NFP to confirm job losses slowed while unemployment rates tick higher.

Consensus has US unemployment rate unchanged at +10.2% this morning despite the White house going out of its way and on the record that it ‘will’ tick up today. The Reuters headline got little attention. Market watchers, like the US banking committee, were scrutinizing Bernanke’s defending his every last word! Prior to the ‘other’ job reports this week, analysts had aggressively and positively revised their NFP predictions, some to less that -100k job losses. With Wednesday ADP bearish print, there were revisions galore, rather passive, but around the -120k mark. ‘Less bad is good’ and we will know soon enough!

The US$ is stronger in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies in a ‘subdued, yet illiquid’ trading range ahead of employment numbers.

Trichet did was expected of him yesterday, kept ECB rates on hold at 1%, but surprised us with their exit strategy rhetoric. They are changing the rules on their 1-year financing operations. Prior to their communiqué, the market believed that they would conduct the operations as a ‘fixed rate tender procedure with full allotment’, now it will be a variable rate, tracking the main rate next year. What the impact? Invariably it ‘constitutes a tightening from conditions prevailing in previous operations’. It’s a strong signal that policy makers now seem to be motivated to hurry the exit ‘from exceptional liquidity provisions’. In layman’s terms his statement is hawkish! What about the time horizon? The ECB will carry on with full allotment on other operations until April. The market had been expecting this. In reality they have not changed their economic projections enough to suggest an earlier exit. Their forecasts were upgraded, however, not materially so. The EUR strength is causing them enough troubles as it is, but any hawkish exit strategy plans will only continue to support the currency for most of next year!

The decline in initial jobless claims yesterday was a breath of fresh air (-5K to 457K) and continues that positive trend. Most analysts had expected the holiday shortened week to have had the opposite effect. The 4-week moving average (a less volatile measure) fell to +481.2k vs. the +495.5k from the previous week. One the flip side, continuing claims took the opposite direction. It managed to post its first weekly gain in 3-months (+28k to +5.47m) and followed a larger than expected decline of -176k the previous week. Note continuing claims do not include individuals receiving extended benefits under other Fed programs. Yesterday’s report also showed the number of people who have exhausted their traditional benefits and are now collecting ‘extended’ payments advanced by +323k to +4.46m. Why the jump? Perhaps more individuals re-entered the program or it’s totally down to the exhaustion of the traditional programs.

Non-manufacturing ISM slipped once again into contraction territory (48.7 vs. 50.6) and goes some way’s to offset the ongoing expansion signaled by Tuesday’s ISM manufacturing index (53.6). There are strong positives in the report, new export orders have been shining over the last few months. Some analysts believe that with a strong order category, the softness of the headline print can only be temporary. On a sour note, the employment sub index continues to contract and disappointingly at an ‘unchanged’ pace. Inventories are been run off (the scourge of this recession), however just like employment, at an unchanged pace. Business activity barely slipped in contraction (49.6) after 3-months of expansion. For now, let’s just assume this is a blip! Finally, the prices paid component advanced to 57.8. Despite the increase, no red flags have to be raised just yet, as a trickle down effect remains well contained so far.

Yesterday, the Thomson/Reuters same store sales-index showed that US chain posted much weaker than expected sales numbers for last month. It managed to print a gain of +0.5% vs. market expectation of +2.1% as consumers seem to be concentrating on deep ‘discounted’ holiday items as we enter the start of this most important holiday season. Psychologically, impulse buying is being put on hold as the state of the US economy remains forefront in consumer’s minds.

