Has NFP got the strength to surprise?

With China’s manufacturing growth declining, and deepening budget cuts in Spain and UK, is undermining ‘the faith’ in the recovery process this morning. Now that the second quarter-end transactions have been executed, the market will try and focus on tomorrows NFP details. This month’s payrolls are expected to fall by -125k after the +431k ‘Census’ related jump in May. With no influence from yesterday’s ADP print, private payrolls are projected to increase by +105k. The unemployment rate is estimated to tick up a tad to +9.8%. Hourly earnings will probably decrease by -0.1%, after a +0.3% gain last month, while the average workweek is forecast to remain flat at +34.2 hours. That been said, today is shaping up to be a carbon-copy of yesterday, equities under pressure, FI in demand and growth and safe heaven currencies testing major support and resistance levels.

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.

Yesterday’s US ADP private payrolls was a disappointment. It revealed an increase of only +13k new jobs this month, down from the +57k the previous month and well below the street consensus of +60k. Despite it being the fifth consecutive monthly gain, it was the weakest print in 4-months, certainly indicating that the private-sector hiring is decelerating heading into the summer. Digging deeper, it was the medium-size companies leading the gain (+11k), while larger companies hired +3k and small enterprises shed -1k positions. Breaking it down into sectors, the services sub-category added +30k positions, while the goods-producing sector reduced their workforce by -17k. A pleasant surprise came from the manufacturing sector, adding +16k new posts. How will this influence Friday’s NFP wagers? Of late the correlation between the two reports has been somewhat weak. The market expects the headline print to be somewhat distorted as Census hiring started to unwind in June. The market expects to see a headline decline because of the Census temp jobs paring -243k positions in opening fortnight of June (NFP reporting window). Ex-census distortions, analyst expects core payrolls to come in around +110k, mostly from the private sector.

The USD$ is lower against the EUR +0.15% and CHF +0.51% and higher against GBP -0.27% and JPY -0.06%. The commodity currencies are weaker this morning, CAD -0.14% and AUD -0.73%. 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. Currently, risk does not look attractive and more traditional safe havens are coming to the fore like dollars and JPY. 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 two-trading sessions, sell, sell, sell. The Aussi fell close to its three week low as expansion in China’s 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%). Technical analysts are now plotting the currency’s downfall to the 0.8000 support level, assuming further losses are to be expected in equities as there is still an underlying panic in the market and dealers note that ‘the path of least resistance on any disappointing news is to the downside’. Already this week 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. European funding fears has technical analysts wanting to sell the currency on rallies and shifting into more risk adverse currencies like JPY and CHF (0.8383).

Crude is lower in the O/N session ($74.56 down -110c). Crude prices remained close to home yesterday after falling from this weeks 2-month high, capping its first quarterly decline in two years. In the O/N session, the commodity took its cue from weak global bourses and resumed its downward trend. 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. The fear that a double dip is on the cards has investors wanting to sell. Direction is dictated by demand and with ample supply and global growth worries, speculators continue to sell on rallies.

Bigger picture, Gold continues to be a safe heaven attraction. This week the commodity has managed to retreat from its record highs on technical resistance and profit taking, a healthy purge in the recent one directional trade. With the Fed indicating low rates for an extended period of time had questioned the dollar recent strength and by default the commodity provided an alternative investment vehicle. 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 the ‘yellow metal’ is trading with a greater consideration of its safe haven status. Year-to-date, the commodity has gained +16%. 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. For now, buyers are waiting in the wings to purchase product on pull backs as equities flounder ($1,241 -40c).

The Nikkei closed at 9,191 down -191. The DAX index in Europe was at 5,904 down -61; the FTSE (UK) currently is 4,853 down -63. The early call for the open of key US indices is lower. The US 10-year backed up 1bp yesterday (2.95%) and is little changed in the O/N session. Treasury prices fell ever so slightly on European bank optimism. Technically, the market had entered overbought territory on the back of this week’s strong rally. In the week thus far, FI was in demand across the US curve at quarter end on fears of a slowing global economic recovery. Tuesday’s plummeting US consumer confidence has also provided support for the ‘bulls’ positions. Also helping the ‘safer’ asset class on pull backs is tomorrow’s NFP report, where many analysts expect a much weaker headline print.

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