Will NFP Create The Perfect Storm?

Perfect conditions for the ‘perfect storm’ in Capital Markets today! The granddaddy of economic indicators, NFP, has the ability to ruin this long weekend in North America. Yesterday’s claims headlines were on the soft side, it’s a shortened trading day and most of the dealers have left their young lieutenants in charge to navigate today’s illiquid markets starting 20-mins after the job’s data. They say that Sept. trading will only really begin on Tuesday next and warn about possible head-fakes before then. It’s probably prudent to sit back take it all in and come to battle next week, energized and rejuvenated.

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 data.

After falling to a recent low of -524k in early July (seasonal distortions), initial jobless claims jumped back up last month (-570k vs. -564k), and increasing the risk that Capital markets may see a larger ‘decline’ in this mornings NFP headline. Despite some of the more positive rhetoric regarding the labor market, mostly on the back of claims falling from their peak of -674k, a weekly print of -570k does not give us much more confidence. In normal times and these are not normal, the headline print would historically be around -300 to —350k! We know that US companies continue to cut jobs, even if it’s at a slower pace, which eventually would pressurize incomes and consumer spending. Digging even deeper into yesterday’s reports, continuing claims backed up after the previous week’s improvement (6.24m vs. 6.13m). Analysts encourage us to focus on the longer duration benefits categories. Not that pretty, despite emergency benefits claimants falling -35.9k, extended benefits claimants rose +85k, resulting in a net deterioration of -49.1k in the longer term categories! If we add all the components up, initial + continuing + emergency + extended benefit recipients = 10.26m- a new record!

Quelle surprise! Yesterday we witnessed the ISM index for non-manufacturing business (which incidentally is +90% of the US economy) happily advance to 48.4 vs. 48.3 (very close to expansion territory), the highest level in 11-months. However the fear of rising unemployment and erosion of consumer wealth can only discourage consumer spending threatening future growth.

The USD$ currently is lower against the EUR +0.15%, GBP +0.09%, CHF +0.06% and higher against JPY-0.14%. The commodity currencies are stronger this morning, CAD +0.21% and AUD +0.31%. The loonie lacked direction yesterday and ended the day little changed ahead of this morning’s North American employment reports. Even with commodities and equities ‘flapping in the wind’, did little to gain dealers interest. It seems that with little deal flow to signpost anything, investors are happy to sit on their hands going into the long weekend. Unless we get a ‘big surprise’ in this morning’s print, expect the CAD to remain range-bound. The theme this week thus far, the CAD has taken its cue from risk aversion attitudes, equities and commodity prices and not from any Canadian fundamentals!

The AUD gained as Asian equities advanced, boosting speculation that investors will buy the higher-yielding assets. Despite traders previously paring interest rate hike bets after Governor Stevens’s comments earlier in the week, market psychology has done a u-turn in the O/N session. This week we have witnessed some Australia’s data showing economic growth unexpectedly accelerated in the 2nd Q (+0.6% vs. +0.4%), which has aided the currency on expectations that the RBA will raise borrowing costs from its 50-year low. A healthy rise in commodity prices is also helping the currency cause (0.8417).

Crude is higher in the O/N session ($68.64 up +68c). Crude prices remain under pressure following the weaker than expected US fundamental data yesterday. The higher than expected claim numbers has investors questioning the strength of the US economy. Al ready this week, the black-stuff has managed to print a 2-week low on concerns that the US economy is struggling to recover. The weekly EIA inventory report fell -400k barrels compared with analysts’ projections of a decline of -600k. However, the real eye-catcher of the report was that gas stocks were off -3m barrels, way ahead of analysts’ expectations of a -900k barrel draw down (the bullish element). Distillate stocks rose +1.2m barrels, double the expectation build. Total product demand rose +0.1% over the past month compared with year-ago levels as gas demand increased +0.5% over the same period. Refinery utilization was up +3.1% points to +87.2%.Investors are keeping a close eye on Chinese equities, which technically, entered a ‘bear’ market earlier this week and is managing to pressurize global bourses and heightening investor concerns that a slowdown in lending would impede an economic recovery in their country. China has been the go-to region that the rest of the world has been relying on to drag us out of the worst recession in 50-years. Basically demand destruction remains healthy! It’s expected at the OPEC meeting next week that Algeria will demand that other members comply more strictly with production quotas as global stockpiles climb. Fundamentally, inventories are above the normal level of 61 days’ worth of demand. There is little chance that OPEC will revise quotas is the short term.

Who is buying all that Gold? Conspiracy theorists are beginning to wag their tongues and speculate that someone ‘big’ is in trouble. This always encourages a violent switch to a commodity of surety! The easiest answer would be to say that global bourses are under pressure or the greenbacks weaker and by default this increases demand for the ‘yellow metal’ as an alternative investment. But, it seems to be the Chinese! China’s Central Television (the main state-owned TV-company), is running news programs letting the public know how easy it is to buy precious metal as an investment ($990). With 1.3b investors in China who knows where this will end!!

The Nikkei closed at 10,187 down -27. The DAX index in Europe was at 5,360 up +59; the FTSE (UK) currently is 4,849 up +52. The early call for the open of key US indices is higher. The 10-year bonds backed up 2bp yesterday (3.35%) and are little changed in the O/N session. This week we saw FI prices achieve what we expected and make a break to the top-side, managing to print 2-month lows in the process, and all this despite reasonably positive US data. It’s only natural to see traders pare some of their positions ahead of this morning’s employment data and on the announcement of US government issues next week totaling $70b in 3’s, 10’s and long bond.

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