NFP to justify Bernanke and Obama’s actions

There are very few negative opinions in the pool of predictions for this morning’s Non-Farm Payroll. The lemmings have a ‘seasonally fudged’ employment expectation range of a flat reading to a whopping +300k print. The unemployment rate is assumed to remain unchanged at +10%. Recent reports (ADP, ISM, unemployment claims) continue to show the US labor market improving. Technically, businesses are showing a less of a desire to cut jobs. What’s important for investors to do is to look beyond the headline print. In reality, the US economy needs to generate more than +125k new jobs each month to keep up with population growth. Analysts will be looking for stronger evidence for sustainable economic growth. They will focus on the number of hours worked, as a rising print is essential to stability. Hourly earnings and the number of temporary jobs will give us a better indication of future Fed and Government decisions. Do not be psyched out by a surprising positive print, dig deeper. The initial market moves tend to be the wrong moves.

The US$ is weaker in the O/N trading session. Currently it is lower against 12 of the 16 most actively traded currencies in a ‘subdued,’ trading range ahead of employment reports.

Yesterday’s weekly US unemployment claims beat market expectations (+434k vs. +449k) indicating a ‘diminished pace of layoffs’. It seems that improving sales and production gains are convincing companies to slow the pace of firings as the economy recovers from the worst recession in 70-years. Digging deeper into the report, the one worthy surprise was the revision to the number of beneficiaries in the emergency benefits program. Initially it was reported at +4.45m last week, but, yesterday stood at +4.91m, a +459k gain. The other details were not particularly noteworthy. Initial claims held onto almost all of last week’s improvement. The number of new filings rose by +1k to +434k, while continuing claims in the regular state program fell more than expected, down -179k to +4.802m. However, expect much of this ‘positive’ decline to be offset by an increase in the weeks lag federal benefits report.

The USD$ is currently lower against the EUR +0.04%, GBP +0.48%, CHF +0.04% and JPY +0.13%. The commodity currencies are mixed this morning, CAD +0.14% and AUD -0.13%. After printing its strongest level in two months vs. its southern partner yesterday, the loonie eventually backed off as commodities and global equities traded under pressure. Also aiding the currency to extend its losses was the Ivey PMI retreating to 48.4 last month from 55.9 in Nov. showing that Canadian businesses and government spending declined. Already this year’s robust commodity prices have been pushing the currency along and into BOC Carney less than comfortable zone. They next meet on Jan 19th and do not be surprised to have him comment on the currency strength impeding economic growth. We all know that commodity prices and the loonie go hand-in-hand. The loonie ended last month officially posting its biggest yearly gain in 2-years as the Harper led country recovers from the recession pushing the currency closer to parity with the greenback. If everything remains equal, trading at a strong premium within 8-months remains a viable reality. Traders and speculators have been using this USD rally to increase their long CAD exposure citing a stronger risk tolerance as the primary reason. Consensus for this morning’s Canadian employment number is +20k. However, bear in mind no-one has been in the same ball park since the beginning of the last Q in their predictions.

The AUD pared some of this week’s 2% gains ahead of the US employment reports, citing that the recent rally may be overdone on the top side. Last night, data revealed that the Australia building industry shrank again last month (49.3-below 50 a contraction). Analysts expect the impact of higher interest rates (3.75%) and the removal of the first-home buyers grant incentive will ‘test the durability of the housing recovery over the coming months’. On the flip side, earlier this week, Australian retail sales aggressively rose in Nov. (+1.4% vs. expectations of +0.4%), printing the largest increase in 8-month. This will surely keep the RBA on their toes regarding tightening monetary policy again. To date they have led the world in rate hikes (three in total) since Sept. Governor Stevens last raised rates at the beginning of Dec. by 25bp. Futures are now predicting that there is a +58% chance that RBA O/N lending rates will reach +4% by the beginning of Feb. (0.9161).

Crude is lower in the O/N session ($82.43 down -23c). With oil appreciating +15% since late Dec. speculators were happy to unwind some of their profitable position ahead of this morning’s data. Global weather problems and an extended cold snap continue to provide an undertone bid to the market. Freezing weather has supported this rally despite bearish inventory fundamentals this week. US crude inventories rose last week for the first time in a month, vs. the consensus of a draw down on stocks. Crude stockpiles increased by +1.3m barrels to +327.3m vs. an expected -300k decline. This is in stark contrast to the earlier API report which reported a -2.3m drawdown. This report has reversed a four week trend of draw-downs. There was a similar story with gas whose stockpiles grew by +3.7m barrels to +219.7m vs. an expected increase of only +300k barrel. Distillate stocks (include heating oil and diesel) fell by -233k barrels to +159.0m. The market had been expecting a decline of -1.8m barrels. Refining capacity utilization fell -0.4bp to +79.9%, its lowest level in 5-weeks. Despite the weekly report being bearish for crude prices, investors are not focusing wholly on market fundamentals, but on the value of the dollar for the time being. Technically, when this immediate cold snap improves fundamentals will finally get to weigh on prices. Forecasts for below-normal temperatures through mid-Jan. are expected to erode some of fuel stockpiles.

The recent ‘yellow metal’ scenario remains the same, despite the commodity retreating somewhat yesterday as a strong greenback curbed demand for the metal as a hedge against weakness in the currency. Earlier this week the commodity managed to print a fresh three week high as a weaker greenback boosted the demand for the commodity as an alternative investment. However, this morning’s employment report could once again give the greenback a boost resulting in fresh selling of the commodity. If you want to own the precious metal it would be advisable to cross it with the EUR or GBP where an investor potentially gets more bang for their ‘buck’. Gold and the USD remain negatively correlated trading at $1,123.

The Nikkei closed at 10,798 up +116. The DAX index in Europe was at 6,073 +18; the FTSE (UK) currently is 5,529 up +3. The early call for the open of key US indices is lower. The US 10-year bond eased 1bp yesterday (3.83%) and are little changed in the O/N session. Treasuries climbed ahead of this mornings US employment data as global equity indices remained under pressure yesterday after China’s announcement that they would be hiking short term Bill rate to curb lending practices. Traders and investors took this as an indication to buy bonds on global growth concerns. US growth remains muted along with inflation and in the short term will provide a bid on deeper pull backs for the asset class. Let’s see what NFP has in store for us.

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