Lost 5.1 million jobs, how many today?

It was not the highly anticipated ‘stress test’ results that pushed indices lower yesterday, but the US long bond auction. It drew a poor response and reactions were similar to that of the failed BOE gilt auction last month, sell currency, sell equities, and sell bonds. Why? Investors worry that the rising costs of capital could damper the US’s economic recovery. This morning we have the mother of all reports the Non-Farm payrolls. It will be dismal (-610k est.), but will it surprise us like most other data this week?

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.

All we have left is NFP and we go home for the weekend. Yesterday’s data presented us with a bag of mixed fortunes. Firstly, US initial jobless claims provided stronger evidence that we may be experiencing a turning point, but remember this report has no bearing on this morning’s number. Claims came in at a 3-month low of +601k. The last time we saw these levels was back in Jan. (+590k). This headline certainly contributes to the ‘green shoot theory’, however analysts expect that further plant shut downs in the auto industry will renew the downward trend. Continuing claims remain on an upward trajectory and printed a record high of +6.35m on extended benefits. We should see that 10% unemployment print by mid-summer. Secondly, other data showed that US productivity rebounded in the 1st Q (+0.8% vs. –0.6%). The US economy continues to struggle with a widening output gap as domestic and foreign demand tapers off, but productivity (measures output per hour worked) is improving! Output for the 1st Q revealed an -8.2% q/q decline with employee hours falling –9%. Compensation per-hour slowed to +4.1%, q/q, as unit labor costs also slowed to +3.3%.

Trichet as expected yesterday announced that the ECB had cut lending rates to a new record low of +1.00%. At the same time and after months of back room bickering, the policy committee has entered the quantitative fray. ‘The Governing Council has decided in principle that the euro-system will purchase euro-denominated covered bonds issued in the euro area’. Effectively printing money just like the Fed, BOJ and BOE.

Governor King at the BOE left rates unchanged yesterday (+0.5%), but will ‘print’ GBP50b to aid its program of asset purchases to fight the recession. They will increase the program to buy-back government and corporate bonds. This is their attempt to stave off ‘deflation’ in an economy where GDP fell the most in 30-years last Q.

The USD$ currently is lower against the EUR +0.13%, GBP +0.08%, CHF +0.07% and higher against JPY -0.03%. The commodity currencies are stronger this morning, CAD +0.14% and AUD +0.13%. With the loonie highly correlated to global risk, it was only natural to see the currency come under some pressure ahead of this morning’s North American employment reports. Already this week Canadian data has exceeded expectations, which lifted the currency to a brief 6-month high. Over the past 4-weeks it has appreciated +5% against its largest trading partner south of the border. The volatility and swiftness of the move has been fuelled by renewed global optimism. This has resulted in pushing both equities and commodities prices higher and by default all ‘risk commodity currencies’ too. Technically the move has been too swift despite what ever is revealed today. Will the employment reports drag the loonie back to 1.1850 this morning?

This has been another winning week for the best performing currency this year vs. the USD (+8.8%). It will be the 10th weekly advance, the longest streak in 6-years. Fundamentals look good, even this week Australian employers unexpectedly added workers last month, pushing the jobless rate lower (+27.3k, m/m and +5.4% vs. +5.7%). With global optimism growing one should expect better buying of this risk currency on dips (0.7530).

Crude is higher in the O/N session ($57.25 up +54c). Crude ended trading close to unchanged yesterday after previously rising +5% on the back of both the API and EIA reports reveling this week that supplies of crude and gas are declining or are less than expected in the US. On Tuesday, API stated that crude inventories dropped by -1m barrels, and gas declined by -2.9m barrels last week. The EIA release was ‘bullish’ in respect to the other reports of late. Crude supplies rose +605k barrels to +375.3m last week (a new 19-year high), but less than the forecasted +2.5m gain. Meanwhile gas supplies fell -167k to +212.4m vs. a +500k gain and distillate fuel (heating oil and diesel), rose +2.43m barrels to +146.5m, the highest print in 32-months. Gold continues its rally as a safe heaven alternative after the ECB cut rates yesterday ($914). Analysts point to strong gold fundamentals that should push prices beyond their recent highs, as speculators believe that the worst of the global recession may be over.

The Nikkei closed 9,432 up +47. The DAX index in Europe was at 4,881 up +78; the FTSE (UK) currently is 4,438 up +40. The early call for the open of key US indices is higher. The 10-year Treasury’s backed up 9bp yesterday (3.31%) and are little changed in the O/N session. Well the Government came to the table to tender $14b long bonds and investors said these levels are too ‘rich for us’, with that dealers aggressively pushed yields towards their highest levels in 4-months. We are back to trading the supply and demand push-pull by the US government and the Fed. With the abundance of supply and the pickup in economic activity, dealers will not support the longer end of the curve. The Fed will have to increase their buy-back program to keep rates low (+600b) otherwise these high rates will stifle any growth that’s been promised. If we get a good non-farm there will be no support!

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