9.8% US Unemployment Rate with over 10.4 million on Jobless Benefits.

Is this it? Is this the big one? Will we get to print that 10% US unemployment rate this morning? 9.9% would probably be a safer bet, but be prepared! Dealers live for these moments …of anticlimaxes. The best case scenario, get 9.9% shut up shop and go home and watch the Irish waddle live on ESPN sports into their polling booths to put an X beside the ‘Yes’ for the Lisbon Treaty. Where is the fun in that? If they put it beside the ‘No’ then Monday would be worth coming in for as we watch the EUR implode. With respect to this morning NFP, consensus is looking for some further moderation in the pace of job losses last month (-216k), which was the mildest in 12-months! My gut says to follow Goldman’s lead. They revised their prediction down yesterday from -200k to -250k!

The US$ is weaker in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies in a ‘subdued’ trading range ahead of NFP.

Forex heatmap

Capital markets had a lot of data to chew through yesterday before traders could prepare for any surprises from this morning’s employment report. US consumer spending came in slightly stronger than expected, but analysts fear for a decline ahead. We were delivered a better than consensus print for both income and consumption (+0.2%, m/m and +1.3%). Why? Temporary stimulus! Despite the market already pricing in the cash-for-clunkers portion, analysts fear for Sept.’s numbers, where spending has a good chance to plummet again. Auto incentives and the likes have managed to temporarily push consumer savings ratio lower (fell -1bp to +3%). Human psychology naturally would want to replenish household’s incomes, just on the sheer fact of future job insecurity. Thus, reality dictates that all these incentives are creating a monthly and quarterly distortion. It’s worth noting that personal consumption soared in Aug. to solidify the strongest monthly gain in 8-years! The main reason for the push higher in personal income may be attributed to UI benefits increasing +4.4%, m/m. The PCE deflator declined less than expected on a y/y basis (-0.5%) as prices rose +0.3%, m/m. Core-PCE also moderated at 1.3%, y/y. As expected and sign-posted by the Fed, inflation is not on anyone’s radar!

What surprises can we write about when US jobless claims continue to straddle a well defined range? They are treading water since improvements were registered at the beginning of the summer. The disappointing part is that they continue to hover above that psychological sub 500k print (-551k). On the face of it, it looks like continuing claims are much stronger, but, one should not take the face value print (+6.09m vs. +6.16m and the lowest print in 4-months). Why? Because continuing claims recipients eventually lose their benefits and go on emergency and then extended benefits. True unemployment numbers follow the route of initial, continuous, emergency and then extended. This report showed that emergency benefit recipients jumped by a staggering +100k recipients, while extended benefit recipients advanced by +4.6k. There are now +10.4m on some sort of jobless benefit!

Yesterday we saw that the US manufacturing sector continued to expand last month, but, at a slower pace and weaker than expectations (52.6 vs. 52.9). Not surprisingly the pace of production growth deteriorated after the cash-for-clunkers program expired. On a positive note, the headline remains above a 50 reading, implying that a production led recovery remains intact for now. Digging deeper, one notices that inventories continue to contract on drawdown’s but at a slower pace m/m. In the sub-categories, new orders dipped to 60.8, but, still remained at the fastest pace of growth in 19-months. It’s also worth noting that new export orders eased slightly to 55.0, however analysts believe that ‘domestic’ new orders will continue to provide temporary support until all the incentives and stimulus packages lose their impact. Employment remained around 46.0. Let’s see what NFP has in store for us! On the inflation front, the prices paid component remained above 60 but lower than the previous months.

What’s up with pending home sales? Yesterdays guesstimate was as bad as Canadian analysts trying to predict the retail sales number! No one was on the same playing field. The pending home sales print blew everyone out of the water and advanced at the second fastest pace since 2001 (+6.4% vs. +1.0%). Of course, the million dollar question is, how many pending becomes existing home sales? We already have witnessed disappointing re-sale prints. Is it because of the first time home buyers credit is coming to an end on Nov. 30th?

