FOREX TRADING

Canada’s economy got back into job creation mode in August with employment rising by 35,800. This result was largely in line with the consensus forecast for a 30,000 job gain. The unemployment rate, which rose in July to 8.0%, increased again in August to stand at 8.1% because the 53,500 rise in the labour force outpaced the gain in employment.

The August reports showed a see-saw pattern in educational services, which dropped 65,000 jobs in July and rose by 68,400 in August. Other big gainers were professional and technical services (28,000) and construction (12,000). Despite the headline increase, the industry breakdown showed that the majority of sectors posted declines in August. The goods sector reduced employment by 8,200 as manufacturers cut 25,600, reversing much of July’s gain. Building and supply services and information, culture and recreation also trimmed back their payrolls. All jobs created in August were in the public sector with private employment falling by 39,900. (more…)

Market Movers ahead

• There is little in the way of US events or data that can seriously be expected to move markets, partly because Monday is Labor Day.
• Can the German upswing continue despite the problems stateside? There is much speculation about this at present, so it will be worth keeping an eye on the figures for German manufacturing orders and output. The UK and Japanese central banks are holding rate-setting meetings, but we do not see either being particularly exciting.
• The US, China and big European economies will be releasing foreign trade data during the week, which could also say something about whether the familiar pattern is persisting, with Asia as growth engine and Europe as its big supplier.

Global Update

• The sense of relief was tangible as incoming data painted a slightly brighter picture than in previous weeks. The strong ISM figures in particular confirm that the risk of a really hard landing in the US is relatively small.
• In Europe, we had evidence that the upswing is becoming broader-based, and the PMI data from China indicates that the recent downturn in manufacturing there is over. On the other hand, the Bank of Japan disappointed with its not particularly ambitious easing of monetary conditions.

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• The ECB is taking a pause on the exit path. We expect the full allotment at all auctions to be extended until year-end and interest rates kept unchanged.
• As the risk of an economic downturn has increased we expect a softer tone at the press conference. Trichet is not going to announce new measures, but the door is still open.
• The staff growth forecast should be revised upwards – in particular for this year – while the inflation forecast should be kept practically unchanged.
• We expect a first interest rate hike from the ECB in Q4 2011. Current market pricing, based on EONIA forwards, suggests no hikes for the next couple of years.

Is Mr. Trichet still happy?

Will Mr. Trichet be as happy as he appeared at the last meeting? We believe not – US data have deteriorated a lot since the last meeting and it can only be a matter of time before the US downturn begins to drag on European growth. Nevertheless, the euro area did enter Q3 with strong momentum and seen from Frankfurt there is no cause for alarm yet.

Will the ECB prolong full allotment? We are pretty confident that they will – at least until the end of the year. This has already been indicated by Axel Weber in an interview with Bloomberg on 20 August 2010, see Flash Comment – ECB: No further exit before 2011. Financial markets are still fragile and there is no good reason to “rock the boat” before end-Q3 and before year-end, when liquidity tends to becomes more scarce. (more…)

Highlights

• Ifo goes up – Euro goes down
• Dollar strengthens on double dip fears
• ECB Council meeting: Will dovish comments be confirmed or corrected?

Euro Does Not Benefit from Good Eurozone Economic Data

The single European currency lost some ground against the dollar on average again this week. After climbing over 1.33 at the beginning of August, the euro hovered around 1.27 this week. This seems rather odd, given that most of the eurozone economic indicators were much better than forecasted, in contrast to the US data, many of which were disastrous, fuelling fresh fears of a sharp economic slowdown.

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The dollar and yen fell on Tuesday as investors sought riskier assets. July US economic data were mixed. Producer prices rose for the first time since March and industrial production grew for the fourth time in five months, but building permits fell to the lowest level since May 2009. The S&P 500 gained 13.16 to 1,092.54. The USD/JPY advanced today, supported by speculation that the Bank of Japan will intervene if the yen rises further. The EUR/USD rose after Spanish and Irish borrowing costs declined following successful bond auctions for the highly indebted countries. Sterling fell ahead of the release of Bank of England policy meeting minutes. The GBP/USD is at a critical support. If the minutes are dovish, the pair may break the support and drop substantially. July UK consumer-price inflation slowed to 3.1% y/y but remained more than 100 basis points above the BOE’s target, forcing Governor Mervyn King to write to Chancellor George Osborne to explain why inflation is so high. The Canadian dollar rose after Potash Corp of Saskatchewan said it had rejected a $39 billion takeover bid from BHP Billiton. A successful takeover would lead to significant Canadian dollar buying. (more…)

