NFP trading is for contrarians!

Capital Markets do not seem to get as apprehensive about non-farm payroll day. This week, dealers and investors are worn out by the ‘smoke and mirrors’ campaign from CBankers rhetoric. Nothing has changed, just a word here, a word there! The G20 will keep the current strategy at work, no risk taking for them, as it’s deemed too early for removal of any stimulus. But, the Aussies are a different bunch all together as they lead the way! So this morning’s headline print will make little difference. A strong number will drag stocks even higher and with it more risk will be applied. Worse numbers will only justify the Fed’s stance of ‘extended period’ of accommodative monetary policy. There are two factors that would burst this utopia scenario, the ‘lemming’ carry trades unwinding or US long term yield’s dramatically backing up. Someone got to gamble, let it be the contrarian and call it a week!

The US$ is weaker in the O/N trading session. Currently it is lower against 15 of the 16 most actively traded currencies in a ‘subdued’ trading range ahead of the employment reports.

US total jobless claims are starting to decline (+512k vs. +532k), but this positive blip is expected to be only temporary. Collectively, initial jobless, continuing (+5.749m), extended benefits (+551k) and emergency unemployment compensation (+3.4m) are now down to approximately +10.4m claims. But, and it’s a big but, all of the improvement has been in initial and continuing claims as claims for both the extended and emergency pushed higher the previous week. It’s not a good sign that the US government is trying to extend benefits for the fourth time since the recession began. They want to provide an additional 14-week’s to all states plus another six week’s to states with the highest unemployment rates. This will obviously have an impact on continuing claims going forward. Analysts believe that it should capture ‘the unemployed workers who have lost access to all benefits programs and it’s expected to push both emergency programs higher still’. Digging deeper, initial jobless claims remain above the psychological +500k threshold, further evidence that many are still being laid off to date. This may be a strong indicator for a surprise in this morning’s NFP headline!

Unlike their counterparties in North America, both King and Trichet for the first time signaled that they may be reaching an end to the accommodative policies that have been implemented during this financial crisis on evidence that the global economy is recovering. The BOE increased its bond-purchase program by the lowest amount in 3-extensions. The program will max at 200b pounds, while the market had been expecting 225b. ECB said ‘extraordinary’ measures to provide banks with funds will be phased out ‘in a timely and gradual fashion’. This is similar rhetoric to that of the RBA. ‘Not all our liquidity measures will be needed to the same extent as in the past’ Trichet in his communiqué yesterday. Governor Kings statement indicated that ‘a number of indicators of spending and confidence’ suggest ‘that a pickup in economic activity may soon be evident’. There we have it now on to the next meetings!

The USD$ is currently lower against the EUR +0.14%, GBP +0.19%, CHF +0.10% and JPY +0.21%. The commodity currencies are stronger this morning, CAD +0.44% and AUD +0.74%. Yesterday, Canadian building permits rose +1.6% in Sep., the 4th gain in 5-months. Residential permits jumped +9.4% to $3.2b, the largest increase in a year. This is the 2nd report this week to signal a rebound in Canadian construction intentions. The government housing agency raised its forecast for ‘new’ home starts next year to +164k from a Sept. prediction of +150k. The Ivey PMI was not as happy as it registered a reading of 61.2 vs. a Sept. print of 61.7. Of course all eyes will be on this morning’s Canadian employment report. Market consensus has a +10k headline print with the unemployment ticking up a notch to +8.5%. The last two announcements have led to wicked volatile markets. Sept. came in 6-times higher than analysts predictions and the currency managed to appreciate 3%, a similar scenario today and we will have to expect the BOC to be ever present and willing to ‘wield the big stick’! Governor Carney has declared that they would use a combination of currency intervention, credit and quantitative easing options to influence the loonie value as they believe that a strong currency is detrimental to economic growth.

In the O/N session an RBA statement said that ‘a further gradual lessening of monetary stimulus is likely to be required over time’ because the economic expansion will accelerate. Governor Stevens indicated that the Aussi economy will expand at more than three times the pace forecasted in Aug., and signaled he and his policy makers will continue to lead the world in raising borrowing costs. The currency is well supported by commodity prices and by investor’s appetite for risk for a higher yielding currency. Expect dealers to remain better buyers on pullbacks (0.9169).

Crude is higher in the O/N session ($80.16 up +54c). Yesterday, crude prices were little changed from the previous session’s gain after the weekly EIA report showed a surprise decline in US crude stocks. Crude inventories fell -4m barrels last week vs. expectations that stocks were to rise by +1.4m barrels. It was a bullish report across the board because no one seems to want ‘excess supply on hand’ and not because of a ‘tightening market’. Imports of crude fell -764k barrels, or -8.6%, to +8.13m barrels a day (the lowest level in 3-months). Refineries surprisingly are operating at +80.6% of capacity, down -1.2% from the previous week and the lowest rate in 6-months. Fundamentally, analysts point out if it were not for the drop in refinery runs, the weekly figures would have been considerably more bearish. A similar story for gas, where gas inventories fell -287k barrels to +208.3m, w/w, vs. an expected increase of +400k barrels. A tad better news from distillates (includes heating oil and diesel), stocks fell -378k barrels to +167.4m. The market had been expecting a decline of around -1m barrels. Bear in mind one week does not make a trend! However, the softness of the greenback continues to support commodities. Expect OPEC once again to enter the fray and perhaps talk down crude by commenting on the sustainability of the ‘fragile global economy’.

For a 4th consecutive day yesterday gold remained better bid and on course to make an assault on that $1,100 an ounce resistance level, as a questionable greenback continues to support the ‘yellow metals’ appeal as a hedge against currency depreciation. After the RBI purchase of 200 metric tons or $6.7b of the yellow metal from the IMF, speculators are convinced that others will follow suit. Cbanks are toying with the idea that ‘the commodity is a safe store of value compared to the dollar’ and a better bet for upside potential. Year-to-date, gold has climbed +23% ($1,090).

The Nikkei closed at 9,789 up +72. The DAX index in Europe was at 5,478 down -2; the FTSE (UK) currently is 5,131 up +5. The early call for the open of key US indices is higher. The US 10-year bonds backed up 2bp yesterday (3.52%) and are little changed in the O/N session. Treasuries fell for a 4th consecutive day ahead of this morning’s NFP report. From a technical perspective, Bernanke is trying ‘to forewarn and set up the market to prepare them for the inevitable’. If the Fed is dragging on rates, then that increases inflation expectations and the FI market needs to take this into consideration. Supply also remains an issue, next week the US treasury plans to sell a record $81b in its quarterly auctions of long-term debt and replace its inflation-protected 20-year bond (TIPS) with a reintroduction of the 30-year security. To accommodate this, the 2’s 10’ spread continue to widen out (256-the widest in 2-months). They will issue $40b 3-year notes on Nov. 9, $25b 10’s on the 10th and $16b 30-year bonds on Nov. 12th. What’s the unemployment rate going to bring?

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