NFP, will it be the loss of -1 million jobs?

Rumor and innuendo has violently put pressure on the Greenback this morning ahead of the infamous NFP data. The market already knows it’s bad, but, insisted on selling the safer heaven currency. This morning’s government report may show the US lost the most jobs in 60-years last month. Some people are calling for a headline loss of -1m and an aggressive spike in the unemployment rate. Soon we will be moving from calling it a recession to a depression!

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 ‘volatile’ trading range.

As expected the BOE reduced its O/N borrowing rate to its lowest level ever (+0.5%) and said it would start purchasing about GBP 75b of assets and commence printing money to fight this recession. According to Governor King, he said ‘in these highly uncertain times there are merits to stimulating the economy through a variety of different channels’. This quantitative approach will have the UK government pump ‘New’ money into the system to alleviate a worsening recession as rates at or near zero will cease to have the desired effect. To put the size of the 75b asset purchase into context, one could expect 2/3rd to be in Gilts which equates to 50b GBP or 70b USD (the US economy is over 6 times the size of the UK, by superimposing that would be equal to the Fed purchasing $440b in Treasuries!), more importantly they will increase the size of the program if needed. Trichet did the predictable and said the unpredictable yesterday. He indicated that policy makers will cut the O/N lending rate further after reducing it to a record low of 1.5% as Euro-land buries itself in a deepening recession. But they remain mute on using other tools, their economy is sinking faster than what they had anticipated 3-months ago. They have cut their economic forecasts again (between -3.2% and -2.2%, down from -1%) and expect inflation to remain ‘well below’ its 2% ceiling this year and next. Trichet’s tone was extremely dovish and finally the ECB seems now to be fully acknowledging the seriousness of the crisis and the impact on Euro-land!

The US labor market continues to deteriorate as shown by last weeks unemployment claims data. It suggests that further hits to household wealth and heightened downside risks to economic growth as we head deepen into recession. Initial jobless and continuing claims both rose by less than expected, but, both remained high with initial jobless claims at +639k vs. +647k, and continuing claims at +5.1m. Analysts note that this release will not have an impact on this morning’s NFP, but will have an impact on the revisions going forward. Consensus for NFP remains at -700k losses!

US Factory orders fell less than expected in Jan. after non-durable goods shipments advanced for the first time in over 5- months while durable goods orders were revised down -0.7% to -5.2%. Orders declined -1.9% vs. expectations of a -3.5% m/m loss, the 6th -consecutive monthly decline and most of the weakness was in the transportation sector. It’s worth noting that food shipments accounted for a portion of the increase along with coal and consumer goods. Even though the pace of deterioration may have slowed last month, with factory orders still on the decline, industrial production is expected to deteriorate as demand continues to wane.

Not unexpected, but we saw mortgage delinquencies edging higher in the 4th Q, from 6.99% to 7.88%, q/q. More disturbingly, the last Q was a record high, and it’s expected to be broken in the 1st Q of this year as the jobless rate continues to increase. This is not good news for US housing market; it will provide further price pressures on house in the months ahead.

The US$ currently is lower against the EUR +1.07%, CHF +1.43%, JPY +0.59% and GBP +0.71%. The commodity currencies are stronger this morning, CAD +0.30% and AUD +0.54%. Investors sought sanctuary in the safer heaven USD and JPY over riskier assets such as commodity currencies. This has pushed the loonie lower and in pole position to make a challenge at its yearly lows. It’s only a matter of time before we record new lows in this cycle for the currency. Already this week, the BOC slashed borrowing costs by 50bp to 0.5% and indicated further easing which has not helped the currency’s cause. In their communiqué the BOC sent a strong signal that it may well not be done cutting rates and that it is moving toward outright quantitative easing. This is a huge shift in tone from the last communiqué where they placed emphasis on how different Canada is compared to the problems being witnessed elsewhere in the world. Traders are looking for better levels to sell the CAD$ in the short term. NFP data this morning may give us that opportunity.

Economic data this week has put the AUD$, a higher yielding currency on the back foot. Couple this with yesterday’s plunging global indices as China suppressed speculation it will add to its already announced stimulus plan has investors selling on rallies (0.6396). Jan.’s building and a surprising GDP report which showed that the economy unexpectedly shrank last quarter (-0.5% vs. +0.2%), has put pressure on the RBA to resume interest-rate cuts again. In a surprise move earlier this week Governor Stevens kept O/N rates on hold at 3.25%.

Crude is higher O/N ($44.28 up +68c). The initial exuberance of a bigger Chinese stimulus package waned yesterday. Combine this with the market expecting the US to announce higher jobless number this morning had traders paring their positions. Earlier this week investors had increased their demand for the black stuff on speculation that China would broaden their efforts to boost economic growth and bolster fuel demand in the world’s 3rd -largest economy. They believe that the already announced $585b stimulus plan would achieve their goal of 8% growth. Weaker macroeconomic data can only weigh on commodities. This week’s surprising EIA report showed an unexpected decline in US crude, the initial support cannot be sustainable as demand destruction remains. Crude oil supplies fell -757k barrels to +350.6m vs. an expected rise of +1m barrels. Refineries operated at 83.1% of capacity, up +1.8% from the last report. Meanwhile gas inventories rose +168k barrels to +215.5m vs. an expected decline of -800k. Stockpiles of distillate fuels (heating oil and diesel), climbed +1.66m barrels to +143.3m. Analysts had expected a +1m decline. It’s interesting to note that US gas consumption averaged +9m barrels a day over the past month, that’s an increase of +2.2%. Already this week we saw a report that showed OPEC had cut output by -2.7% last month as producers try to stem price declines. The market is now trying to anticipate the future outcome of the scheduled OPEC meeting on Mar. 15th. With the stronger ‘buck’ cuts may not be warranted. Gold is breaking out of its negative price run by advancing as investors buy the ‘yellow metal’ as falling stock markets boost its demand ($940).

The Nikkei closed 7,173 down -230. The DAX index in Europe was at 3,712 up +17; the FTSE (UK) currently is 3,569 up +39. The early call for the open of key US indices is lower. The 10-year Treasury yields eased 14bp yesterday (2.83%) and another 6bp in the O/N session (2.775). Treasuries have rallied aggressively, especially in the long end as investors speculated that the Fed may buy government securities after the BOE said it would buy sovereign and corporate debt. Despite a $63b funding announcement for 3’s, 10’s and 30’s for next week, equity markets are dragging prices higher as global indices fail to find that much needed traction!

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