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Just as anticipated here yesterday, employment numbers of several past months have seen significant upward revisions, and this month’s result turned out to be better than expected, although, still far from being satisfactory. Among the many interesting facts in the release, we note in particular the fact that this time, in spite of the Census Bureau layoffs being over, the public sector contributed a significant negative value to the headline number. This is well-understood to be caused by the diffculties faced by certain state governments, like California and Hawaii, where in some expreme cases, the school week was shortened by one day in order to make ends meet. On the whole, this is a new phenomenon, since analysts usually tend to focus on the private sector data to the exclusion of public sector jobs in order to get a good view of the underlying picture, the assumption being that public sector should be more or less stable, with some bias towards a gradual increase over time. It appears that this will no longer be the case, which makes future NFP releases even more crucial for drawing the big picture.

Stocks were mostly up today, the iTraxx CDS indexes showed improvements on risk perception in all categories, yield curves steepened, as the dollar appreciated against the Yen, CNY against the dollar (USDCNY at 6.7973), and most other risky currencies gained against safe havens. The NFP was fairly bullish, and could well bring some momentum to the upside for the rest of this month, but even then, our bias remains bearish for as long as the external risks (as opposed to domestic) threatening global growth are not resolved in a credible manner.

Eurozone retail sales up 0.1 m/m in July

Europe seems to be troubled, in addition to its other difficulties, by the pessimistic outlook espoused by European citizens, and their highly cautious approach to consumption. In the best of times, they tend to be careful about their spending habits, and if today’s numbers are any guide, they are retrenching even deeper in response to the issues of this year.

Some people had expected the world cup to boost retail sales somewhat, but that doesn’t appear to be the case, and now the outlook is tilted to favor stagnation in spending, even as the ECB maintains its extremely lax stance to address the region’s problems.

The year-on-year rate is barely holding near the 0.5% level, and has been fluctuating around there for quite a while. It is clear that the momentum observed in the earlier part of this year is gone which doesn’t bode well for Eurozone economies outside of Germany and a few similar place, which are being boosted for now by robust export sector performace

Ozawa talks tough on yen

Ichiro Ozawa, the challenger to Japan’s PM, is on the wires advocating intervention if the yen continues to appreciate. Most commentators are inclined to regard his words as whiffs of hot air, however, since it is only too easy to pontificate from the sidelines while challenging the incumbent, but an altogether different matter to challenge established strategical balances once one is at the helm. It is widely expected that the BoJ will only intervene if volatility reaches levels that will indicate disorderly functioning of the currency market which is far from being the case at the moment. Indeed, markets are likely to give a breather to the Japanese after today’s data, which would make intervention an even harder measure to adopt once the next leg of appreciation commences.

NFP surprises to the upside

The headline number came at -54.000, making this the third month in which the U.S. economy has been losing jobs. On the other hand, the private sector actually added some 67.000 new workers to payrolls, and the prior months saw a revision of about 123.000 to the upside.

The unemployment rate is now at 9.6 %, in line with expectations, while the broadest measure of the unemployment rate, sometimes known as the U-6, rose from 16.5% to 16.7% in August, implying that the deterioration is worse than what the sterilized numbers of the BLS would imply. Excluding layoffs due to the Census Bureau, state and government payrolls contracted by about 14.000. Manufacturing contracted, while construction, professional and business services, and temporary employment sectors saw new workers added to the payrolls.

On the income front, average hourly earnings rose by 0.3%, which is quite robust in the present circumstances, while the workweek remained stable.

This is a good reading overall, but only so in the context of the severe disappointments of the past few months. With weekly jobless claims still above 450.000, there is barely a reason for optimism about the job market, even as the actual payrolls data continues to fluctuate around the centerline. As we have written here many times before, we do not expect the U.S. economy to trigger the next stage of the downturn, since it has already been severely mauled by developments of the past years. The center of the next stage should be Asia and developing nations, as well as the troubled economies of the Eurozone, but needless to say, the U.S. economy has a heavy weighting, and any difficulties here will make the troubles of the periphery much more intractable.

So, a bullish end to a week that has seen much optimism on all fronts. It looks like this will be the theme of the month, as long as the rest of the world, especially Europe, does not spoil the party with their ever-deepening problems.

