‘Less bad is Good’, but for how long?

All eyes will be down this morning checking the numbers, it’s like playing Bingo. Will you number come up? Despite China playing ‘he said, she said’ the Foreign Ministry supports the USD reserve currency idea, for the time being at least, has given the whiplashed currency newfound support ahead of the main event, NFP. The ECB will not surprise, with so much disagreement amongst policy members, all Trichet will do is elaborate in more detail on their implementation of their ‘unconventional measures’. With a holiday shortened week, the markets have so little time to confuse us even more. Remember ‘less bad is good’!

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies in a ‘whippy’ illiquid trading range ahead of NFP.

The headline print for June’s ADP number yesterday should limit hopes for further declines in the pace of job losses. The print was more than anticipated (-473k vs. -394k), but the ‘positive’ revision to May’s number (-485k vs. -532k) made it more digestible. Superimposing this on today’s NFP number, we could see a higher print than the consensus call of -375k, somewhere in the region of -475k perhaps. The unemployment rate is expected to rise to +9.6%, two-tenths higher than in May. What ever way you slice and dice it, the overall scenario remains bleak. However, what would be good news for ‘buck’ if we saw some stabilization in the trend for job losses, continuing our theme that less bad news is in fact good news. Remember employment normally trails overall economic activity and despite some economic stabilization of late, it’s expected to decline for at least several more months.

Slightly disturbing, US mortgage applications dropped last week on both refinancing and purchases. The -18.9% decline in total applications was driven by a -30% drop in refinancing and a -4.5% fall in purchase applications. All this happened despite the fact that the fixed long term mortgage rate having eased 30bps over the last month! Certainly this is not good news for Obama’s efforts to revive the housing market. What also weighs on their efforts is that spending on construction projects also fell in May (-0.9% vs. a revised +0.6%, m/m-the 4th time in 5-months). This provides us with stronger evidence that a rebound will be slow.

On a more positive theme, data showed that manufacturing in the US fell last month at the slowest pace in 10-months. The ISM Manufacturing PMI advanced to 44.8 from 42.8 in May. After trimming inventories at the fastest pace on record in the 1st Q, any pick up in consumer demand will kick start a recovery in manufacturing and by default convince factories to bump up production. The index is very close to the 50-neutral level, a positive signal that activity should resume in the 2nd half of this year.

The USD$ currently is higher against the EUR -0.37%, GBP -0.80%, CHF -0.60% and JPY -0.04%. The commodity currencies are weaker this morning, CAD -0.15% and AUD -0.64%. A national holiday yesterday left trading of the loonie up to everyone else rather than the domestics calling the shots. The currency was dragged along by the liquidation of USD positions ahead of this morning’s employment report and by the performance of commodities. Already this week, Canadian GDP came in as expected at -0.1%, and the 9-month downward spiral remains intact! On a quarterly basis, Canada’s economy shrank by -5.4% in the 1st Q, and -3.7% in the 4th Q. Some analysts point out that because Canada is lagging other countries in depleting their inventories (the scourge of this recession) and not imposing stringent production cuts, 2nd and 3rd Q’s will not fair any better. Governor Carney seems to have got it right when he said last week that Canada’s recession is as deep as their largest trading partner. Investors will take their cue from this morning’s job report.

The AUD fell vs. the JPY and USD after the trade deficit ballooned more than economists had initially forecasted (-$556m vs. -$125m). This may convince the RBA to keep rates low longer than had been speculated. Despite last quarter being the best performance by the currency vs. its US counterpart in 14-years, speculators will seek to sell the currency on upticks for now (0.8045).

Crude is lower in the O/N session ($68.34 down -97c). Crude managed to reverse some of the previous day’s losses (-2.2%) initially yesterday after the API showed the biggest decline in crude inventories in 9-months in the US. Weekly supplies fell -6.8m barrels to +349.7m. The bearish report was supported by the weekly API release which recorded a bigger than expected weekly drop of –3.7m vs. -1.8m barrels. With the greenback under pressure, by default it was going to drag commodity prices higher. Already this week we saw US consumer confidence unexpectedly decline last month which obviously had an impact on prices, but positive news that China’s manufacturing continues to expand has again temporarily given the ‘bulls’ the upper hand. The commodity has gained approximately +39% last quarter, the largest advance in 20-years as a rebounding world equity markets and a weaker dollar convinces investors to buy the ‘black stuff’ as an alternative investment. The IEA lowered its 5-year forecasts for global crude demand because of the economic slump. They are cutting daily consumption levels by -3m bpd until 2013. Demand destruction remains commodities greatest nemesis and not volatile currency levels. The ‘yellow metal’ found technical support under $925 from ‘physical buyers’ (jewelers etc) and with a weaker greenback yesterday temporarily lent support to the commodity ($936).

The Nikkei closed 9,876 down -63. The DAX index in Europe was at 4,841 down -63; the FTSE (UK) currently is 4,319 down -21. The early call for the open of key US indices is lower. The 10-year Treasury’s backed up 2bp yesterday (3.55%) and is little changed in the O/N session. It was the 2nd time this week that bonds prices retreated, all on the back of reports showing that the labor markets may be stabilizing. If so then we can expect investors to shy away from the safety of Government debt even more. Last months ‘less bad’ NFP report burnt many FI traders who were long product. The have been extra cautious ahead of this mornings NFP release.

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