Depression beckons?

This morning’s psychologically accepted number will be -700k for NFP. Below this, the USD will rally and a large sigh of relief, at least for another 4-weeks anyways and anything greater than -700k, then goodbye ‘mighty greenback’. We know it’s bad when President elect Obama uses campaign style techniques to sell his policy changes. Many feel that this month’s figure will be the ‘watershed’, I expect next months to be worse!

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 ‘whippy’ trading range ahead of employment data.

Analysts are asking the question, are yesterday’s US employment claims the calm for today’s storm? It’s highly anticipated that this morning’s numbers will be bad but probably not as bad as next month’s data. Due to last week’s 4-day stat week, we once again saw claims fall to +467k on a seasonally adjusted basis. The market had been expecting a figure close to +545k. But, on a non-seasonally adjusted basis, claims increased to +726k. More of a concern was that continuing claims pushed through the +4.6m benchmark, and is now encroaching on the all time high of just over +4.7m continuing claims that was achieved 26-years ago in Nov.1982. This is the component that is the engine for the unemployment rate and the trend is now pointing towards an 8% unemployment rate for the 1st Q of 2009.

Preliminary December same-store sales from the International Council of Shopping Centers (ICSC) fell -1.7% in Dec. over Nov. The combined Nov/Dec holiday season was down -2.2% which is the largest decline on record back to 1970. Analysts foresee the distribution of sales is becoming much more skewed toward discounters and sharply away from high-end retailers. Sales ex-Wal-Mart was down by -4.3%. Expect over the coming month a higher percentage of Retailers going out of business.

There were no surprises yesterday when the BOE cut their main borrowing rate by 50bp to 1.5%. This is the lowest rate since the inception of the Cbank in 1694. Governor King is trying to prevent the credit squeeze from deepening. Next week we have Trichet and the ECB. Historically they are tight lipped but market consensus is leaning towards a 25bp ease. Next stop quantitative easing

The US$ currently is higher against the EUR -0.62%, GBP -0.42%, CHF -0.32% and lower JPY -0.09%. The commodity currencies are weaker this morning, CAD -0.84% and AUD -0.93%. The loonies’ rapid rise came to a halt this week as both crude oil inventory reports and a weaker than expected US job data knocked the loonie from its 2-month high printed earlier in the 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 North American employment, where it’s expected to show that Canadian unemployment rate edged 2/10’s higher to 6.5%. With oil paring close to 3% 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. Let see what Canadian employment numbers has in store for us this morning.

The AUD is heading for its 1st weekly loss in a month as investors once again shy away from higher yielding asset classes. O/N the AUD$ had comfortably pared all of last weeks gains as the price of commodities continue to trade under pressure. Commodity exports account for 40% of the countries total exports (0.7038).

Crude is higher O/N ($42.08 up +38c). A fear of a much deeper recession continues to undermine crude prices. A weakening equity market and rising number of jobless workers have intensified concerns that the recession will cut fuel usage. Demand destruction remains the order of the day. Oil has been unable to retain the week’s earlier gains after this week’s EIA report took the market by surprise. The black stuff managed to lose another 3% yesterday as the weekly 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 rallied the most in a week as the greenback eased vs. the EUR, thus boosting demand for the ‘yellow’ metal as an alternative investment ($854) in the O/N session it remains little changed.

The Nikkei closed 8,836 down -39. The DAX index in Europe was at 4,874 down -5; the FTSE (UK) currently is 4,490 down -15. The early call for the open of key US indices is lower. The 10-year Treasury yields eased 2bp yesterday (2.47%) and have backed up 4bp in the O/N session ahead of this morning’s data (2.43%). Dealers had been pushing 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. This morning NFP number could once again be another eye opener that may lead to FI to experience another rampant rally.

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