NFP D-day!

Capital markets will be NFP headline watching this morning. Government and Fed officials are trying to stay ahead of the curve by the introduction of liquidity incentive measures this week. But, a weaker than anticipated employment headline number will surely undermine market confidence further. A positive surprise will have the US fit enough to fight another day.

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in a ‘whippy’ trading range ahead of this morning’s US employment data.

Yesterday’s data concludes that recession fears in the US remain alive and ongoing. GDP growth came in weaker than expected for the 2nd Q (+1.9% vs. an expected +2.3%). Grabbing the headlines were the revisions, which showed that the US economy contracted at the end of last year (4th Q 2007, -0.2%) and again in the 1st Q, 2008 (+0.9% vs. +1.0%). Analysts now believe that the US actually entered a recession at the beginning of this year and investors should anticipate even worst data to follow. We cannot expect trade to contribute positively to GDP headline going forward with global economies cooling. Digging deeper, despite the tax rebates of late, consumer spending remains very weak (total consumption was up only +1.5% in 2nd Q, while durables fell -3%). The US consumer is obviously changing their spending habits and has reduced spending on ‘big ticket items’ to offset the costs of higher energy and grocery bills. With the credit crunch and spiraling house prices, the consumer is unable to tap home equity like before, as their overall wealth depletes. Businesses are faring no better, as they too are curtailing their spending amidst fears over the economic outlook. Support was seen from government spending (Fed, State and local). But, how is this sustainable? One can expect diminished tax receipts across the board as credit market problems persist. No wonder the government and the Fed stepped up to the plate this week with their new policy initiatives to boost capital market confidence. But, do not expect this to be enough as further Fed cuts come back into play (2.00%).

Providing no support for equities yesterday, US initial jobless claims ballooned much more than anticipated (+448k vs. +395k, w/w). This was on the back of increased layoffs in the trade, services and manufacturing industries, which suggests that the US economy is just getting weaker. Continuing claims also shot up above the +3.2m mark and expect to see a move up in the unemployment rate for last month in this morning’s data (+5.6%).

The US$ currently is higher against the EUR -0.24%, GBP -0.38%, CHF -0.10% and JPY -0.32%. The commodity currencies are weaker this morning, CAD -0.13% and AUD -0.67%. The loonie has extended its recent decline after government reports yesterday showed that real GDP unexpectedly fell – 0.1%, m/m for May (3rd monthly decline since Jan.). Energy, finance, forestry, construction and wholesale trade sectors all experienced a drop in economic activity during the month. This report has taken the market by surprise; earlier monthly data did not anticipate this. One should expect economic activity for the remainder of the year to remain ‘sluggish’. The data could very well bring the BOC back in play to potentially cut rates by year end as inflation remains well contained for now. Falling commodity prices have signaled that economic growth is slowing. The perception that the US is entrenched in their ‘slowdown’, and that other economies are only starting theirs would favor the greenback vs. its major trading partners. But, of course all this could change after this morning’s data.

The AUD$ remains under pressure across the board (0.9359) as traders speculate that slower economic growth and benign inflation numbers this week will convince the RBA to cut interest rate sooner rather than later (7.25%).

Crude is lower O/N ($123.03 down -105c). Well, the temporary bid for crude was just that, temporary. Traders are speculating that high prices and slower US economic growth will further reduce demand in the US (the world’s largest consumer) and hence oil prices. This weeks EIA report had initially surprised the market and reported an unexpected decline in gas stocks. Supplies of the fuel fell -3.53m barrels to 213.6m vs. an expected rise of +350k barrels. Analysts note that the end of the summer driving season is near its conclusion and there is still enough supply as consumption has weakened over the past month (consumption has averaged 20.2m barrels a day, down -2.4% y/y). According to Nigeria, recent militant attacks have not impeded production as much as initially perceived. They said output remains close to +2m barrels a day vs. the initial +1m number. To date, they remain the US’s 4th largest source of oil imports. Geo-political concerns over Iran are coming to a head once again. Their supreme leader, Ali Khamenei indicated that his country will push forward with its nuclear program. He said that ‘Iran will pursue its peaceful nuclear energy and no one can undermine the nation’s attempt to progress’. Iran has said it may blockade the ‘Strait of Hormuz’, the shipping lane for a 5th of the world’s crude. This stoic stance could affect the insurance premium of oil in the medium term. Gold advanced yesterday and treading water this am ($916) after weaker headline numbers in the US temporarily affected the strength of the greenback and boosting the appeal of the ‘yellow metal’ as an alternative investment. But with US$ gaining momentum once again the shine of the metal is beginning to tarnish.

The Nikkei closed at 13,094 down -282. The DAX index in Europe was at 6,438 down -41; the FTSE (UK) currently is 5,358 down -27. The early call for the open of key US indices is lower. Yields of the US 10-year bond eased 10bp yesterday (3.95%) and are little changed O/N. Treasuries prices advanced after yesterday’s government reports showed that the economy grew at a slower pace in the 2nd Q. This has heightened speculation amongst investors that the Fed will not be in a position to hike interest rates any time soon (2.00%), they may even cut! All bets are off until after today’s NFP headline.

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