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The non−farm payroll event rolls into town – unemployment at 10%?

Fri, Nov 6 2009, 07:10 GMT
by Saxo Bank Strategy Team

Saxo Bank

On the other hand, RBA upgrades its forecast for Australian economy – AUD looking firmer

MAJOR HEADLINES – PREVIOUS SESSION

• CA Sep. Building Permits out at +1.6% m/m, as expected, vs. revised +7.4% prior 

• US Q3 Non-farm Productivity out at 9.5% vs. 6.5% expected and revised 6.9% prior

• US Q3 Unit Labour Costs out at -5.2% vs. -4.2% expected and revised -6.1% prior 

• US Weekly Initial Jobless Claims out at 512k vs. 522k expected and revised 532k prior 

• US Weekly Continuing Claims out at 5745k vs. 5750k expected and revised 5817k prior 

• UK Oct NIESR GDP Estimate out at -0.4% vs. unchanged from prior revised number

• CA Oct. Ivey PMI out at 61.2 vs. 58.0 expected and 61.7 prior 

• AU AiG Performance of Construction Index out at 50.9 vs. 50.8 prior 

• JP Sep. Leading Index out at 86.4 vs. 83.2 prior 

• JP Sep. Coincident Index out at 92.5 vs. 91.2 prior 

• Swiss Oct. Unemployment out at 4.0%, as expected, vs. 3.9% prior

THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• UK PPI Input/Output (0930) 

• GE Factory Orders (1100) 

• CA Unemployment (1200) 

• US Non-farm payrolls (1330) 

• US Unemployment Rate (1330)

• US Wholesale Inventories (1500) 

• EU ECB’s Gonzalez to speak (1630)

• EU ECB’s Nowotny to speak (1700) 

• US Consumer Credit (2000)

• G-20 Meeting (n/a)

Market Comments:

The second phase of central bank meetings occurred overnight and there was a hint that both the BOE and ECB were adopting a slightly more optimistic approach on their respective economies, though this did not stop the BOE from announcing a £25 bln increase to its quantitative easing programme. The total for its Asset Purchase facility was upped to £200 bln but the pace of disbursement on the remainder was extended to 3 months rather than one. Noted for its extremely cautious view on the state of the economy, the MPC this time suggested that a pickup in activity may soon be evident (albeit at a snail’s pace). With the increase in the QE measures at the lower end of market expectations, and the day’s economic data coming in better than expected, GBP survived an early sell-off and came back strongly, touching a 2-week high.

The ECB meeting by contrast was as steady as they come although Gov. Trichet was a tad more hawkish in his press conference than the market had expected. He said that interest rates were “appropriate” but it was comments that “not all liquidity would be needed in future” that got the EUR going, pushing it up to a one-week high.

Across the Atlantic, US productivity spiked 9.5% in Q3, no doubt reflecting the impact of stimulus measures and hefty job cuts by companies. The jobless claims showed a slight improvement with 512k jobs lost vs. 532k last week and, when compared with the slightly worse ADP report yesterday, may cloud the release of tonight’s non-farm payroll data. Equities liked the data, rebounding strongly, but the correlation between strong equities/weak dollar appeared to disengage with the greenback closing marginally higher on the Index. No doubt the uncertainty surrounding tonight’s jobs report was a factor influencing currency markets.

The major mover during the Asian session was the AUD (though only a 30 pip-or so rally) following the release of the RBA’s quarterly monetary policy report. An upgrade to near-term growth forecasts for 2009 to 1.75% from 0.5% and for 2010 to 3.25% from 2.25% proved the catalyst while revisions to headline CPI through December 2010 to 2.25% (though still within the target band of 2-3%) also helped. Overall an upbeat assessment with less spare capacity than originally thought, but nevertheless any increases in interest rates are likely to be gradual. The report acknowledged that consumption growth was showing signs of slowing as stimulus fades but forecast that spending would remain resilient.

The other headline in Asia concerned Fannie Mae, though Asian markets failed to show any reaction to the news. The mortgage lender has requested an additional $15 bln in additional funding by year-end after posting another net quarterly loss of $18.9 bln in Q3. The lender has already received some $44.9 bln in federal government assistance under a senior preferred-stock purchase agreement. Should the market decide to take notice then it should be another knock back for risk appetite.

An article in the China Daily suggested that the huge surge in deposits at China’s biggest bank could signal that the huge rallies in the country’s equity and property markets this year are sustainable and not just fueled by massive cash injections from the central bank. The report notes that deposits at the country’s four largest listed banks grew by Yuan 4.3 tln ($629.7 bln) during the first half of 2009, more than the Yuan 3 tln increase in loans from the same banks.

Looking ahead to tonight’s non-farm payroll numbers, the market is looking for a loss of 175k jobs in the payroll report and an increase in employment up to 9.9%. A print with a 10% handle would likely cause a dent to risk appetite (even though eventually the market sees it as inevitable) and the risk of a surprise would likely lie to this side. We note that Wednesday’s weak reading in the employment sub-component of the non-manufacturing ISM data is a definite negative for tonight though the ADP report could suggest a possible shrinking in the magnitude of payroll losses. All in all, a bit of a lottery.

Apart from the US employment data, other data points on the horizon include Swiss unemployment, UK PPI and German factory orders during the European session while the US session can look forward to Canada unemployment and US wholesale inventories. G-20 meeting in Scotland this weekend but nothing concrete or defining for currency markets is expected though individual finance minister may pass asides about the strength of their currencies versus the greenback.

Have a great weekend.

Published on  Fri, Nov 6 2009, 07:15 GMT