FOREX TRADING

The risk trade lives and breathes. The United States July employment situation report from the Bureau of labor Statistics was uniformly disappointing in detail and worrying in implication. But currency traders piled into the euro, the yen and the sterling and generally opted to see the anti-dollar comparison rather than the threat that a serious slowdown United States poses for the world economy. The euro rose to more than 150 points to 1.3332, the yen 82 points to 85.11 and the pound 130 point to 1.5996, within 90 minutes of the NFP release. (more…)

U.S. Review

Slower Growth Looks Certain, but Not a Double Dip

• While July’s employment report was weaker than expected, it still showed solid, yet unspectacular, gains in private sector payrolls. The unemployment rate was unchanged, but only because the labor force continued to shrink.
• The ISM manufacturing index slipped 0.7 points in July to 55.5, indicating that manufacturing activity expanded at a slightly less robust pace during the month.
• Falling food and energy prices helped lift real personal income and spending 0.1 percentage point during July. The saving rate rose to 6.4 percent.

Growth Will Slow but we see no Double Dip

This week’s economic news went a long way toward alleviating fears about an imminent double-dip recession. While a second downturn cannot be totally dismissed, we see the probability as very low and expect the economy to again show surprising resiliency. Expectations for a slowdown are built around five basic principals: the winding down of massive government stimulus, less of a boost from inventory rebuilding, slower global economic growth, cutbacks at state and local governments, and further gains in household saving. All five of these look certain to restrain growth during the next few quarters, but we expect business fixed investment, exports and consumer spending to remain solidly positive. In addition, inventories are likely to bounce back further than many people expect, as many industries are reporting bottlenecks throughout their supply chain. (more…)

Today saw investors selling the US Dollar, with strong gains by its major rivals – the Euro, Pound, and Yen. There are mounting fears of a global double-dip recession as recent data is showing the US recovery sputtering with the labor market remaining to be very loose and housing retrenching sharply following the expiration of the government’s home-buyer tax credit.

Traders and investors are also likely pricing in a very weak Friday non-farm payroll report. Today also showed that the manufacturing sector in the US is beginning to cool as the ISM manufacturing index slowed to 56.2 from 59.7. Expectations had been for a reading near 58.9.

Adding fuel to the fire are the ongoing troubles with European banks as well as austerity measures that will be undertaken by European nations and the UK which will hurt growth in that region. But even more importantly, the developed world may have been counting on the developing world – and China – to lead the way forward. However, China, being concerned about an economy that is overheating and fueling not only inflation but a possible housing bubble has tried its best to put the brakes on its economy. The efforts seem to have paid off at least in the manufacturing sector, as data overnight showed. (more…)

Hungary makes waves

Risk appetite headed south ahead of the US employment report on new developments in Hungary, that were at least hinted at yesterday by a spike higher in EURHUF on an "informal" visit from the IMF to Hungary. Now suddenly it has come to light that Hungary’s finances are a shambles after the new center-right PM Orban took power on May 29 and now is out suggesting that the country is in a "grave situation" because the previous government lied about the state of the economy and cooked the public books. More news on specifics is expected this weekend, and the news is not likely to be pretty, as the previous administration was obviously up to no good, and as the PM will likely try to firmly pin as much of the situation on his predecessors as possible. The situation is reminiscent of Greece, with important differences – Hungary can devalue its currency and can more easily default than Greece – the question is how it handles its mortgage debt – much of it denominated in Swiss francs – and whether the country gets another IMF bailout or ends up in some kind of default. EURCHF broke below 1.4000 in today’s trade – but are CEE defaults a CHF positive? More on this in the future. In any case, the situation puts a damper on the entire EM complex as it reminds how fragile these economies are when a crisis hits.

Chart: CHFHUF

During the go-go days of the great global credit bubble, when risky assets of all stripes were appreciating almost regardless of fundamentals, it seemed a no-brainer for Hungarian citizens to finance their home purchases in Swiss francs, where interest rates were very low and the currency was weakening, while Hungarian rates were far higher and HUF was strengthening. During the middle years of the decade, up to 80% of mortgages were financed in foreign currencies. The chart below shows how much more expensive those mortgages have now become from currency appreciation – some 33% or more from 2007 lows in CHFHUF.