And finally, residential construction spending surged +4.2%, this offsets the -0.4% drop in non-residential spending to record a small gain of +0.8% in total construction spending. The bulk of the increase was in home renovation building. Home improvement is actually +46% of total construction spending. Private residential construction spending gained on single-family homes (+4.5%), but fell on multi-family homes (-4.5%).

The USD$ is currently lower against the EUR +0.16%, CHF +0.16%, JPY +0.46% and higher against GBP -0.30%. The commodity currencies are mixed this morning, CAD -0.35% and AUD +0.03%. Analysts are two for two in missing recent Canadian fundamental expectations. Last week, no-one was in the same ball park when trying to predict Canadian retail sales (-0.8% vs. +1.1%). This week we had July Real GDP. Consensus was expecting a positive headline of +0.8%, instead we were fed a flat reading of +0.0%, m/m. With higher auto-production (+17%), it provided some support, but was not enough to offset the weakness in utilities, agriculture, mining, oil and gas extraction. A number like this does not warrant the BOC to rush and hike rates anytime soon. Depending on what the last 2-months bring us, we could be setting up for a tepid 3rd Q GDP print. The loonie ended down on the day, as stocks and crude fell on the back of reports showing that US manufacturing advanced at a slower pace last month. Dealers spent most of yesterday cleaning up their positions ahead of US employment.

No big surprises here, the AUD managed to retreat from its 13-month highs on the back of global bourses seeing red. Technically, the relative value of the currency may have overshot its mark in the short term. With equities expected to open the North American session under pressure, has persuaded investors to temporarily shy away from the higher yielding asset classes (0.8646).

Crude is lower in the O/N session ($69.87 down -95c). Not much of a surprise to most of us that crude pared some of the previous day’s rally after weaker than expected US manufacturing data implies that their economy could stall. It was also prudent for investors to book some profits ahead of this morning’s data, especially after the USD has made a valiant attempt to break to the top side. All this occurred despite the weekly EIA report recording a large gas drawdown. The report revealed a -1.6m barrel drop in gas inventories, inline with the API print, but against analysts’ expectations of an increase. Over the past month, US gas demand is up +5% and this after the end of the holiday driving season! On the flip side, crude inventories happened to increase by +2.8m barrels, w/w, vs. expectations of a +600k rise. Demand destruction remains, as the increase in distillate inventories was smaller than expected and posted monthly demand down -9% from this time last year. In fact, a closer look tells us that the report remains mixed with a bias towards oil products, like heating oil and diesel, to remain weak. With energy fundamentals remaining unconvincing, it would be a safe bet that the black stuff should be confined to its $10 range of $65-$75. We can never rule out the political influence. The threat of imposing greater sanction on Iran because of its nuclear program has heightened geo-political issues. Technically oil prices are inflated, they are not supported by market fundamentals, but geo-politics will always keep the black-stuffs prices artificially higher.

Gold prices remain under pressure this morning, the first time all week as the greenback tentatively rebounded thus eroding the yellow metal’s appeal as an alternative investment. Geo-political tensions in the Middle East should provide support on deeper pullbacks ($999).

The Nikkei closed at 9,731 down -246. The DAX index in Europe was at 5,523 down -32; the FTSE (UK) currently is 5,018 down -30. The early call for the open of key US indices is lower. The 10-year bonds eased 11bp yesterday (3.19%) and a further 3bp in the O/N session (3.16%). Treasury prices continue to maintain their bid as investors speculate that the Fed will signal that interest rates will remain at record-low levels for the ‘foreseeable future’ after reports yesterday showed that jobless claims increased, manufacturing declined and inflation remains subdued. The long bond (30-yrs) is managing to yield less than 4% as dealers pared some of their positions ahead of today’s employment numbers. Risk aversion strategies continue to dominate the horizon. If we get the 10% unemployment print where are we heading to? Maybe 10-years will yield 3.10%!

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell