Market is anemic ahead of Job data

It’s the last week of unofficial holidays and this thinly traded market should probably savor these last few days before the rest of the market participants head back to the grindstone.

What have we to look forward to this morning? ADP and Chicago PMI. Analysts consensus expect a+100k print for ADP, just below last months reading. The danger is obviously to the downside, softer data would hold true to form the stream of poor data releases over the past few weeks. The market is certainly insulating itself from a poorer showing from the Chicago PMI, its expected to drop from 57.6 in July to 52.7 this month. It is the last regional manufacturing indicator in August ahead of tomorrows ISM data. To date, all the other regionals have disappointed. A below expectations print could be another non event with so much pessimism already priced in.

This morning German jobless rate held steady (+7%) with the number of jobless Germans continuing to fall (-8k vs.-10k), although the overall pace of improvement is showing signs of slowing. If it was only that easy for NFP to print something of sustainable substance!

The US$ is stronger in the O/N trading session. Currently, it is higher against 12 of the 16 most actively traded currencies in a ‘subdued’ trading session.

Discouraging indicators yesterday had traders in a sell first mentality with the dollar and the EUR both suffering declines on ‘crumbling confidence in their economies’. The mood in the US plummeted this month (44.5 vs. 59.2), the lowest reading in two-years, mostly on the back of the debt ceiling debate. Digging deeper, consumer expectation for economic activity over the next six-months plunged to 51.9 from a revised 74.9 (75.4). The present situation index fared no better, slipping to 33.3 from 35.7. The conference board noted that the headline decline was well under way before the S&P downgrade and Hurricane Irene (metric cutoff was August 18). Consumers inflation expectation held steady at July’s +5.8% 12-months from now. For an employment data filled week consumers views on the job situation turned negative. There were +49.1% of respondents who think that ‘jobs remain hard to get this month’, up from +44.8% in July. Only +4.7% think jobs are plentiful, down from last months +5.1%. Even more disappointing was the percentage of consumers expecting more jobs in the months ahead declined to +11.4% from +16.9%. Perhaps Friday’s data will be another blind side effort?

The S&P Case-Schiller home price index brought us little comfort despite rallying in June (+1.1%) for a third consecutive month. However, adjusted for seasonal factors the 20-city index declined -0.1%, while year-to-date, unadjusted June prices were down -4.5%. The US housing market has been struggling to recover due to high-unemployment (+9.1%), an abundance of foreclosures, a historic shadow inventory and tighter mortgage requirements.

The dollar is higher against the EUR -0.06%, GBP -0.16% and lower against CHF +0.88% and JPY +0.15%. The commodity currencies are weaker this morning, CAD -0.04% and AUD -0.01%.

Like all good commodity growth sensitive currencies, the loonie for the first half of this week was supported by the rise in risk interest. Yesterday, the currency managed to fall for the first time in three-days as a report State side revealed a dramatic drop in consumer confidence to a 28-month low from Canada’s largest trading partner. Yesterday’s rally in commodities managed to mitigate some of the CAD ‘potential’ loss. Month-to-date, the loonie is heading for its biggest drop in a year on speculation that the BoC would refrain from tightening rates anytime soon. The month-end pressure on global equities is also discouraging investors from wanting to own higher-yielding assets.

Canadian data yesterday revealed that the current account deficit widened in April through June to the second largest on record (-$15.3b). Many analysts have now cut by half their expectations for a BoC policy rate increases through the end of next year.

Last week Governor Carney stated that the Canadian economy has stalled and may have even contracted in the second-quarter. This morning we get the Canadian GDP number m/m and fundamentally, the market will have to wait and see what Friday’s US employment number brings to the table before investors place longer term bets. Outlook for the Canadian economy has come under serious scrutiny over the past few weeks. Yesterday’s Fed minutes revealed a dovish meeting and one that shows that policy makers are still prepared to act if things get worse from here, allowing investors to become better buyers of dollars on dips (0.9790).

The Aussie is headed for a monthly decline outright and against the JPY on signs the global economy is slowing. The currency has lost -3.5% against the dollar since its record high print last month. Declines in the AUD o/n have been limited on prospects that slowing jobs in the US will increase pressure on the Fed to add stimulus, and in turn boost demand for higher-yielding assets.