Overview

More are belatedly coming round to our long-held view that some yield is better than no yield and only really top-notch securities will do. Yield curves are collapsing, some to their flattest in a year, and several benchmarks are trading at new record lows so that credit spreads are widening, a two-pronged attack as investors shirk poor quality while taking AAA to rock bottom yields. Irish ten-year sovereign debt is trading within 5 basis points of June’s record 311 over Bund, these hitting a new low at 2.40%; ten-year JGB’s just 0.975%, Swiss Confederation another record 1.265% looking increasingly like their Japanese counterparts, and Mexican Bonos a record low 6.27%. All stock indices except Mumbai’s sold off (see underlying themes), many forming ‘bearish engulfing’ candles in the process, the Nikkei 225 to its lowest since July 2009 and a key chart level at 9,050, hardest hit Athens and Russia down 5.50% and 4.50% respectively, the Hang Seng not far behind down 4.25%. The US dollar regained some of July’s losses, except against the yen which managed a 15-year low at 84.72 outperforming all currencies and taking yen crosses lower. The CRB index is down a little on metals yet Nymex Cotton at 87 cents per pound is close to the highest prices in its 40-year history. (more…)

HIGHLIGHTS OF THE WEEK

• The U.S. economy scrapped 131K non-farm jobs in July.
• If it continues to create jobs at the speed it has showed since the labor market bottomed in December 2009, it would take roughly seven years to fully absorb the 8.4 million jobs lost to the recession.
• A research paper written by Federal Reserve FOMC member James Bullard reignited the debate on the prospects of further Quantitative Easing.
• Following six months of strong gains, Canadian employment fell by 9,300 in July, and the unemployment rate inched up to 8.0%, from 7.9% in the prior month. The majority of the jobs lost were in full-time positions (-139,000) where almost half the decline was in education services.
• Canadian Building permits rose to 212,000 units in June, up from 208,500 units in May. Despite the slight uptick, building permits are below levels seen at the end of 2009, indicating a continued drop in construction activity.
• This week we got a preview into July’s existing home sales for major Canadian markets – where sales fell well below the record levels from a year ago.

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The greenback traded on weaker footing against the major currencies in the Tuesday session, sliding by 0.8% versus the Japanese yen and losing around 0.4% against both the euro and the British pound. Crude oil managed to extend gains further, trading up by 1.3% to settle near $82.40-per barrel – its highest level since May 13th. Meanwhile, the US equity bourses closed marginally lower with the Dow Jones and S&P 500 shedding around 0.4% and the Nasdaq declining by 0.5%. Wall Street stalled on the heels of soft earnings reports from Proctor & Gamble and Dow Chemical. (more…)

Highlights

• Growth concerns weigh on dollar
• Beige Book sees modest increase in economic activity
• Central banks in emerging markets scale down rate hike plans

Emerging Markets: Central Banks are Becoming More Cautious

This week, EUR-USD firmed again somewhat to 1.30, even touching 1.31 briefly. The euro also rose slightly against most non-European currencies. The main reason for the movement was the diverging economic climate: both the macro data for the euro area and corporate quarterly earnings made a positive impression, especially against the gloomy backdrop of the sovereign debt crisis. The US indicators, on the other hand, underline the impression that growth has slowed down. Given the mediocre corporate results, the US equity market tended to move sideways.

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Today’s beige book report, compiled in preparation for the August 10 FOMC meeting, provided a much more qualified characterization of the recovery among the 12 Fed districts compared to the report prepared in advance of the June 22-23 FOMC. Although the report opened by stating that economic activity continued to grow, the qualifier “on balance” quickly followed. This qualifier reflected that while eight Districts seemingly indicated that economic activity improved, albeit modestly, two Districts indicated steady activity with two Districts, Atlanta and Chicago, indicating the pace of activity had slowed recently. In June, it was indicated that economic activity had improved in all 12 Fed Districts. (more…)

U.S. Review

Home Is Where the Economy’s Heart Is

• Housing starts and existing home sales declined in June, reflecting the winding down of homebuyer tax credits.
• Building confidence fell to 14 in July, and June’s numbers were revised down slightly.
• The effect from the unwinding of various economic stimulus programs is evident in other data, with the leading indicators declining 0.2 percent and weekly firsttime unemployment claims bouncing back to 464,000.
• Bernanke’s midyear report to Congress outlined possible future steps the Fed may take to boost economic growth.