Originally posted from Markets End the Week Higher on a Positive NFP Result, and a Sense of Optimism

The U.K. released Services PMI during the London session Friday morning.  The expected figure was 53.1, but the actual release disappointed slightly to the downside at 53.0.  The purchasing Manager’s Index is considered a leading indicator of economic health and any number above 50 denotes expansion while any number below 50 denotes contraction.

Thus, breaking down the pound reading, we can see that the number does show expansion, but it is expanding at a slower than expected pace.  This is in line with many analysts thoughts concerning the U.K. economy.  Prime Minister Cameron has been aggressively slashing the budget deficit by cutting back on spending, and many economists have been concerned that this decrease in spending will weigh heavily on U.K. economic growth in the near-term.

The U.K. public, however, is loving the cuts.  Credit Ratings Agencies such as the S&P have warned the U.K. that if they did not reduce their deficit considerably, they could be in danger of losing AAA credit status, which would weigh heavily on the country.  AAA credit status comes with many perks, primarily very low interest rates for public debt, which is essential for a country to remain competitive economically.  

This week has been quite a disappointing week for economic data out of the U.K.

• Wednesday-Manufacturing PMI came out at 54.3 versus the expected figure of 57.1
• Thursday-Nationwide HPI came out at -0.9% versus the expected figure of -0.3%
• Friday-Services PMI came out at 51.3 versus the expected figure of 53.0

This steady stream of disappointing data out of the U.K. has caused the GBP/USD to move into a relatively tight zone of consolidation as investors are trying to make sense of the current economic picture around the world.  There are lots of mixed signals in the economy at the moment; however, the GBP/USD should find a difficult time moving much higher in the near-term until some sort of positive note is sounded in the U.K.

The disappointing numbers out of the U.K. are quite in line with Central Bank and U.K. government expectations.  The expectations in the U.K. is that the economy will enter into an extended period of very sluggish growth, which is what we are seeing now.  They are not expecting any form of economic contraction, which would lead to a double-dip recession.  Although Bank of England President Mervyn King has been very cautious concerning economic development in the U.K., he has made it clear they are expecting that the U.K. economy will continue to move forward, albeit at a very slow pace.

Due to the massive spending cuts and austerity measures, the U.K. most likely will not be engaging in another round of quantitative easing anytime soon, unless it become  a matter of economic life and death, which at the moment it is not.  If the U.S. does move forward with another round of quantitative easing, and the U.K. does not, and the U.K. economy is able to continue moving forward, then we could see a very strong rally in the pound versus the dollar in the coming months as investors begin to price in future monetary tightening cycles.

Originally posted from Austerity Measures Weighing on U.K. Economy But Could Strengthen Pound

The European Central Bank kept rates unchanged at 1.0% as expected on Thursday morning.  The market was not so interested in the actual interest rate announcement near much as ECB President Jean-Claude Trichet’s press conference 45 minutes later.  Since no developed nations are currently in a rate tightening cycle due to deteriorating economic conditions, the market is much more interested with speeches and statements from Central Bank leaders in order to get some insight on future monetary policy actions.

On Thursday morning, Trichet was very sure to emphasize that the ECB has no plans in site to begin a tightening cycle. This was a bit disappointing to the market and caused a very light sell-off of the euro,b but the euro really did not move much on the day at all.  Total movement in the New York trading session was only 53 pips on Thursday.  Before the recent slow-down in the United States, most market analysts were expecting the ECB to begin raising rates by the end of 2010, but that probability is slowly slipping away as the economic conditions worsen in much of the developed world.

Trichet made it clear that he does not believe there will be a double-dip recession in the EuroZone; instead, he is expecting a prolonged period of very slow growth.  His tone is still quite more upbeat and hawkish than Fed Chairman Ben Bernanke, which could mean further euro strength in the near term.  Currently, the economic signals are much too mixed for investors to really commit one way or the other in financial markets.  We are seeing currencies continue to trade in relatively tight ranges as the market waits for the NFP report in order to develop a clearer picture of economic conditions.

This divergence between the ECB and Federal Reserve could weigh on the U.S. Dollar in the near term.  The ECB is moving in the opposite direction of the Fed.  Although the ECB is not in a tightening cycle yet, they are heading toward that direction.  They are looking to move forward.  The Fed, on the other hand, is moving backward.  Mr. Bernanke has been discussing the very real possibility of another round of quantitative easing measures.  Mr. Trichet is clearly against further measures of quantitative easing measures and instead believes Central Banks should begin tightening fiscal measures in order to bring down ballooning deficits.