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The dollar traded mostly higher on Thursday ahead of Friday’s important US labor data. ADP’s forecast of private-sector payrolls rose less than expected. US service industries expanded for a fifth consecutive month. The S&P 500 index traded in a narrow range and increased 4.45 to 1,102.83. The dollar index is just below the important 87.50-area resistance. If this is broken, the dollar will gain significantly. The USD/JPY rose for a second day and broke the 92-area resistance, supported by Japan’s political uncertainty following yesterday’s PM resignation. The GBP/USD declined modestly despite the higher UK services PMI and home prices. The Australian and Canadian dollars were little changed at important technical levels.

The EUR/USD reversed earlier gains and fell on continued worries about the European banking system and weak retail sales. The pair had tested the 1.2150 area for a seventh time. In a clearly defined downtrend, the EUR/USD is likely to fall further despite being extremely oversold on most measures. However, it may not be recommended to enter short positions here as a possible short-covering rally could be very sharp. Further support is in the 1.20 area and resistance in the 1.25 area.

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March nonfarm payrolls rose by 162k

US April nonfarm payrolls and unemployment rate will be released on Friday May 7th. March nonfarm payrolls rose by 162k and the unemployment rate held steady at 9.7%. March nonfarm payrolls employment increased by the most in three years. The March employment report suggests that businesses and employers are gaining confidence in the US economic recovery and are starting to hire. Excluding census hires the March nonfarm payrolls rose by 124k. The March unemployment report suggests that the outlook for US labor market has improved. According to the Bureau of Labor Statistics (BLS) temporary workers and health services continued to add jobs along with employment in the federal government. Employment declined in financial activities and information.

Temporary hiring and long term unemployment up

On the positive side, the March unemployment report showed an increase of 40k temporary workers. Temporary hiring is normally considered an indicator of future job growth. So far temporary hiring hasn’t translated into many full time jobs. In addition, the average workweek increased and improving weather contributed to an increase in construction jobs. Construction jobs rose by 15k last month which was the biggest monthly increase since March 2007. On the negative side, long-term unemployment continues to rise and a third of the rise in the nonfarm payrolls reflects temporary or government workers. According to the BLS the long-term unemployed (those jobless for 27 weeks or more) increased by 414k to 6.5mln. 44.1% of unemployed persons were jobless for 27 weeks or more. In past recessions the level of long-term unemployed never reached 24%. The underemployment rate which includes part-time workers who prefer full-time positions and people who stopped looking for work increased to 16.9% from 16.8%. Government payrolls increased by 39k in March. Although more part-time workers were hired in March and the hours worked were up, wages slipped a bit. (more…)

U.S. Review

Economic Recovery Continues, but is it Enough?

• Economic indicators this week suggested continued economic growth. Factory orders, the Institute for Supply Management manufacturing index and employment all suggest continued progress.
• Yet the pace of the recovery still presents several fundamental challenges. First, construction spending is disappointing and for a society that has put so much emphasis on housing, there is a disconnect between aspirations and reality. Second, the pace of growth will not likely solve the budget shortfalls in many states or at the national level.

Economic Recovery Continues, but is it Enough?

Three important economic indicators this week suggested continued economic growth. Factory orders, the Institute for Supply Management Index and employment all suggested continued progress on the economic front. Factory orders increased 0.6 percent in February and the gain reported for January was revised higher. Factory orders have gained in 10 of the past 11 months and are now more than a third of the way back to where they were at their peak in July 2008. Specifically, new orders for non-defense capital goods ex-aircraft are up nine percent (annualized) over the last three months, consistent with our expectations for 8 percent or more gains in real equipment & software spending for this year.

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Wakeup Call: Weak Greek 7-Year Auction To Be Put To The Test In The Coming Days

Greece decided to try with a EUR 5bn 7-year auction, but the outcome was not too impressive. The issue was covered 1.4 times (Easter was quickly blamed) and the 5-year CDS jumped 23bps yesterday.

Calendar

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USD Lower, Stocks Rise, Growth Currencies Outperform

• USD: Lower, improving risk sentiment, RBA rate hike speculation, diminished Greek uncertainty
• JPY: Lower, retail sales post best annual gain in 12 years, selling in cross trade
• EUR: Higher, EU economic confidence rises to a two year high, Greek bond spreads remain wide
• GBP: Higher, consumer credit rises, mortgage approvals dropped, Conservatives expand lead
• CHF: Higher, EUR/CHF rebounds from all-time low, threat of intervention
• CAD and AUD: AUD & CAD higher, hawkish comments from the RBA, firmer equities, higher crude

