NFP Gospel according to BLS

After spending most of yesterday squaring their positions, plugging all potential loss trading scenarios, the entire market waits for this morning’s unemployment data. It will not be the headline print that traders will focus on but, the private payroll release. A few dealers have pitched some high expectations, ranging from +50k to +120k for the private employment sub-category, with the unemployment rate dipping to +9.3%. Lofty prints indeed, if achieved, it maybe the beginning of a min-dollar rally. With the IMF happy with the Greek debt cuts, German factory orders climbing and Trichet pontificating that the Euro-zone is stronger than expected continues to hurt the dollar bulls. They need position vindication soon!

The US$ is a tad weaker in the O/N trading session. Currently it is lower against 11 of the 16 most actively traded currencies in a ‘subdued’ trading range ahead of NFP.

Again, weekly US jobless claims surprised to the upside, remaining volatile and range bound. The number of new claims jumped +19k, w/w, to +479k, the highest print in three months. The market had been expecting a ‘modest’ decrease to +455k. Analysts believe the inflated print was partially caused by seasonal factors (car manufacture traditional close for two-weeks in July). Digging deeper, the 4-week moving average sits at +458.5k (+5.2k, w/w). The market would be happier with weekly prints moving towards the +400k psychological benchmark. It certainly would be more positive for upcoming NFP releases. Individuals, who continue to receive jobless benefits, declined by -34k to just over +4.53m persons. The 4-week moving average rose by +25.75k to +4.575m.

The USD$ is lower against the EUR +0.05%, GBP +0.13% and higher against the CHF -0.28% and JPY -0.32%. The commodity currencies are stronger this morning, CAD +0.12% and AUD +0.26%. Enough said! It seems one would be a fool not to own the loonie after the Canadian Finance Minister’s Flaherty’s comments yesterday. He said the CAD rise makes sense given the country’s fundamentals. That’s such an easy answer to explain away the currency’s move this week. Traders have been making a mountain out of a mole hill, introducing the well worn rumor of Royal Dutch Shell acquiring Encana. Capital Markets have been beating this rumor for a number or years, when finally executed, traders will be lost for excuses. This morning we get to feed on North American job reports. Market participants speculate that the Canadian economy will again add to the strong job scenario (+13k). If they do, it will be the 7th consecutive month of job gains. Last month, the Canadian economy added +92.3k new jobs, holding the unemployment rate steady at +7.9%. Investors will not try to get too far ahead of themselves, especially with bond yields so low. The currency month-to-date has underperformed against most of its major trading partners as US economic data has been less than impressive. Thus far, the currency had been guilty by association with its largest trading partner. That been said, on dollar rallies there are CAD buyers about. However, do not be surprised to see a dollar relief rally no matter what’s released this morning.

Again the JPY is dominating the trading sessions and the higher yielding commodity currencies have managed to be included. The AUD happened to pare more of this weeks gain on future reports expected to show that China’s growth is slowing. However, it still trades near a three-month high vs. the USD as gains in global bourses and commodities boosted demand for higher-yielding assets. Any pare backs have been tempered by this weeks AUD trade surplus print unexpectedly advancing to a record last month (+$3.54b) as Chinese demand boosted exports of coal and iron ore. China is Australia’s largest trading partner. Overall, there is still a sign of concerns that the world economy is in a fragile recovery phase. It’s widely expected that the that the Fed may go into a new phase of asset buying, which will keep US interest rates low, equities higher and risk appetite supported’. Because of the equity actions, the market is a cautious buyer on pullbacks, wary that the recent strong rally technically may be overdone (0.9156).

Crude is higher in the O/N session ($82.07 up +6c). Crude prices softened yesterday as a rise in the weekly US jobless claims raised concerns about the state of their economy. Not helping matters is this week’s bearish headline inventory report showing that the underlying stock sub-categories were rising. The steep drop in the ‘headline’ oil stockpiles has thus far prevented much deeper losses. The EIA report showed that oil inventories fell -2.8m barrels, more than the -1.6m the market had been expecting. On the flipside, gas stocks again advanced by +700k barrels, compared with expectations of an -800k decline. Not to be out done, distillate inventories (heating oil and diesel) also advanced by +2.2m, doubling the expected gain. Digging deeper, the report also revealed that demand, y/y, was little changed and also too low to consume the fuel produced by refiners operating at +91.2% of capacity (highest level in 3-years). Demand is only up +0.2% from the same period last year. The recent macro-data flow indicates that the US activity has slowed down and the market should expect some price pull back as the ‘one directional’ move may be overdone. The ‘historical’ US summer driving season is over, coupled with a lack of tropical activity in the Gulf are ingredients for justifiable weaker energy prices. Speculators remain better sellers on up-ticks in the short term.

Rebounding from some very strong technical support levels last week, the ‘yellow’ metal prices floundered during yesterday’s trading session. Gold has found traction on speculation that prices near its recent lows would fuel demand for the physical asset as China’s plans to relax rules on trading and weaker equities will increase natural demand. Many believed that last week’s decline has been overdone. Mind you, a weakening dollar will always increase the demand for the commodity. For most of this year, we have witnessed gold rally on the back of a weaker EUR, for the past 6-months investors have been buying the commodity as a safe heaven asset. Until recently, a weaker dollar had been the biggest factor in supporting commodity prices again. Since the record highs witnessed on June 21st ($1,266), the commodity has fallen over -5.2%. If the EUR continues to stabilize against most of its trading partner, by default, the market will end up selling the commodity asset class on up-ticks. Historically and fundamentally, this is the ‘slowest’ season for physical demand and now with China potentially changing the ground rules will drag the metal higher. Year-to-date, the commodity has gained +7.4% ($1,198 -40c). Let’s see how far the metal can travel after the employment data.

The Nikkei closed at 9,642 down -12. The DAX index in Europe was at 6,351 up +18; the FTSE (UK) currently is 5,388 up +23. The early call for the open of key US indices is slightly higher. The US 10-year eased 4bp yesterday (2.91%) and is little changed in the O/N session. The treasury market clawed back the previous day’s losses within minutes after the weekly US claims report yesterday. The US 2’s/10’s spread (+236bp) narrowed as investors reduced inflation expectations ahead of this mornings NFP report. Again, markets are fearful about the economic outlook in the US. Earlier this week, the US treasury announced the issuing of $74b of new debt next week (3’s, 10’s and long-bond). This is more than the $69b average for this particular mix of securities. Again, the market seems to be second guessing what the Fed will do with the proceeds from its maturities. It’s widely rumored that on Aug 10th the Fed will announce if it’s to buy more mortgage and/or treasury bonds. With the growth concerns, the market is content in owning product on deeper pull backs.

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