If the economy continues with very slow growth in the U.S., and a double-dip recession does not begin to develop, then the Dollar may face further weakness versus the euro as investors begin to price in EuroZone monetary tightening.

Originally posted from Trichet Speaks: Accommodative Monetary Measures Will Stay In Place

As everyone waits for the all important non-farm payroll numbers to be released tomorrow morning at 8:30, there is time to take a breath and ruminate about why there is so much uncertainty in today’s trading markets. The S&P 500 has been stuck in a ranging pattern for the past twelve months, and there is no immediate indication that its direction will dramatically change in either direction, either up or down. Pessimists and optimists state their respective cases, but the market index and the major currencies that correlate with it are at a loss to find a sustainable long-term trend.

It is a bit like a prolonged U.S. Open tennis match over in Flushing Meadows. A fundamental data release pounds a hard serve that splits the forecourt. The crowds cheer, and the market swings up 50 points. But a smashing return from technical analysis subdues the optimism and blasts the market in the opposite direction. Each volley appears wonderful on its own merits, but this sideways match refuses to find an ending.

Much has been said on the technical side that a large “Head and Shoulders” formation is dictating an impending 200-point fall in the S&P 500 Index. Surprisingly enough, there appears to be a similar pattern replicating itself in the “EUR/USD” currency pair. Are we to believe what we are seeing in the chart below, or is this just one more “false” signal?

Other markets around the globe are also focused on the fluctuations of the S&P 500 as well. It is well known that many countries depend on the export trade to drive their domestic economies, and the relative value of their currencies versus the greenback tends to correlate quite mysteriously with the movements of our broader stock indexes. This rule is easy to understand when speaking about Australia or New Zealand, but for the past few months, the Euro has joined the dance.

It looks like forex traders need to guess along with everyone else where the S&P 500 is really headed. Friday’s payroll data may be the latest ephemeral market mover, but the time horizon for a major trend keeps moving forward like “hockey stick” business plan projections for early stage development companies. As soon as the market assimilates the BLS data, about 30 minutes past the 8:30 release, we are apt to witness a nice run for four hours of one currency at the expense of the other. Fortunes are to be made when trading on the news, but it is not for the faint of heart.

Once the frenzy has died down a bit, the talk show pundits will proclaim that uncertainty remains because, after all, it is an election year. Consequently, the “right shoulder” in everyone’s charts will continue to form over another three months. The latest rumor is that the administration is open to deferring the expiration of the Bush tax cuts for another year, but an act of Congress is required for this to take place. Many believe that a legislative gridlock, similar to what happened during President Clinton’s presidency, may be the best thing for the economy in the long run. However, ironclad certainty on that prognostication will not arrive until early November.

Investors are left to ponder where to put their capital. They have fled equities in droves and settled in bonds, but bonds are a ticking time bomb. The length of the “fuse” rests solely with Bernanke and the Fed. Any increase in rates will spell depreciation in bond values and another mass exodus to the next safe haven. The housing and banking sectors seem doomed since any recovery in their midst will be pounded down by higher costs of capital.

Will risk-averse capital fly back to Gold? Current technicals signal an overbought condition at present, but technicals have never stopped a gold-bug from buying more of this precious metal. The Euro and Gold have tended to correlate rather well over the past decade, but they stopped being dance partners back at the turn of the decade when Gold abruptly chose the Dollar to dance with instead. This trend does not appear to be changing when one looks at the chart below:

The line for Gold is almost “mirrored” in the Euro “blue lake” below the “0 %” shoreline. If the Euro does depreciate, then it bodes well for Gold, and vice-versa. Perhaps, there are no safe havens in this perfect storm that is brewing, but currencies always come in pairs, and one of them will always be appreciating.

If employment data can move this market, then disposable income per capita will move it more. That statistic has been abysmal in our country for the past decade, flat-lining at zero to negative growth for the period. The destruction of our middle classes’ buying power has been brought about by decades of outsourcing and offshoring of jobs in every economic sector. Corporations have been on cost-cutting binges to remain competitive. Their earnings reflect the success of these activities, but the resulting cash of $2 trillion remains frozen on their respective balance sheets, waiting for “certainty” to rise from the ashes of American consumers.