The USD$ is currently higher against the EUR -0.04%, CHF -0.03% and lower against GBP +0.42% and JPY+0.11%. The commodity currencies are weaker this morning, CAD -0.02% and AUD -0.00%. The loonie remains in a tight trading range ahead of this morning’s North American employment reports. Analysts have not had a stellar batting average over the last few Canadian releases. In fact, very few of them have been in the same ball park! Consensus is looking for a gain of +15k vs. last month horrid print of -43k, with the unemployment rate to remain unchanged at +8.6%. Similar to the last one, if the release is not with the confines of expectation, then the loonie will have some movement ahead of NFP release, otherwise, traders as per the norm will wait for ‘Big Brother’s’ report before doing anything. Year-to-date the CAD has appreciated +17% vs. the greenback on the back of risk sensitive securities that by default endorse the currency. Earlier this week, the Canadian economy officially grew in the 3rd Q with GDP rising +0.4%, y/y. This is the first sign of growth in four quarters and maybe a signal that it’s the end of the worst recession in 50-years. Let’s see if we are able to maintain that momentum this morning!

The AUD remains unchanged today but has managed to carve out a winning week ahead of the NFP release. Technically, the currency has remained better bid this week as demand for riskier assets is robust on speculation that US job data will record the fewest amount of job losses this year. Earlier this week the RBA came and delivered, but hinted of ‘no’ further threats to raising future rates as Governor Stevens hiked rates 25bps to +3.75% on compounding fundamental evidence revealing an economy gaining strength. He also signaled that that he may now pause, stating that the board’s ‘material adjustments to borrowing costs are enough to keep inflation within policy makers 2-3% target range’. Rising consumer confidence, higher house prices and China’s demand for commodities continues to drive the ‘new upswing in the economy that will last several years’. On the face of it, the RBA statement is very bullish in respect to other Cbanks, but at the same time distancing them from any aggressive tightening cycle. The currency and commodities will continue to go hand in hand (0.9253).

Crude is lower in the O/N session ($76.04 down -42c). Yesterday, crude prices pared some of the previous day’s -2.3% loss even with bearish inventory reports and weaker US service sector data not in its favor. Basically, the dollar drove price direction, nothing more nothing less. This week’s EIA report revealed that US inventories climbed as consumption dropped. Oil inventories rose +2.09m barrels to +339.9m, w/w (highest level in 3-months). Also surprising was gas supplies surged +4m barrels to +214.1m. The market had been expecting a drawdown for crude of -400k, while gas was to increase by +700k barrels. Demand destruction is alive and kicking as weekly fuel demand slipped -2.6% on the back of refineries reducing operating rates for the 4th time in the last month and a half. A very bearish report that should prevent crude prices making any assault on the $80 handle anytime soon. It was also estimated that the 4-week moving average for total US daily fuel demand was +18.5m barrels. Other factors also contributed to yesterday’s negative price action. Firstly, the USD has found some support ahead of this morning’s ECB announcement and tomorrows NFP data. Technically, the markets are paring their open positions in this illiquid market. Secondly, a report on Russian output (the world’s largest producer) showed that it remains at a record high for a second consecutive month and finally the market has erased the insurance premium of the Iran and the British sailor’s saga.

Bull investors remain in control. Gold prices have experienced wild gyrations of $20-$30 price swings over the past few trading sessions and it does not seem to want to take a breather. The yellow metal recorded new record highs this week as investors sought a store of value as an inflation hedge. Demand remains robust on any pull backs as the metal trades as it’s ‘the international currency’ ($1,207).

The Nikkei closed at 10,022 up +45. The DAX index in Europe was at 5,740 down -30; the FTSE (UK) currently is 5,283 down -30. The early call for the open of key US indices is higher. The US 10-year bond backed up 7bp yesterday (3.37%) and are little changed in the O/N session. Its official, Treasuries prices fell for a third consecutive day yesterday, and managed to record the longest losing streak in a month! All on the back of bullish initial jobless claims coupled with the US debt announcements for next week. Again $74b of new product needs to get absorbed (3’s-$40b, 10’s-$21b and 30’s-$13b), so dealers are willing to make room. Big picture, if the Fed uses reverse repos, pay interest on excess bank reserves and sell securities directly to investors to withdraw or neutralize cash in the banking system, it will only pressurize FI prices further. But alas, Bernanke has testified that he have a very cautious exit approach!

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