As expected-NFP surprises!

All hands on deck. It will either be a bust or a wild few hours before we can knock off for the w/d. To often the market reacts like a ‘cat on a hot tin roof’ getting ahead, getting stopped and drowning in all the noise, which is NFP day. This month’s prediction is like a moving target, whispers of –150 to -400k. The sure bet is that unemployment rate will be edging that much closer to the psychological 10% level and that we will have volatility. We will be put out of misery with in a few hours!

The US$ is stronger in the O/N trading session. Currently it is higher against 10 of the 16 most actively traded currencies in a ‘subdued’ illiquid session ahead of NFP.

On the face of it, yesterday’s jobs numbers was about giving and taking. With a better than expected headline for initial claims (550k vs. 588k), the goodness was taken out of it by the continuing claims figure (+6.310m vs. +6.241m). Analysts will tell you that continuing claims figure is highly correlated with the unemployment number (+9.5% and expected to tick up this morning). Initial claims is off from its Jan highs, but firmly entrenched in the mid -500’s in the last Q. Similar story for continuing claims, off from its peak in June but the data remains consistent. The market is holding its breath and hoping that the seasonal distortions have smoothed themselves out. In reality, there are probably two reasons which could dispel this theory. Firstly, Capital markets believe that the worst of the auto distortions are over, but its other industries may still be lagging. Secondly, what about the cash-for-clunkers program? Could it once again distort the numbers as production and workers recall gets an artificial leg-up until the incentive program winds down indefinitely. However, analysts believe that the lower claims figures are an important economic development and confirmation that the economy is turning the corner. Aggressive punters are predicting a -150k NFP print this morning with the unemployment rate continuing to tick higher (+9.6%).

One surprised, the other did not. Both the BOE and ECB as expected kept O/N lending rates on hold. But, it was Governor King’s following communiqué which took the market by surprise. In a surprise move, policy makers are to expand its bond purchase program beyond its original limit (GBP175b) in an effort to spur lending and fight a recession that’s deeper than previously anticipated. It seems that they believe that the current stimulus plan, coupled with low interest rates (+0.5%) is not doing enough to snuff out the threat of deflation. On the other hand, Mr. Personality ’not’ Trichet was full of excitement and could hardly contain himself when he announced that the Euro-zone economy will not return to growth until next year and that interest rates were ‘appropriate’ (+1%). It was ‘the same, same old’ from the ‘play by the book’ CBanker. They want to give their stimulus measures time to filter through the regions.

The USD$ currently is lower against the EUR +0.01% and higher against GBP -0.33%, CHF -0.07% and JPY -0.02%. The commodity currencies are weaker this morning, CAD -0.11% and AUD -0.23%. We have waited all week for some Canadian data and yesterday’s Building permits painted an odd picture. The headline advanced (+1% vs. -1.2%) but declines in unit term would suggest that weaker housing starts lie ahead. Building permits (in dollar terms) remained strong in June (+2.0%, m/m, gain in both residential and non-residential construction permits). Nonetheless, in unit terms, permits actually declined in June, which would suggest that we will see a decline in this month’s headline. Dealers were happy to pare some of this week’s gains and lock in profits ahead of North American employment reports this morning. Already this week we witnessed both investor and dealers disregarding the Finance Ministers fighting words, where he stated that ‘there are some steps that could be taken to dampen the currency’s rise’. Since Mar. the loonie has strengthened 21% vs. its inward-looking southern neighbor. For the loonie per-se, nothing fundamentally has changed. The strength of the currency continues to get ahead of fundamentals. Will the job data be a non-event?

The RBA next move would see policy makers hiking interest rates (+3%) as they scrap a prediction that the economy would fall into recession. The currency is heading for the 4th consecutive week of gains (off the highs) on optimism that a global recovery will boost demand for higher-yielding assets. Naturally traders have trimmed some of their positions ahead of the employment numbers (0.8364).

Crude is lower in the O/N session ($71.25 down -69c). It’s finally dawning on traders that this week’s report was actually bearish. Crude prices have backed off from its 2-month highs on higher oil inventories after refiners reduced processing. The weekly EIA report showed a bigger-than-projected supply increase, add the weaker US fundamental data we have already seen this week and voila we have lower prices. The commodity’s rise of late has been rapid and gut feelings tells us it has been over extended on the top side. The crude oil builds across the States and at Cushing (where West Texas is stored-+1.2m to +33.3m w/w), are weighing on the market. Demand destruction remains healthy as noted by industries reports contracting last month. This certainly does not bode well for any strong rebound in the coming months. Crude stocks increased +1.67m barrels, w/w, vs. an expected rise of +0.6m. Gas stocks declined -212k to 212.9m. The market was expecting a decline of -800k. Supplies of distillate fuel (including heating oil and diesel), fell -1.14m barrels to +161.5m, an increase of +1.23m was projected. On the face of it, it’s a bearish report. However, we continue to range trade. Technically the market needs to break below $69 to gain any true momentum. Reality tells us that inventories are high, demand is still really weak and the risk is increasing that we will see a bigger correction towards $60. We are not seeing growth, but indicators are showing us a ‘less bad is good’ scenario. It’s worth noting that OPEC increased their output levels for a 4th-consecutive month in July (agreed compliance is slipping as some members states take advantage of the stronger prices).Their output averaged +28.39m barrels a day (up +45k, m/m). The market seems to want to take its cue from this morning’s NFP report! Gold got a boost yesterday as the greenback weakened and weaker fundamentals data persuaded investors to covet the ‘yellow metal’ as an alternative investment, however that only lasted to late afternoon when the USD did an aggressive return. Direction is all about this morning’s numbers ($970).

The Nikkei closed at 10,412 up +24. The DAX index in Europe was at 5,342 down -28; the FTSE (UK) currently is 4,647 down -43. The early call for the open of key US indices is lower. The 10-year Treasury’s eased 1bp yesterday (3.75%) and are little changed in the O/N session. Treasuries prices basically treaded water ahead of this morning’s NFP data. Dealers have been paring position themselves ahead of next week’s $75b sale of notes and bonds. They cannot be too aggressive ahead of today’s headlines

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