Non-farm Payroll to hit -1m…when?

The bets are on that Governor King will have pushed the BOE rates to new record lows this morning and slash another 50bp off borrowing costs. With European consumer confidence dropping aggressively this morning (-30 vs. -25) will surely pressurize Trichet and Co. to follow suit next week. Soon we will be using quantitative easing methods and more bank recapitalizations across Europe to get us out of this mess!

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

After yesterdays disappointing job market indicators, analysts have revised this Friday’s NFP aggressively upwards to show a potential loss of -750k plus. Anywhere close to this and we will have achieved the biggest monthly drop in history (excluding WWII numbers). The ADP private payrolls recorded a loss of -693k last month, while the Challenger survey recorded a massive surge in layoff announcements. It managed to surge +275% higher than a year ago. It’s worth noting that the actual monthly number was lower in Dec. as the figures are not seasonally adjusted. Last month, the ADP report was revised to incorporate improved modeling techniques and additional data sources in order to increase its predictive power for the NFP which is generally released 2-days later. Last month’s revisions suggest that the correlation between ADP and US Bureau of Labor Statistics may have improved. But, one set of data does not make a trend. Digging deeper into the report, medium-sized businesses accounted for the majority of the losses, paring -321k jobs, while small-sized businesses shredded -281k. Large businesses fared a tad better, there we witnessed a more moderate decline of -91k. As the loss of medium and small-sized business workers continues to grow, one can conclude that the recession is spreading well beyond the initial losses in manufacturing and housing related activities. Perhaps the psychological -1m loss is just around the corner, with such a dismal holiday retail season, next month we may be pushed over the top!

The US$ currently is higher against the EUR -0.55%, CHF -0.33%, GBP, -0.35% and lower against JPY +0.98%. The commodity currencies are weaker this morning, CAD -0.78% and AUD -1.80%. The loonies’ rapid rise came to a abrupt halt yesterday as both crude oil inventory reports and a weaker than expected US job data knocked the loonie from its 2-month high printed earlier this week. The currency is guilty by its association and proximity to its largest trading partner, the US. 50% of all Canadian exports are commodity based, technically on a cross related basis it’s aggressively underperforming and rightly so, but it’s holding in rather well vs. the USD. Traders are waiting for this morning Ivey Purchasing Managers Index, where it’s expected to show that Canadian businesses and government spending decreased last month. With oil paring close to 8% yesterday, traders continue to favor selling of the loonie on any USD pull backs. Consensus has the loonie trading under pressure for the remainder of this quarter and backing up towards the 1.2800 level again. Politically Canada has not been proactive in protecting itself from a deepening global meltdown. If anything its reactive, unlike the US. Eventually the true value of the currency will catch up and things fundamentally and technically point to a weakening CAD.

The 3-day rally came to an abrupt halt in the O/N session. The AUD$ has pared most of last weeks gains as the price of commodities buckled under pressure. Commodity exports account for 40% of the countries total exports. The currency has managed to maintain its losses as home-building approvals dropped the most in 6-years for Nov. (-12.8% vs. -1.4%) adding to signs that the economic slowdown is worsening (0.7008).

Crude is higher O/N ($42.67 up +4c). The day before it was above $50 and yesterday close to $42, what a fickle lot these commodity traders are. Oil has been unable to retain its recent gains after the weekly EIA report took the market by surprise. The black stuff managed to lose close to 12% yesterday as the data showed a bigger than expected increase across the board for crude oil, gas and distillate fuel. Inventories of oil rose +6.68m barrels to +325.4m last week, that’s the highest level in 8-months (the market had anticipated an increase of +800k barrels). It’s all about contango trading, which encourages companies to increase stockpiles if they have available storage (hence the demand for supertankers to be used as a mobile storage facility). Dealers are encouraged to do so as the price of oil for delivery in 11-months time is 33% more than for next month. Gas stocks rose +3.33m barrels to +211.4m barrels vs. an expected +1m barrels. Finally distillate supplies (heat oil and diesel) jumped +1.79m barrels to +137.8m. Yesterday’s US economic numbers will impede future fuel demand as it provides stronger evidence that a deepening recession is occurring globally. The geo-political issues like the violence in Gaza and natural gas crisis, is no match for demand destruction caused by weakening economies. Gold prices remain under pressure as the greenback rallies vs. the EUR, thus eroding the appeal of the ‘yellow metal’ as an alternative investment ($842).

The Nikkei closed 8,876 down -362. The DAX index in Europe was at 4,887 down -49; the FTSE (UK) currently is 4,486 down -21. The early call for the open of key US indices is lower. The 10-year Treasury yields backed up 3bp yesterday (2.49%) and are little changed in the O/N session. The long end of the US yield curve continues to loose traction as dealers cheapen up the curve ahead of the $16b 10-yr auction today. Dealers are pushing push yields close to their highest levels in 3-weeks despite global equities coming under pressure once again. FI prices are being weighed down by the sheer size of President-elect Obama’s stimulus plan. Cbanks need to raise cash, but the size of issues remains a problem. Yesterday, Germany pared back the size of a 10-year bunds issue as investors balked at the amount needed to be raised. But, with what the Fed believes and economic data providing the evidence, this sell off could be a head fake for a much larger FI rally!

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