of the tax breaks’.
The USD$ is higher against the EUR -0.16%, GBP -0.06%, CHF -0.47% and JPY -0.38%. The commodity currencies are mixed this morning, CAD -0.06% and AUD +0.28%. The CAD has plummeted to a three week low as GDP data showed that the Canadian economy unexpectedly stalled in April and below market expectations +0.0% vs. +0.2%. However, bear in mind it’s only one release, hardly evidence of a trend. Analysts have us believing that there should be enough underlying momentum to dismiss the monthly ‘blip’ and not enough evidence to dissuade Governor Carney to give up just yet on normalizing rates. Digging deeper, there was a large decline in retail sales and a relatively smaller decline in manufacturing activity. The utilities were offset by an increase in mining, wholesale trade and, to a lesser extent the public sector and construction. It’s worth noting that a strong base effect contributed to the April decline. The loonie ended up experiencing a volatile intraday range. Initially the currency appreciated on ‘less’ fear European reports and on the back of commodities and equities rallying. With the risk-off trading scenario, the CAD was down -4.2% last quarter, recording its first quarterly decline in a year. On the crosses, CAD is trying to hold its own and in relative terms is seen as a safer way to play a global economic recovery with links to commodities and less banking. Speculators had been betting that Cbanks will up the ante and use the currency as a safe haven destination for capital. Beware there are many waiting in the wings wanting to own the currency.
Like all commodity and growth linked currencies, their fate has been the same over the past couple of trading sessions, sell, sell, sell. However, the AUD received a small reprieve O/N. The currency rallied vs. most of its trading partners after PM Gillard reached an agreement with mining companies on resources taxes. With the market speculating that the Fed will keep interest rates at a record low to aid a ‘waning US recovery’, is preserving the regions yield advantage. Earlier in the week, the Aussi fell close to its three week low as expansion in Chinese manufacturing slowed for a second month (52.1 vs. 53.2) and Australia’s building approvals unexpectedly dropped in May (-6.6%) while its retail sales growth weakened (0.2% vs. 0.3%). Weaker global industrial and confidence data has investors talking of ‘double dips’ which will obviously affect growth and high-yielding currencies. In the last quarter the AUD has dropped just over -5.7% vs. the greenback. Earlier this month, comments from the RBA, who said that Europe’s debt crisis would ‘inevitably weigh’ on global growth, had fueled speculation that the Governor Stevens may keep rates unchanged until at least the end of the year. It seems that the ‘previous rate rises has given them flexibility to leave borrowing costs unchanged at next month’s meeting’. To date, the crisis in Europe has not had a material impact on the Australian economy, but, that’s been called into question (0.8483).
Crude is higher in the O/N session ($73.08 up +8c). Crude plummeted the most in five months yesterday on fears that the world’s two largest economies, China and the US, were showing signs of slower growth and would reduce the demand for the black-stuff. Reports recording manufacturing slippage and weaker growth (The US and China respectively) had the commodity plummeting close to -4.5% intraday. Fear that the global economy is heading for a double dip recession will have crude fighting for every dollar uptick as the bear’s continue to have a stranglehold on prices this week. The weekly EIA report showed that gas inventories rallied for the first time in 2-months while crude stocks fell. Gas stocks rose +537k barrels to +218m vs. an expectation of a decline of -400k barrels. On the flipside, crude stockpiles fell -2.01m barrels to +363m vs. an expectation loss of -1m barrels. Supplies of distillate fuel (heating oil and diesel) also managed to climb to a two month high print. Distillate fuel climbed +2.46m barrels to +159.4m. The market had been expecting a +950k barrel gain. This was a bearish report as the build in gas and distillates are offsetting the larger than expected drop in crude. Oil was down -9.4% for the quarter and -4.4% this year. Crude stocks remain well above the five-year average level, and are +3.2% above a year ago, the biggest year-on-year surplus in 6-months. Currently there are too many negative variables that support the bear’s short positions. Direction is dictated by demand and with ample supply and global growth worries, speculators continue to sell on rallies.
What a time to fall out of bed. Gold had its biggest intraday loss since Feb. yesterday, as investors aggressively pared their positions on ‘new’ market belief that perhaps the European Financials are in better shape that originally thought, thus reducing the demand for commodities as a safe heaven investment. With the EUR having its largest one day rally vs. the dollar in 13-months and EU banks requiring less cash than originally perceived for repayment purposes has the market believing that ‘the European debt situation is not so bad’. Bigger picture, Gold continues to be a safe heaven attraction also retreating from its record highs on technical resistance and profit taking, a healthy purge in the recent one directional trade. Technically, pull-backs have been bought. The commodity’s prices, especially vs. EUR and GBP, should remain strong on speculation that European’s Economic woes will be prolonged. With broader risk appetite under pressure, the market is capable of printing new record highs again and again. The upward bias trend remains intact as long as $1,185 holds. Year-to-date, the commodity has gained +12.5%. Generally, it has become the benefactor when all other currencies fail. Thus far, Europeans have been content in using the commodity as a hedge against their European holdings, believing that the EUR has not bottomed out just yet. We will see ($1,210 +400c)!
The Nikkei closed at 9,203 up +12. The DAX index in Europe was at 5,871 up +14; the FTSE (UK) currently is 4,825 up +20. The early call for the open of key US indices is lower. The US 10-year eased 3bp yesterday (2.92%) and is little changed in the O/N session. Treasury prices again rose, flattening the US yield curve, and pushing longer term yield’s to the lowest print in 10-months. Demand again intensified as an increase in US initial jobless claims and slower manufacturing growth (see above) raised the risk of deflation. With investors becoming more nervous, the outlook for growth has become bleaker, giving confidence to investors to extend their FI interests out along the curve to maximize their yield returns. Now we wait for this morning’s NFP report. The market expects a weak headline print. Have we been buying the rumor and now want to sell the fact?