Overview

The USD starts the week lower pressured by improving risk appetite as equity markets firm. The improvement in risk sentiment is attributed to last weeks announcement of an EU/IMF aid plan for Greece, stronger economic data from the EU and Japan and speculation that this week’s US nonfarm payrolls will post a sharp rise. The EU/ IMF aid plan for Greece limits some of the uncertainty about Greece and reduces the risk of a Greek debt default. The head of the IMF says there is no immediate sign that Greece needs help. EU economic confidence rose to a two year high and Japan’s retail sales rose at the fastest pace in 12 years. These reports fuel optimism about the strength of the global recovery. Commodity currencies traded higher tracking the improvement in equities and firmer commodity prices. AUD traded higher supported by hawkish comments from the RBA Governor Stevens that interest rates are too low and could not remain at prior levels. This week’s main focus will be Friday’s release of US March unemployment. Nonfarm payrolls are expected to rise by as much as 190k. Anticipation of improving US employment outlook adds today’s improvement in risk appetite. Today’s US economic data was mixed with personal income unchanged, and personal consumption in line with expectation. Bloomberg reports that analysts at Goldman Sachs have changed their negative USD bias stating that the USD is supported by low inflation, rising equities and safe haven demand sparked by the Greek fiscal crisis.

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Weekly Economic and Financial Commentary

U.S. Review

Public Policy Grabs Center Stage

• Public policy dominated this week, with the passage of healthcare reform and confirmation the social security system would run into deficit this year contributing to disappointing Treasury auctions and higher bond yields.
• Advance orders for durable goods rose in line with expectations, but a large downward revision to January’s nondefense capital goods orders raises a red flag as to how strong capital spending will be in the first quarter.
• Sales of new and existing homes both declined in February, raising fears the incipient recovery in housing has faltered.

Strange Days in the Credit Markets

The bond market is the ultimate truth detector and its verdict on healthcare reform is the new law will be more costly than the Congressional Budget Office (CBO) estimated and budget deficits will be larger. The bond market was already on edge from the ongoing Greek debt saga and reports that Berkshire Hathaway and a handful of other businesses can now borrow more cheaply than the U.S. Treasury. The CBO confirmed the Social Security system would pay out more in benefits this year than it receives in taxes, something that was not supposed to occur until 2016. The Social Security shortfall means the Treasury will need to redeem the “special issue notes” issued to the Social Security trust fund, which will require the Treasury to sell real bonds, which has become more challenging in recent weeks.

The last few years have seen Treasury yields rise during the spring, triggering a whole new set of challenges. History looks like it will repeat itself this year, with the end of the Fed’s mortgage-backed securities purchases next week adding to the upward drift in yields. The supply of bonds coming to market will remain a challenge, with additional money needed to pay Social Security benefits and recapitalize Fannie Mae and Freddie Mac. Sovereign credit risk and worries about growing supply also extend to municipalities, which saw yields climb sharply recently.

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U.S. Review

Growth & Credit: On the Road to Singapore (Recovery)

• Economic growth and finance are both in recovery mode as evidenced by the gradual upturn in jobs and the gains in leveraged loan issuance. Yet, like Bing Crosby and Bob Hope, the economy never seems to be able to reach the happy land of Singapore.
• This recovery is still subpar for housing and the consumer as the pace of recovery still leaves many homeowners underwater in certain areas and many workers underemployed or unemployed. Skies are getting clearer but we remain far away from a sunny day.

On the Road to Singapore

In their most famous “road picture,” Bing Crosby and Bob Hope vow never again to repeat past mistakes and head off to Singapore. Of course, they do repeat their past mistakes and never do get to Singapore. For the U.S. economy the pace of improvement appears maddeningly slow and yet there is improvement.

Employment losses have steadily declined over the past six months. In fact, private sector jobs (ex-construction) have risen over the past two months. There is a cyclical recovery in private sector jobs while the structural problems in real estate limit the recovery. Job gains have also appeared in manufacturing sectors such as machinery, primary metals and electrical equipment. Meanwhile the index of hours worked has risen over the last three months, consistent with sustained economic growth. Combining hours worked and average hourly earnings, our income proxy has broken into positive growth territory. This suggests positive income and therefore spending gains in the months ahead.

Structural – Not Cyclical – Challenges to Employment

While the employment data suggest cyclical recovery, there are also suggestions of structural challenges that will limit our progress on the road to Singapore. We see this clearly in the unemployment rate by education and the duration of unemployment data. The stark reality of the unemployment situation is that higher education levels are associated with lower unemployment – and vice versa unfortunately. Unemployment for college graduates is 5 percent – for high school drop outs the rate is 15 percent. Meanwhile, the average duration of unemployment remains high at 30 weeks. There is a significant skills mismatch in the U.S. economy. It is not as though there are no jobs. More precisely, there are no jobs for many willing workers who do not have the skills to compete in the 21st century workplace.