So, it seems that the currency cannot lose at the moment. If US data continues to improve then local market pricing for interest rate cuts by the RBA will evaporate. On the flip side, if US data takes a turn for the worst, then the AUD will benefit from a weaker dollar. Now that this growth and interest rate sensitive currency would likely be supported on both poor and strong US data, certainly favors a test of the old highs north of 1.10.

However, domestic data is found wanting. Aussie consumer sentiment is holding at two-year lows, private sector borrowing has slumped, retail spending is well below normal, home prices are falling, construction and services sector are weak and manufacturing is contracting at a faster pace. These are all strong enough reasons for the RBA to remain on the side line until it has a stronger handle on the economy. Currently, investors are better buyers of Aussie dollars on pullbacks as long as this risk loving environment remains (1.0670).

Crude is lower in the O/N session ($88.77 down-0.13c). For a third consecutive day crude prices have climbed to their strongest print in a month, advancing with gas and heating oil as East Coast refineries worked to restart refineries after Irene and on signs that the US housing market is perhaps stabilizing. With Sunoco shutting a Philadelphia fuel-making unit and other terminals operating at reduced rates is also providing price support for the black-stuff.

Last week’s EIA inventory report revealed that oil stockpiles fell -2.21m barrels to +351.7m. The market had been anticipating a build of inventories of +800k barrels. Crude imports fell-477k barrels per day to +8.77m. Also of note, data released by the IEA showed that the US SPR supply fell -4.8m barrels last week. On the flip-side, gas inventories rallied +1.36m barrels to +211.4m. Analysts had been expecting a-1m barrel decline. Average gas demand in the last four-weeks fell -2.4% from a year ago. Finally, distillates (heating oil and diesel), rose +1.73m barrels to +155.7m, more than the forecasted rise of +700k barrels. Refinery utilization rose +1.2% to +90.3% of capacity.

The report has been bullish for crude and bearish for the products. For the moment, Crude prices continue to hold just above strong support levels, supported by unrest in Libya where the availability of light oil with low-density and sulfur content output has fallen. The Fed’s monetary policy should be bearish for the dollar and bullish for crude in the longer term.

Classic flight-to-safety instruments got a shot in the arm yesterday. Gold has rallied aggressively after the US consumer confidence number sank to a 28-month low and in doing so has pushed US equities lower. The inverse correlation between equities and gold continues to hold steadfast. Investors again are speculating that the Fed will be required to ease monetary policy in answer to stimulate the economy. This is boosting the appeal of the yellow metal as an alternative asset class. To date, the Fed has kept borrowing costs at a record low for nearly three-years to stimulate the economy.

Already this week the possibility of a stimulus package from the Fed in the weeks ahead had seen the return of risk appetite to the market with ‘safer haven assets’ being liquidated. The commodity is close to paring all of this week losses where both fundamental and technical pressures bore down on the commodity once it approached new record levels.

Year-to-date, the lemming commodity trade is up +29%, as the global debt crises and volatile stock markets boost the appeal of the metal as an alternative asset. The Fed’s efforts to drive interest rates lower to support lending should curtail the dollar’s appeal and by default, support commodities. The commodity is heading for its eleventh consecutive annual gain ($1,833+$3.70c).

The Nikkei closed at 8,955 up+1. The DAX index in Europe was at 5,730 up+87; the FTSE (UK) currently is 5,325 up+57. The early call for the open of key US indices is higher. The US 10-year eased 5bp yesterday (2.18%) and is little changed in the O/N session.

US Treasuries prices have rallied, especially longer dated securities, as consumer confidence plunged this month to the lowest in more than two years, highlighting concern that global growth has slowed and boosting demand for the safest assets.

Yields on shorter term treasuries remain rooted to their record lows after the Fed signaled earlier this month that they are willing to take further measures to prevent the US from falling back into a recession. The spread between 2/10’s has again flattened (+199bp).

The Euro-zone and US consumer confidence data yesterday was ‘grossly weaker than expectations and consistent with what has been going on with weakening data of late’ according to Bill Gross. This is causing the market again to retrace towards the double-dip recessionary price level. Longer dated securities have pared their monthly yield gains that they earned after Bernanke’s Jackson Hole address where he said the Fed has tools to aid the recovery if needed, stopping short of indicating any implementation of QE3. 10-year yields remain range bound +2.35-2.03%.

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