Euro woes deepen relying on NFP for relief

Trichet is finding it difficult to convince global investors of the strength of European solidarity. The PIIGS, one by one, are being set upon methodically by capital markets. They are losing credibility and with that global investments support. Will today’s NFP number really matter? Maybe we have seen the ‘storm before the calm’, given the large dollar move. The risk aversion in the markets, supported by the actions of global equities and the widening of sovereign debt spreads could trump this morning data, unless we are dealt a large revision, which should be explained away rather quickly. It seems buying ‘dollars and wear diamonds’ is the appropriate action as we have no alternatives at the moment.

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies in another ‘volatile’ trading range.

Forget the PIIGS for one moment and focus on the ‘miracle’ report that was presented to us yesterday. Data reveals that US productivity (+6.2%) is experiencing the three strongest growth quarters since England last won the World Cup (1966). Productivity growth has soared because hours worked were excessively cut, probably caused by companies inability to finance excess inventories. Historically, growth in hours worked will eventually expand will have to follow the expansions in part- and full time jobs, resulting in productivity growth softening. Digging deeper, there were limited downward revisions to previous month’s growth, and an upward revision to unit labor costs. Analysts will tell you that the scenario, of productivity growth and over-all contained labor costs, can only be bullish for corporate earnings. Why? Pricing comes at the expense of hired-labor.

Now for something a tad disappointing, US jobless claims, a report that remains excessively high. Initial claims (+480k vs. +472k) continue to grind higher after late Dec.’s lows, and are now threatening the top end of the Nov. range, but far below the last Spring peaks of +600k. This obviously does not help the continuing claims scenario (+4.602m). In support for continuing claims, it’s gravitating towards the low levels of last year. However, one should bear in mind that individuals continue to move towards emergency and extended programs. Of the two latter programs, extended benefits is declining (-40k), off from their peaks of just under +0.6m in Nov. Unlike emergency compensation which continues to rise (+281k to +5.632m), practically on top of its record high print earlier last month. The reasons, the duration of unemployment continues to move out and firms are reluctant to hire.

The USD$ is currently higher against the EUR -0.35%, GBP -0.39%, CHF -0.73% and JPY -0.83%. The commodity currencies are again softer this morning, CAD -0.18% and AUD -0.06%. Finally, the loonie was able to satisfy analyst’s prediction of a 1.0750 print yesterday. The CAD plummeted to its Nov. lows as global equities sank on weaker fundamental data, thus weighing on commodities and growth currencies. Yesterday’s US jobless claims disappointed the market, coupled with European sovereign woes had speculators heading for the hills ahead of this morning’s North American employment reports. Canadian data is expected to add +15k new jobs. Unless, the headline print deviates far from expectations, the loonie will wait for NFP and the greenback for direction. On a cross related basis, the CAD continues to outperform other G7 currencies. Depending on equities and commodities, any CAD rally will have investors looking to sell some of their long positions. Let’s see what employment gives us.

The Australian dollar managed to jump on to the commodity negativity band wagon last night and remains under pressure with global bourse’s finding it impossible to find any traction. Analysts are now predicating that the currency slide may even be greater. Some believe that the AUD, by mid-year, will trade close to 0.8200 on prospects that the RBA will raise interest rates at a slower pace than traders are anticipating. Earlier this week, the RBA kept rates unchanged at 3.75%, establishing a wait and see policy, as they wait to experience the true impact of the earlier hikes. Naturally, there remains a lofty rate premium built into the currency after three successive hikes. Let’s see how the growth currencies react to tomorrows NFP numbers (0.8639).

Crude is lower in the O/N session ($72.73 down -41c). There was no way that crude prices were going to remain elevated with a ‘dollar’ trending upwards. At one point the commodity fell as much as -5.5% yesterday, the largest drop in 6-months, as the greenback rallied and a drop in equities supported ‘skepticism that the economic recovery will be sustained’. Earlier this week, we witnessed a surprisingly large build in oil inventories in the EIA report. Crude stocks advanced +2.3m barrels, beating expectations for a little change, w/w. With the report showing a smaller build than the earlier API print (+4.7m), the data affirms the markets concern that the demand for energy is weakening as the US economic recovery remains tepid at best. Refineries continue to struggle with the problem of excess supply and too-little demand. They are operating at 77.8% of capacity, down from 78.5% last week, a loss of -0.8%, w/w. Gas stockpiles fell by -1.3m barrels to +228.1m vs. an expected +1m increase. Also in the declining boat was distillate stocks (heating oil and diesel fuel), they fell by -948k barrels to +156.5m vs. an expected decline of -800k. Continued geo-political concerns in Nigerian continue to temporarily support the market. Again for a second consecutive time, the crude print was the only bullish component of the report. Look for better selling interest on upticks. This morning’s NFP number will solidify commodities fate.

I bet many had wished they had gotten off the gold train much earlier. The lemming long trade of last year (+24%) has witnessed wild gyrations over the last 5-trading sessions. Yesterday, the ‘yellow metal’ plunged the most since 2008 as the dollar extended its rally, thus eroding the appeal of the precious metal as an alternative investment. All markets are now a measure of risk tolerance. With the dollar entrenched in an upward trend year-to-date should further pressurize the yellow metal. A percentage of dealers do not believe that the commodity downfall has run its course, even after two months of previous declines. Liquidation with a purpose will again have nervous investors seeking an early exit. With the EUR questionable and the dollar the ‘go-to’ currency for surety reasons, expect to see selling on upticks for the time being ($1,052).

The Nikkei closed at 10,057 down -298. The DAX index in Europe was at 5,468 down -65; the FTSE (UK) currently is 5,055 down -83. The early call for the open of key US indices is lower. The US 10-year note eased 9bp yesterday (3.60) and are a further 3bp in the O/N session (3.57%). As stated yesterday, US fundamentals are proving a challenge for FI prices. Despite ‘big picture’ leading us towards higher yields, yesterday’s weaker US claims report coupled with European sovereign debt concerns created a stampede towards the safety of treasuries. The flight to quality has been supported by global equity indices falling. Next week the US government will sell an equivalent to last Nov.’s record-tying $81b in notes and bonds (3’s $40b, 10’s $25b and 30-years $16b). This mornings NFP should provided ‘food for though’ and conviction for a few.

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