NFP -533k and the unemployment rate ticks up to 6.7%

Unemployment D-day! This is expected to be an ‘ugly’ number with deeper revisions after every piece of economic analysis this month pointed to a softening job market. Unfortunately with the time of year that is in it, many employees are getting a month’s reprieve. The first quarter of 2009 will only get uglier.

The US$ is mixed in the O/N trading session. Currently it is higher against 10 of the 16 most actively traded currencies, in a ‘subdued’ trading range ahead of North American employment numbers.

Forex heatmap

Yesterday Cbanks coordination efforts continued with policy makers around the world continuing to cut rates to head off further economic deterioration as inflation risks disappear. Sweden’s central bank unexpectedly cut its benchmark rate by 175bps to 2% overnight as it heads into its first technical recession since 1992. New Zealand was not far behind as it also tries to deal with a technical recession, leading the Cbank to cut the target rate by 150bps overnight (although this time it was expected), bringing the benchmark rate down to 5.00% (it remains one of the highest target rates in the industrialized world). In addition, the Bank of England cut rates by 100bps to 2.00%, the lowest level in 57-years, while Trichet and Co. cut 75bps to 2.5% as both the Euro-zone and the UK fight growing downside risks to further economic weakness. The BOC is up next week with a 50bps cut expected (futures pricing 75bp now), while the Fed brings up the rear on Dec.16 with an expected 50bps cut to 0.5%. While the Fed will likely be done easing in Dec. one can expect to see further rate cuts coming from all of the other major central banks in the developed world in 2009.

US initial jobless claims came in lower than expected for last week. The rise in continuing claims and upward revisions continues a worrisome trend. This should not affect today’s NFP numbers since the survey period for that is roughly the first half of the month. Initial claims came in at +509k last week vs. the +540k consensus. It’s worth noting that it was the 4th week above the psychological +500k watermark. Continuing claims came in at +4.087m higher than the expected +4.05m (the previous week was revised higher to +4m from 3.962m). Continuing claims remain at their highest since level in 25-years. Many analysts have revised this morning NFP estimates higher on the basis of ISM manufacturing and non-manufacturing, ADP payroll, Beige Book, and mass layoffs data. Do not be surprised if the headline number comes in above the -400k with an unemployment rate of 6.8%. As per usual, the revisions will once again have the bigger impact.

Finally US Factory orders fell -5.1%, m/m in Oct. as both durable and non-durable goods orders fell for the 3rd straight month. Ex-transportation orders declined by a more moderate -4.2% despite an -8.7% drop in capital goods orders as transportation orders dropped by -11.2%, the largest decline since Jan. Weakness was widespread across all major industries as commodity prices softened substantially in Oct. while foreign demand retrenched. But, it is worth noting that a building inventory overhang only compounds the problem. The cut back in inventory positions over the past 2-months will be a ‘negative’ once again for GDP growth. The result is that the inventory-to-shipments ratio (seasonally adjusted) now stands at 1.33 which is the highest level in 7-years. With difficulty accessing credit to fund inventories, the focus will be upon more aggressive production cut backs and layoff announcements in the months ahead. Future NFP headlines will continue to look bleak.

The US$ currently is higher against the EUR -0.11% and CHF -0.51% and lower against GBP +0.31% and JPY +0.13%. The commodity currencies are mixed this morning, CAD -0.04% and AUD +0.68%. Yesterday’s Canadian building permits unexpectedly plummeted -15.7% vs. +12.5%, m/m in Oct. which would suggest that we will see a further contraction in housing starts for Dec. But, it is worth noting that permits numbers tend to be volatile (Oct. decline was the largest since Feb. 2007). The loonie had its toughest day in 2-weeks as unsettling political rumblings in Ottawa forced PM Harper to seek suspension of Parliament to stave off a no confidence vote before he introduced the budget to the hose. Couple with weaker commodity prices has traders eyeing a 1.3000 print again in the short term. This morning Canadian employers are expected to shed -20k jobs last month. With commodity prices continuing to take a beating, it’s only a matter of time before the loonie again makes a major assault on the yearly highs. The 6-month fall off in oil prices has managed to have a negative effect on the sentiment of the Canadian dollar. Crude accounts for approximately 10% of all of Canada’s export revenues. With the recent deep cuts by CBankers, futures traders are pricing in a 75bp by Governor next week. It seems a week in politics is like a lifetime and it will not do the currency any favors what so ever.

The AUD dollar has remained better bid on pull backs as investors continue to speculate that Cbank interest rate cuts around the world will bolster economic growth. Economic reports this week have shown that the Australia’s economy grew at the slowest pace in the 3rd Q in over 7-years (GDP +0.1 vs. +0.2 q/q). This has occurred despite the aggressive monetary easing by the RBA over the last few months. This week the RBA lowered interest rates by 1% to 4.25%, the 4th cut since Sept., they objective like any other Cbank is trying to avoid a recession. To date they have slashed rates 300bp and analysts expect another 75bp ease by Mar. of next year (0.6447).

Crude is higher O/N ($44.06 up +35c). Crude oil hit it lowest levels in 4-years yesterday as traders bet that a deepening recession in Europe, Japan and the US will erode future consumption once again. Imagine where we would be trading if China started to curb their demand, perhaps we would be sub $25? With risk aversion trading strategies taking precedence, there is currently noting capable of slowing down the negative price action and than even includes the widely anticipated OPEC cut later this month. This weeks EIA report showed that inventories declined for the first time in 10-weeks as refinery operating rates and imports tumbled. Stocks fell -456k barrels to 320.4m, w/w, vs. an expected weekly rise of +1m barrels. Refineries unexpectedly cut operating rates, and imports dropped -13% also contributed to jump in the black-stuffs prices. With overall demand remaining weak, refiners are making a concerted effort to reduce stocks. Technically they are slashing deliveries to keep stocks from accumulating. Refineries are operating at 84.3% of capacity, down -1.8%, w/w. It is the biggest one week declines since Sept. Consumption averaged +19.6m barrels a day, that’s up +0.6% from last week and down -5.7%, y/y. Comments from Qatar oil minister has done little to boost prices. Al-Attayah said that OPEC will ‘definitely’ cut output at its next meeting in Algeria on Dec. 17, after postponing a decision last month. He reiterated that the group wants prices between $70 and $80 a barrel, a desired level at which one can invest. OPEC decided last weekend to defer reducing production until its next meeting. Gold prices rose yesterday as a slumping greenback renewed demand for the ‘yellow metal’ as an alternative investment ($770).

The Nikkei closed 7,917 down -7. The DAX index in Europe was at 4,477 down -87; the FTSE (UK) currently is 4,128 down -35. The early call for the open of key US indices is higher. The 10-year Treasury yields eased 9bp yesterday (2.57%) and are little changed in the O/N session. Treasuries prices rose as traders bet that the longer end of the yield curve would rally on the back of the Fed wanting to buy treasuries. The curve once again has flattened to record lows (currently 2-10’s are 171bp). Traders are raising their bets that the Fed will ease by 75bp on Dec 16th. With global equities finding little traction, expect investors to remain better buyers on pull backs as ‘risk aversion’ trades become the norm as the recession deepens.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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