NFP Guesstimates are Slashed and Yours?

The playing field is battered and bruised this morning as we wait for NFP. The EUR has buckled, the CHF has risen, global bourses see red and bond spreads have widened as suspect toxic positions are diluted. The paring of long stale EUR positions was a theme in August and this month has started the same way with an extension of those trades. Obviously, the object for dealers is to shed as much risk going into an event like this mornings NFP when predictions are a moving target.

A better than expected print will take the pressure off the Fed to implement a new ‘dollar diluting stimulus program’ . However, this will give the remaining EUR longs little breathing space. The QE battered dollar should get the ‘kiss of life’, as stronger US data shifts investors focus back on all that ‘ails’ the Euro-zone.

Citing signs of weak hiring in late July and August, the Big Boys like Goldman have cut their prediction for this morning’s employment report by 50% over the last 24-hours. It’s still a positive prediction, but at +25k, it’s a paltry effort from the might of the US. The guesstimates range from-10k to +117k headline print.

The US$ is weaker in the O/N trading session. Currently, it is lower against 10 of the 16 most actively traded currencies in a ‘subdued’ trading session ahead of jobs data.

Forex heatmap

Yesterday’s US data gave us the feel good factor for a brief period anyway. Will today’s employment report shatter that experience? Initial claims in the US fell-12k to +409k last week, slipping from the revised higher +421k print from the prior week. As expected, the number was inflated by the Verizon strikers. The market was thankful that the number was in line with expectations with no seasonal or special factors needed to be applied.

The reading remains too high to offer any comfort to the sluggish labor markets, claims above that psychological +400k watermark suggests an economy with a weak hiring policy. Digging deeper, continuing claims fell-18k to +3.735m, above the market expectation of +3.67m because the preceding week saw an unusually large upward revision to +3.753m from +3.641m, putting it up +32k rather than down the reported-80k. Analysts note that this trend remains ‘flat’ and similar to initial claims and does not point to a recession. Both emergency claims and extended benefits advanced +31k and +7k respectively, to +3.118m and +558k. There is nothing to suggest that we should be concerned about a double dip scenario. It’s now up to NFP. Predictions are widely varied from-10k to +117k.

US labor costs rose last spring (+3.3%) more than expected as labor productivity fell (-0.7%). This scenario is expected to eventually hurt companies bottom-line and certainly does not support this labor market or the economy at large. It’s no wonder that the Fed has cut its projections on economic growth into next year. With companies becoming more inefficient and costs rising cannot protect company’s margins. Where is the incentive? Currently, labor costs are having no influence on inflation and because of the US economy’s weakness the Fed expects prices to remain subdued into 2012.

The surprise of yesterday was the US ISM manufacturing index easing last month (50.6 vs. 50.9) and handily beating market expectations (48.5). Investors were tickled that the US economy was capable of eking out another month of growth despite the volatility. However, near term growth remains questionable. Digging deeper, new orders index edged higher to 49.6 from 49.2. It’s noted that it is still the second lowest reading in two-years. The production index dropped from 52.3 to 48.6 and not to be outdone, employment slid to 51.8 from 53.5, again the lowest print in two-years. Supply delivery times quickened while the inventory index rose. Add this all together and we have concerns about future growth. Weaker activity in orders and production will drag down delivery times and not require a build in inventories. The price index dropped for a fourth consecutive month. More worrisome is the export index declining while imports rose. It’s this that seems to be the trend of all the recent surveys.

The dollar is higher against the EUR -0.06% and lower against GBP +0.11%, CHF +2.05% and JPY +0.15%. The commodity currencies are weaker this morning, CAD -0.07% and AUD -0.30%.

The CAD managed to print its strongest level in a month yesterday after a surprising manufacturing report from its largest trading partner beat all estimates. Currently, the currency is happily treading water ahead of this mornings US employment report. The loonie is on its way to erasing its biggest monthly decline since May, witnessed earlier this week, as domestic data showed that the economy grew by +0.2% in June on Wednesday. Unfortunately the big picture is not so ‘pretty’. The quarter GDP declined -0.1%, for an annualized rate of +0.4%, marks the first decline since the second quarter of 2009. Exports fell -2.1%, the sharpest drop in two-years and imports grew +2.4%, which points to net exports of having a significant affect on growth.

