Expected NFP fallout

The risk this morning is being too optimistic. The market is geared for a strong employment report with consensus of +150k and an unemployment rate of +9.7%. Anything close to expectations or softer will have us quickly unwinding the premium thats been priced in all asset classes since Wednesday’s euphoric private employment number. A strong reading would be consistent with firmer risk appetite and should help riskier currencies. A strong reading will likely push US yields even higher. With Euro stress concerns limiting Trichet’s options, a stronger jobs numbers will have the dollar continuing to outperform its European counterpart, in contrast to the risk-appetite Euro driven rallies that we have witnessed in the last quarter. Capital Markets focus will shift towards the Spanish bond auction next week. Later this afternoon, expect helicopter Ben to provide some insight into their ‘fairly high threshold’ for adjustments to their QE2 plan.

The US$ is stronger the O/N trading session. Currently, it is higher against 13 of the 16 most actively traded currencies in a ‘subdued’ range ahead of employment.

Yesterday’s reading of weekly jobless claims came in slightly better than expected, allowing investors to pare some of their pro-dollar positions ahead of today’s litmus test supporting recent US indicators that the economy is actually picking up steam. The number of workers filing new claims for jobless benefits rose slightly less than expected (+409k vs. +410k) and has failed to give the dollar a sustainable boost, that will be left up to a strong surprise with NFP. The four week average of applications for jobless benefits dropped to +411k, the lowest level in over two-years. Digging deeper, continuing claims fell by-47k to +4.1m, while emergency and extended payments decreased by about-23k to +4.51m.

The USD$ is higher against the EUR -0.11%, GBP -0.11%, JPY -0.24% and lower against CHF -0.20%. The commodity currencies are weaker this morning, CAD -0.37% and AUD -0.23%. Canadian Ivey PMI was unchanged yesterday (50-neither contracting nor expanding). Analysts usually take little notice of the December reading, believing that it will always have kinks as the sample of 175 companies is too small and the seasonal factors tend to be widely distorted. That been said the major disappointment was the employment index, which was 47.3, lower than the previous month. It’s worth noting that a decline is not out of historical context for the December reading. Inventories were 54.1, higher than the previous month and a similar scenario for prices paid at 62.3. Month-to-date, the loonie has taking flight on the back of its largest trading partners expected ‘re-acceleration in activity in the first few trading sessions. Stronger data down south reinforces many analysts’ views that the US economy is beginning the year in upward momentum and reason enough for short term chartists to be eying 0.9750 CAD in the first-quarter. This morning’s employment report is expected to surprise to the upside, coupled with Euro peripheral stress should further support Canadian government debt as an alternative to the dollar and the EUR. Investors will take their cue after NFP unless we are side swiped with the Canadian data released beforehand (0.9997).

The AUD fell to its two week low vs. the dollar and is headed for its biggest weekly loss in almost two months after Fitch Ratings said ‘flooding will affect the state of Queensland’s fiscal position’. There is fear that worsening floods will impair resource exports that has driven Australia’s economic growth. Analysts have pointed out that the Aussie is ‘trapped between the dollar strengthening and an economic recovery led by the US’. Weaker data this week down under is expected to slow the pace of tightening, but unlikely to end the hike cycle as employment growth remains so strong. Policy member’s statements this week believe that the government’s stimulus measures will pressurize Governor Stevens to hike rates (4.75%) and that the flood in Queensland ‘may exacerbate already constrained supply conditions and lead to inflationary pressures’. These are good reasons supporting the currency on deeper pullbacks as investors seek to cross the currency vs. the EUR. Last year the currency rose +14% against the dollar which drove down the cost of imports and eroding exporters’ competitiveness. The currency has been trading under pressure outright as US Treasury yields climb, narrowing the yield advantage of assets down-under. Short term offers again appear above parity (0.9920).

Crude is higher in the O/N session ($88.68 +30c). Crude has fallen ahead of the employment report, a precaution, unraveling some of the strength recorded after a surprising gain in the ADP report and growth in the services sector which has boosted optimism that the US economy’s recovery is gathering sustainable momentum. The weekly EIA inventory report revealed that oil stocks fell -4.16m barrels last week, three times more than expected. At +335.3m barrels, inventories are above the upper limit of the average range for this time of year. Gas inventories increased by +3.3m barrels and are in the upper half of the average range, while distillates increased by +1.1m barrels. Again, there are too many hurdles to overcome ahead of the psychological $100 barrier crude. Technically, the market is not showing a tighter supply or demand balance. OPEC believes that supply and demand are ‘in balance,’ and expect demand growth will slow as the global economy struggles to recover, amid ample supplies. The market expects to meet price resistance above $90 as there is far more oil in storage, more fuel capacity and more idle oil wells to limit a stronger market rally in theory.

Gold prices continue to fall on speculation that an economic recovery will curb demand for the metal as a haven. Fast money and the reducing of flight to quality positioning has been pressurizing the yellow metal, as equities, being used as an alternative, is providing more of an appeal in the first week of the New-Year. On deeper pullbacks, the commodity should remains better bid on speculation that currency volatility will boost demand for a safe heaven investment once the Euro contagion fears raise its ugly head again over the coming weeks. The commodity last year completed its tenth annual advance with bullion rallying +30%, it’s largest rally in three years. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against long-term inflation and have some strong technical support levels to breach before the markets witnesses a mass exodus. The Euro-zone contagion issues continue to put a floor on metal prices on demand for a haven. Technical analysts believe that gold ($1,359 -$12.50c) will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,541 up+11. The DAX index in Europe was at 6,969 down-12; the +FTSE (UK) currently is 5,991 down-28. The early call for the open of key US indices is lower. The US 10-year eased 3bp yesterday (3.42%) and is little changed in the O/N session. The big boy’s, Goldman and PIMCO, have put a dampener on the ADP report translating into a strong NFP print this morning. Their opinions carry weight and has forced investors to pare some of their optimism. Fundamentally, the US job market has not gone far enough for the Fed to consider raising interest rates or significantly influencing the unemployment rate. In a few hours we will get to see just how far? Next week the Treasury Department will auction a total of $66b of fresh supply, unchanged from last month and matched market expectations ($32b-3’s $21b-10’s and $13b long bonds).

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