We Have Got to Get in Shape

If the state of the nation’s housing market is at the center of the economy’s near-term prospects, then we have got to get in shape. Nearly all of the major housing indicators reported this past week showed more weakness than was widely expected, suggesting that the payback from the homebuyer tax credit program will be a bit deeper and longer lasting than many had hoped. One of the most disconcerting pieces of news was housing starts, which fell 5 percent in June, following a downwardly revised 14.9 percent drop in May. A slight 2.1 percent rise in building permits initially took some of the sting out of the headline number, but all of that gain was in the volatile multi-family unit series. Permits for new single-family homes fell 3.4 percent, following 10.3 percent drops in both May and April

Single-family permits are now running at just a 421,000-unit pace, well below the recent trend in starts. When you couple this with July’s decline in the Wells Fargo/NAHB homebuilders’ index, there is no reason to expect housing starts to increase in July, and we may not see a gain in August either. With demand flat and credit for homebuilders still extremely tight, there is no incentive for builders to get out ahead of demand.

Existing home sales actually fell less that expected, but the trend remains unfavorable. Existing home sales have been harder to read because of the extension of the closing deadline for homebuyer tax credits from June 30 to September 30. The net effect of the deadline extension will be to moderate the slide in existing home sales over the new few months. (more…)

Overview

A week spent speculating which banks might fail their ‘stress tests’, and whether these were worth doing at all, indices alternating between fairly large up and down days to end the week in positive territory. Jakarta, Mumbai and Thailand set new highs for 2010. The Japanese stock market closed near the lowest levels in two years, pressured by a strong yen (86.27) and dragged down by the banks index. The US dollar has lost ground against all major currencies this week, the Australian dollar leading at $0.8972 (a ten-week high) and the Swiss franc at 1.0400, best this year. The Hungarian forint weakened to 292.00 per Euro because of new PM Viktor Orban’s refusal to implement IMF-suggested austerity measures. Top-quality Treasuries remain well bid, those of weaker Eurozone countries still all too close to their records over Bunds. US asset-backed securities the first casualty of new financial regulation, so the SEC has had to allow a 6-month grace period for implementation. [Rating agencies can now be sued for fraud and reckless behaviour so they are not allowing their ratings to be published in prospectuses]. ICE Sugar rallied to 18.66 cents per pound, its most expensive since March though a fraction of February’s unsustainable 30.40 peak. Most Baltic Freight rates are at their lowest in a year or more.

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The Bank of Canada, as expected, hiked rates by a quarter point to 0.75% in today’s meeting. The accompanying release, while saying economic activity in Canada was unfolding largely as expected, did cut its forecasts for growth in 2010 and 2011. Growth in 2010 is now forecast at 3.5% from 3.7%, while the forecast for 2011 was revised to 2.9% from 3.1%. “This revision reflects a slightly weaker profile for global economic growth and more modest consumption growth in Canada.”

From the Release: “Reflecting all of these factors, the Bank has decided to raise the target for the overnight rate to 3/4 per cent. This decision leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in light of the significant excess supply in Canada, the strength of domestic spending, and the uneven global recovery. (more…)

Bond prices are generally lower as investors seem a little less pessimistic towards risk to start the week. The burning question appears to be whether the notable slowing in economic activity justifies the plunge in yields.

Eurodollar futures – A three day rally for bonds last week saw 21 basis points shaved off the cost of government borrowing as investors rushed headlong into the safety of fixed income. The 10-year note faces a weaker start today even ahead of an expected decline in home builders’ confidence later this morning. September notes are a couple of ticks lower to stand at 123-04 yielding 2.95%. Meanwhile nearby Eurodollar contracts have made minor gains while contracts maturing from June 20011 onwards have declined by one or two pips. (more…)

U.S. Review

Slower Growth, Low Inflation with Big Budget Deficits

• Retail sales and industrial production set the tone for the economic outlook as momentum has slowed to a three month pace of 4 percent compared to a 7 percent year-over-year gain. This slowdown outlook was reinforced by comments by the Federal Reserve.
• Inflation, meanwhile, measured by the Consumer Price Index, is now up just 1.1 percent over the past year. Substantial slack in the economy will likely continue to put downward pressure on core CPI inflation. Slow growth and low inflation suggests big federal fiscal budgets persist for the outlook horizon.

Moderate Paced Recovery with Low Inflation

A Dose of Reality from the Fed: Participants generally anticipated that, in light of the severity of the economic downturn, it would take some time for the economy to converge fully to its longer-run path as characterized by sustainable rates of output growth, unemployment, and inflation consistent with participants’ interpretation of the Federal Reserve’s dual objectives; most expected the convergence process to take no more than five to six years.

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