Focus on the Battle within the FED not NFP

The month-end, quarter-end ‘fix mess’ is now over. Welcome to the beginning of the ‘carry’ month, which April is historically know for. This morning, the market has the grandaddy of economic data releases to contend with, non-farm payroll, followed by ISM manufacturing and the battle of Fed speakers.

The market expects a somewhat robust payrolls headline (+200k), a steady unemployment rate (+8.9) and the ISM to soften a tad, but in line with expectations, which would be consistent with a strong growth outlook.

Today’s we get more Fed speakers, Plosser and Fisher, the market know their views, it’s Dudley, who will be front and center. Up to now he has had close ties with Bernanke’s dovish stance, so expect his copy to balance out some of the recent hawkish comments.

The US$ is little changed in the O/N trading session. Currently, it is lower against 8 of the 16 most actively traded currencies in an ‘orderly’ session.

Yesterday’s claims have not affected forecasts for today’s payroll numbers. The claims are for later in March than when the labor department jobs survey was done, but they do confirm gradual improvements in the US labor market. The headline print saw a weekly decline of-6k to +388k.

Digging deeper, the four week moving average gained +3k to +394k. Continued filings were less affected, falling-51k to +3.714m. However, the number of claimants in all programs (not seasonally adjusted) rose just over +4k to +8.77m. On the bright side, that represents a-24% drop year-over-year, compared with last weeks -22.5% decline. Now we sit back and see what payrolls has in store for us.

The last major regional purchasing manager’s index, Chicago PMI, eased slightly to 70.6% in March from 71.2%.The prices paid component climbed to 83.4% from 81.2%, while new orders edged slightly lower to 74.5% from 75.9%. However, the employment index remains supportive 65.6% versus 59.8%.

Finally, US February factory orders unexpectedly declined, -0.1%, well short of market consensus increase of +0.5%. Analysts note that the biggest surprise was that petroleum orders (-0.1%) failed to extend recent price gains. Digging deeper, nondurables increased by +0.3%, while durables were revised up to a -0.6% from a negative -0.9%.

Overall, the durable data remains weak and the nondurable increase was modest, failing to back a strong ISM manufacturing for last month. Shipments and inventory headlines could see first quarter GDP forecasts trimmed even further. The Fed will likely need to drastically revise ‘their’ central tendency GDP outlook lower, it’s currently at +3.6%. The current mark-to-market GDP estimate is now +1.6%!

The USD is weaker against the EUR +0.04% and CHF +0.01% and higher against GBP -0.07% and JPY -0.54%. The commodity currencies are little changed this morning, CAD +0.00% and AUD +0.00%.

The loonie finally got the only piece of data expected for her this week, yesterdays GDP (+0.5%). The details were softer than the headline print. The market views it as a decent print, but analysts note that temporary factors that boosted manufacturing distorted the headline. We should expect some of these effects to be reversed in the February release. If we excluded the manufacturing component, the real GDP would have grown by +0.2%.

It’s worth noting that the inflation adjusted +2.8% month-over-month manufacturing rise is based on temporary factors, specifically skewed towards the auto production in January. It is this that will lead to a downside risk to real manufacturing GDP for February. The inflation readings will not put pressure on Governor Carney to change his immediate stance, it allows policy makers to bide their time.


Digging deeper, the goods-producing industries expanded +1.1% (third consecutive month of gains) month-over-month, while the service sector (70% of the economy) saw modest growth of +0.3%, which was similar to the previous month. 

Despite a Canadian government being toppled last week, the ‘hawkish’ tone coming from Governor Carney about how the elevation in commodity prices generally leads to higher interest rates continues to give the loonie its bid tone as traders happily sell Yen against CAD, pushing that pair towards a yearly high.

In the wings there is further interest to buy the loonie as ‘carry’ becomes the go-to trade. Investors should expect the Federal political uncertainty to have a limited affect on the Canadian dollars strength. The currency will be supported in the long term by its fundamentals, a sound financial system and a strong job environment. The market will take its cue from this morning’s payroll release (0.9686).

It’s quarter end and the AUD is heading for a third consecutive gain outright and against the yen, boosted by last nights retail sales beating analysts expectations (+0.5% versus +0.4%).

April is historically know as the carry month and the AUD is starting on the front foot rallying against JPY, to its strongest level in 11-months, as investors buy higher-yielding currencies on signs Japan will keep monetary policy loose to spur the economy. The AUD strengthened +0.9% versus the dollar last quarter and +3% against the yen. Higher yielding pacific currencies also got a boost from a stronger Chinese Manufacturing data in the O/N session.

Domestic data this week has has been pro-AUD. The currency managed to touch a record high, post 1983 float, after the RBA said loans provided by banks and finance companies climbed last month. The AUD has been supported by investors pricing out the possibility of a rate cut and pricing in the chance of a rate hike again next week. The probability of a reduction in Australia’s benchmark interest rate on April 5 is 13%, down from as much as 34% last week.

Appetite for growth and commodity sensitive currencies depends on the new found stamina of risk tolerance by investors. Further appreciation depends on investor’s interpretation of global future interest rates as the carry trade becomes in vogue again (1.0340).

Crude is little changed in the O/N session ($107.09 +37c). Crude prices are again marching higher on contagion fears in the Middle-East and on the back of Libyan forces renewed aggression raising concerns about oil supplies for the near-term.

Initially, a strong weekly EIA reporting inventory at Cushing reaching record highs temporarily eased prices, but, geopolitical uncertainty is providing a bid on most pull backs.

The weekly reports showed crude stocks climbing +2.95m barrels to +355.7m last week. The market had forecasted a rise of only +1.5m barrels. At the other end of the pendulum, fuel demand fell to its lowest level since November with gas softening -2.3% to +8.87m barrels a day. That is -2.1% less than a year ago. Gas inventories were down -2.7m barrels, while distillate (heating oil and diesel) were up +710k barrels.

Recent events will make it unlikely that investors will see a ‘swift normalization’ of crude-oil production in the region. On any pull backs the Middle-East and North African situation will continue to dominate in the event risk category.

Gold has found renewed support on the back of European debt fears and the ongoing crisis in Libya boosting the appeal of the commodity as an alternative investment. Geopolitical reasons continue to provide support on these pull backs, justifying consumers wanting to own some of the asset in their own portfolios.

The commodity has preserved its tenth quarterly gain, its longest winning streak in over 35-years, as low interest rates, geopolitical and event risk pushes the commodity to record highs. It’s difficult to find a reason ‘not’ to own some of the commodity.

The metals bull-run is far from over with investors continuing to look to buy the commodity on dips. Any price pullbacks are viewed as favorable opportunities for investors to continue to diversify into safe-haven assets, with metal being used as a store of value ($1,436 -$3.30).

The Nikkei closed at 9,708 down-47. The DAX index in Europe was at 7,104 up+63; the FTSE (UK) currently is 5,960 up+52. The early call for the open of key US indices is higher. The US 10-year backed up 1bp yesterday (3.46%) and is little changed in the O/N session.

Treasuries are treading water despite the month-end and quarter-end demand. If anything, the market is softer ahead of this morning payroll release on the belief that US economic recovery is strengthening. Bonds are heading for a second consecutive quarterly decline on concern that the Fed may end its QE2 program of debt buying earlier than planned. The market is reluctant to take on big bets ahead of this morning’s employment release.

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