The market will have to wait and see what the US employment number is capable of bringing to the table before investors place their ‘new bets’. This week’s Fed minutes revealed a dovish meeting and one that shows that policy makers are still prepared to act if things get worse from here (0.9770).

It was mostly sideways action from Aussie in the O/N session ahead of NFP. The currency is heading for its third week of gains outright and against the JPY, as investors pared bets that the RBA will cut interest rates. The futures market is pricing in an 80% chance that Governor Stevens will hold rates steady next week.

Australia is the only developed economy to avoid a recession during the global contraction of 2009, and is undergoing a ‘structural adjustment’ as the biggest mining boom in more than a century drives the nation’s currency to a record. The rising local dollar is hurting exporters, and the unemployment rate last month rose for the first time in 11-months.

It seems that the currency cannot lose at the moment. If US data continues to improve then local market pricing for interest rate cuts by the RBA will evaporate. On the flip side, if US data takes a turn for the worst, then the AUD will benefit from a weaker dollar. Now that this growth and interest rate sensitive currency would likely be supported on both poor and strong US data, certainly favors a test of the old highs north of 1.10. Currently, investors are better buyers of Aussie dollars on pullbacks as long as this risk loving environment remains (1.0696).

Crude is lower in the O/N session ($87.98 down-0.95c). A day after completing it biggest monthly drop since May, crude traded near a one-month high after reports showed US manufacturing unexpectedly grew last month and jobless claims decreased yesterday.

This week’s EIA inventory report revealed that crude stockpiles unexpectedly moved up. Inventories increased by +5.3m barrels to +357.1m, and are above the upper limit of the average range for this time of year. On the flip side, gas inventories fell by -2.8m barrels and this after gaining by +1.4m in the prior week. They remain at the upper limit of the average range. Analysts were expecting crude oil inventories to dip by-500k barrels and gas stocks to fall by nearly +1m. Oil refinery inputs averaged +15.4m barrels per day, which were-219k barrels per day below the previous week’s average as refineries operated at +89.2% of their operable capacity. It’s also worth noting that over the last four-weeks, imports have averaged +9.2m barrels per day, which were-441k barrels less than the same period last year.

For the moment, Crude prices continue to hold just above strong support levels, supported by unrest in Libya where the availability of light oil with low-density and sulfur content output has fallen. The Fed’s monetary policy should be bearish for the dollar and bullish for crude in the longer term.

Gold completed its biggest monthly gain in two years this week, on speculation that the Fed will take more action to spur growth. The metal has rallied aggressively after the US consumer confidence number sank to a 28-month low on Tuesday. Investors again are speculating that the Fed will be required to ease monetary policy in answer to stimulate the economy. This has been boosting the appeal of the yellow metal as an alternative asset class. To date, the Fed has kept borrowing costs at a record low for nearly three-years to stimulate the economy.

Already this week the possibility of a stimulus package from the Fed in the weeks ahead had seen the return of risk appetite to the market with ‘safer haven assets’ being liquidated. Year-to-date, the lemming commodity trade is up +29%, as the global debt crises and volatile stock markets boost the appeal of the metal as an alternative asset. The Fed’s efforts to drive interest rates lower to support lending should curtail the dollar’s appeal and by default, support commodities. The commodity is heading for its eleventh consecutive annual gain ($1,851+$22.50c).

The Nikkei closed at 8,950 down-110. The DAX index in Europe was at 5,590 down-139; the FTSE (UK) currently is 5,321 down-98. The early call for the open of key US indices is lower. The US 10-year eased 3bp yesterday (2.16%) and another 3bp in the O/N session.

After completing their biggest monthly gain in nearly three-years, treasury prices again have rallied ahead of this morning’s employment report. Investors are expecting the data to show the pace of growth in non-farm payrolls is slowing, adding to the trend of weakening economic data. Despite yesterday’s data being somewhat good, the reports are however backward-looking. For most of this week US treasury prices have rallied, especially longer dated securities, as consumer confidence plunged to the lowest in more than two years.

Yields on shorter term treasuries remain rooted to their record lows after the Fed signaled earlier this month that they are willing to take further measures to prevent the US from falling back into a recession. This morning’s print will tell us if the Fed needs to be following through on that.

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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