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U.S. Dollar Trading (USD) was strong even as stock markets remained positive as the EUR/USD slumped after the ECB announcement and USD/JPY rallied on increasing US Bond Yields. Weekly Jobless Claims improved to 469k vs. 496k. January Pending Home Sales fell -7.2% tracking a broad set of weak housing data in January. In US stocks, DJIA +47 points closing at 10396, S&P +4 points closing at 1122 and NASDAQ +11 points closing at 2292. Looking ahead, February NonFarm Payrolls forecast at -50k vs. -20k previously and the Unemployment rate is forecast at 9.8% vs. 9.7%.

The Euro (EUR) lost ground after the ECB held rates at 1.0% and described the current levels as appropriate with economic growth uneven. EUR/JPY held its own as stock markets improved but EUR/AUD slumped back close to the key 1.50 handle. Also released, Q4 GDP confirmed at 0.1%. Overall the EUR/USD traded with a low of 1.3551 and a high of 1.3714 before closing at 1.3570. Looking ahead, January Factory Orders are forecast at 1.5% vs. -2.3% m/m.

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Forex Trader Note: The U.S. NFP report printed at -85K, with a net revision of negative -1K over the last two reports. The Unemployment rate posted at 10%, and in reaction S&P futures have hit the floor, with Usd is moving lower initially. The report is very mixed, with no real increase in weekly hourly rates, and the Household survey is way out of line with the Payroll survey; the point to note is the word ‘Survey’; this report is in-line with the more realistic view given by the ADP and weekly Initial Jobless Claims, that are not surveys. This sets up good tests of the 4 hour chart ranges on the majors, and will offer a more reliable read once the Wall Street cash market gets underway.

Once again, the NFP has done nothing to create a clear picture, and the estimated parts of the BLS report create a lot of noise. It will be hard for anybody to put a positive spin on these numbers, and once again we go from famine to feast on the Non-farm Payroll Circus. After all of this, 25 million Americans are still looking for work, and 11% of Americans are still relying on food stamps. The ticker-tape parade from December looks to be rather sobering right now.

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US Nfp May Have Turned Positive In December

The US labor market improved significantly in November and the trend is expected to have continued during December. In November US nonfarm payrolls declined by just 11k. This was well below market expectation that nonfarm payrolls had been cut by 125k. The headline unemployment rate also improved to 10%. The trade had expected the November unemployment rate to be unchanged at 10.2%. Temporary holiday retail and healthcare jobs offset the loss of jobs in construction and manufacturing in November. On Friday January 8th at 8:30 AM ET US December unemployment and nonfarm payrolls will be released. There is a great deal of speculation that the nonfarm payrolls will turn positive in the December report for the first time in 23 months. Estimates for December nonfarm payroll range from -80k to plus 50k. Consensus for December nonfarm payrolls -8k with the unemployment rate expected at 10.1%.

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Sunrise Market Commentary

• Yield curve bear flatten as US payrolls report suggest eco improvement is getting stronger fundamentals
  The surprisingly strong November US payrolls triggered a reassessment of the eco outlook and its potential consequences for monetary policy. Despite the lackluster reaction of equities, US and German yields shot higher, while the curves bear flattened.
• FX: Dollar jumps on US payrolls report
  On Friday, the payrolls triggered an interesting reaction on the dollar and for EUR/USD in particular. The positive outcome supported risk-taking, but it also raised speculation that the Fed might come closer to implementing its exit strategy. This triggered a squeeze of dollar shorts. Are the currency markets heading for a new trading paradigm?

The Sunrise Headlines

• On Friday, US equities rallied sharply after the payrolls, but had to give back part of the gains. The S&P nevertheless gained 0.55%, but the failure to break out of the narrow trading range is disappointingly. Overnight, the Nikkei did again well and so did Chinese bourses, but other Asian indices trade weak. , .
• US TARP bailout cost is cut by $200B, as some investments produce higher returns than forecasted, the US Treasury said..
• UN Copenhagen climate meeting starts today with the challenge to reach a new agreement on a deep cut in greenhouse gas emissions.
• In the US, six more banks closed on Friday, bringing 2009 total of shuttered banks to 130.
• Australian job ads surged by most in over 2-years, up 5.2% in November in another sign that the Australian economy is doing very well.
• Today, markets will focus on the German orders data, but more important on ECB president Trichet and Fed chairman Bernanke

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