In the meantime, the markets wait for no one. The NASDAQ just hit its 20 and 50-day average. The Dollar weighted index has traded flat for two weeks, mimicking the indecision of the S&P 500 index. Optimists are hopeful that a positive breakout will surely occur soon. Pessimists are expecting an imminent downdraft. However, the consensus view suggests that a breakout above the 1,120 level by the S&P 500 index, its 200-day moving average, will signal a positive trend that will last for more than a few hours or so. It may also dispel the disciples of technical pattern recognition and end the debate that a double-dip recession is on the way. Until then, polish up your crystal ball and buckle your seat belts. It just might be a bumpy ride.

Originally posted from The S&P 500 Index is Gripped by the “Uncertainty Malaise” and Contagious

Oil, and stocks rose, the dollar fell, in reaction to generally positive data from the U.S. Initial jobless claims fell by 6000, pending home sales rose by 5.2%, which, combined with the positive manufacturing numbers earlier in the week, led to a strong upward reaction in the S&P that was further boosted by some weakness in the Treasury market, leading some of the money that left that sector back to equities.

In spite of the bullish tone, so far, the crucial determinant for trends, and prices will be the NFP data tomorrow. A disappointment there will quickly lead to a reversal of most the gains registered this week, while the opposite case may help to sustain the market at around current levels for the rest of this month. It is also possible that last month’s weak NFP data will see a strong upward revision, since the NFP sum of states diverged by a much greater margin from the regular release than what is usual for that month.

• Initial jobless claims come at 472,000 vs. analyst average of 475,000

  Markets appear to have been boosted by the improvement in jobless claims data this week even though the number itself can hardly be regarded as positive. A weekly claim above 400.000 is far from being enough to bring down the unemployment rate, and that remaining high, one cannot expect to see consumer optimism rising significantly. Before August 2007, for instance, initial claims would regularly come below 350.000, and a number above 350,000 would be regarded as a very bad result for the economy. Things have changed however, but only if you are prepared to buy what the Fed, and some managers are willing to sell. These high numbers must be made to come down soon, otherwise it is not very meaningful to speak of any recovery on a general basis. Industries may improve profitability through productivity gains (that is, after all, what Japan has been doing, for a long time), but experience shows that without a broad based increase in either wages, or demand, it is not possible to sustain a long-term improvement in growth performance.

Gold rises above $1250

We are anticipating a powerful bubble phase for the gold market in the next two three years without an exact price target. Instead of a price target, we await the normalization of monetary policy around the globe, a clear parabolic price pattern (which doesn’t exist yet), or certain unlikely events that will alter the fundamentals of the gold market drastically (such as new laws about ownership, coordinated sales by central banks, an international agreement), or all of the above, before we become bearish on gold. Until then, we are bullish.

The gold market has once again behaved in its own strage way by rising at a time when it should be falling. After all, we have been observing gold rise as stocks fall, and confidence erodes, but now that the latter improve, one must expect gold to give up some of its gains. Not so today, as gold rose above 1250, and held there, although weakly. It is hard to make predictions about short term events in this market since it is very volatile, and at times counter-intuitive. Still, our main scenario expects a growth shock to be bearish for gold, since margin calls on leveraged players will force some gold sales, which tend to get amplified as speculative players pile in to increase downside momentum. Yet in the long run, as long as the present monetary policy stance remains in place, there is little that can stop the advance of gold from completing the last leg of its bubble formation, and reaching some surprisingly huigh levels. $2000 is the first obstacle in the race, since it corresponds to the all-time high of the early 80s.

Today’s rise was partly explained by some commentators as being related to a E.U. Plan to limit short sales of government debt and stocks to limit volatility. Since this will reduce the flexibility of these assets, some of the money will be moved to gold as there are no comparable regulations in the market. But it is hard to explain the rise in this way, since there is no shortage of liquid, profitable stock markets in the world, and it is hard to see why a stock or bond trader would leave E.U. stocks or bonds and purchase gold instead of short-selling another volatile market like China, Brazil, or Colombia, for example.

In sum, we have a bullish day today, where just about everything that would be expected to rally in a bull market did rally, and safe havens depreciated. The NFP release tomorrow is undoubtedly central to the monthly outlook, and we’ll wait to see the release before reaching a conclusion about the direction of the market in the next few weeks.

Originally posted from Stocks, Currencies Rise as Data Surprises to the Upside

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