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US employment report out today likely an ugly one

Fri, Nov 7 2008, 08:33 GMT
by John Hardy

Saxo Bank

Risk aversion rose yesterday in the late US session, but no big follow through in Asia so far. JPY crosses bounce back a bit.

MAJOR HEADLINES – PREVIOUS SESSION

• US Oct. ICSC Chain Store Sales out at -0.9% YoY vs. +0.7% expected

• Australia Oct. AiG Performance of Construction Index out at 36.4 vs. 31.8 in Sep.

• Switzerland Oct. Unemployment Rate rose to 2.5% as expected and vs. 2.4% in Sep.

• Germany Sep. Trade Balance out at 15.0B vs. 13.5B expected

THEMES TO WATCH – UPCOMING SESSION

Events Today:

• Norway Sep. Industrial Production (0900)

• Germany Sep. Industrial Production (1100)

• Canada Oct. Unemployment Rate and Net Change in Employment (1200)

• US Oct. Change in Nonfarm Payrolls (1330)

• US Oct. Unemployment Rate (1330)

• US Sep. Pending Home Sales (1630)

• US Sep. Consumer Credit (2000)

Market Comment:

BOE takes a machete to rates

Yesterday the BOE decided to one up the market with an enormous 150 bp whack to the overnight rate. Expectations had moved from 50 to well over 75 bps on average, but the huge move was certainly not priced into the equation. At first, the market didn't know what to do with this announcement. A knee-jerk selling move that one might expect was the first order of business, but then a huge rally in GBP materialized within minutes, perhaps due to our argument yesterday that a central bank trying to help the economy is better for the currency than one that is dragging its feet, interest rate differentials aside. Alas, the pound ended the day on a very weak note as risk aversion set in and equities sold off. GBPUSD was dragged to a new low overnight and EURGBP was up trying recent highs (BOE rates are now below ECB rates for the first time ever.). Some argue that this puts the BOE ahead of the curve, but we could also argue that the Bank is really only playing catch-up to where it should have been on the curve a long time ago. The numbers rolling in for the UK economy are awful and there is no relief in sight. That said, the GBP short positioning is already very extreme, and there is huge rally potential in GBP if the market sees any sudden rally in risk appetite.

SNB surprise and ECB foot-dragging

The SNB also came out of the blue to cut by 50 basis point simultaneously with the BOE announcement, and this fact fed into the idea of a "coordinated" cut from all of the European central banks and perhaps as much as 100 bps from the ECB, as Euribor contracts spiked out of control ahead of the ECB's actual announcement. But the ECB only moved by the relatively sedate and foot-dragging 50 basis points. At the press conference, Trichet professed a more pronounced negative view on growth now and said inflation pressures are easing, with the ECB seeing price stability in 2009, but no risk of deflation. Considering the ECB's profoundly misguided move in July of this year to hike rates, we can put any projections from this group of characters right into the shredder. The ECB is in complete rear-view mirror mode. Miraculously, the ever-vigilant president declared that the EuroZone was not in a credit crunch. Is that why we have seen a 1.3 trillion Euro bank bailout? The chairman did not rule out a further rate reduction at the December meeting, which in all likelihood will come to pass. The ECB's behavior is not bullish for the Euro...nor was yesterday's -8.0% month-on-month drop in factory orders for September from Germany. Decelerating growth prospects indeed.

US Employment Report All eyes today on the US employment report. We have a gathering storm of negative employment-related data of late and could see the worst US nonfarm payrolls number today since -300k levels were notched in 2001. Weekly initial jobless claims, mass layoff indicators, the ADP poll and the ISM employment subcomponents are all pointing the same negative direction. Baseline expectations for the payrolls figure, according to Bloomberg consensus, are running around -200k, but we could easily come in well below this. The unemployment rate is expected to jump to 6.3% from 6.1% last month. This would match the high from the last cycle in 2003, but as we have discussed before, the employment situation is far worse this time, especially underemployment. Obama is going to have to create enormous numbers of jobs in the coming years to keep this rate from hitting 8.0% eventually.

CAD too strong?

The employment data for Canada is also up today. CAD has been far too strong of late due to a large M&A deal and we'd like to find a way to short it in the crosses - perhaps AUDCAD or EURCAD? Consider short CAD trades in general, and especially if the employment report shows any sharp deceleration with the other eye on energy prices, after yesterday saw a new 18 month low in crude. History tells us that the Canadian and US economies are tightly coupled and the Canadian unemployment level only started ticking up in February of this year, compared to spring of 2007 for the US unemployment numbers. That's a lot of catching up in the pipeline.

Today a pivot day.

Despite the foreboding ahead of the US employment report, our "sixth sense" feels a bit uncomfortable in the shortest term looking for big further moves in risk aversion right here.
The JPY crosses showed a lot of stability overnight considering the ugly close in the US and the AUDUSD consolidation has been very shallow, suggesting a background bid in risk. Still, let's see how the US employment report comes in and the market's reaction to it for a better read on where we may be headed next week. Today could be an important pivot day for risk.

Published on  Fri, Nov 7 2008, 08:38 GMT