US payrolls clues

September 1, 2010 — Mitul Kotecha

Most investors will be glad to see the back of August, a month that marked the biggest monthly decline in US stocks in nine years. The main imponderable is whether September will be any better. A series of manufacturing surveys globally today will do little to restore confidence although there was some good news in a slight increase in China’s official August purchasing managers index (PMI) as well a stronger than forecast increase in Australian Q2 GDP, which will likely provide some short-term relief for risk trades.

There was also some slight solace for markets in terms of US data at least from the point of view that the data was not as disappointing as many recent releases. Although the August Chicago PMI slipped (to 56.7) consumer confidence increased (to 53.5) though admittedly confidence remains at a relatively low level. The job market situation detailed within the consumer confidence report was more pessimistic in August than the previous month, however, with those reporting jobs hard to get moving higher. This sends a negative signal for Friday’s payrolls data.

There will be more clues to Friday’s US jobs report today which will enable any fine tuning of forecasts to take place in the wake of the August ADP employment report and ISM manufacturing survey. Consensus forecasts centre on a 15k increase in private jobs. Despite the slight increase in the Empire manufacturing survey in August, the falls in other manufacturing surveys point to some downside risks to the ISM today, with a simple average of the three pointing to the ISM closer to the 50 mark, which will highlight a loss in US manufacturing momentum.

Manufacturing surveys elsewhere will also be in focus, with the final PMI readings scheduled to be released for the eurozone and UK. There is likely to be confirmation of the slight drop in the eurozone PMI to 55.0 in August while the UK PMI is likely to drop to around 57.0 over the month. Both surveys remain at a relatively high level but it is clear that activity is moderating in H2 2010 from a healthy level in H2. The data will give little support to the EUR but the currency has found a degree of stability over the last couple of days. Nonetheless, a further downward move is in prospect.

The Fed FOMC minutes provided little for markets to get excited about. The minutes noted concerns about large scale asset purchases from some Fed officials, indicating resilience to increasing quantitative easing despite acknowledging increased downside risks to the growth and inflation outlook. It is unclear exactly what will be the trigger for further QE as acknowledged by Fed Chairman Bernanke last week.

The minutes will do little to help market confidence given the hesitancy to pursue further QE and provide further stimulus to the economy but the USD is likely to benefit from the fact that the Fed may not be as eager to expand its balance sheet further. Other currencies that remain beneficiaries in the current risk averse environment are the JPY and CHF. The JPY may find further upside more difficult given ongoing intervention fears but the trend remains for a lower USD/JPY in the coming weeks.

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Double Whammy

June 30, 2010 — Mitul Kotecha

Markets were dealt a double whammy resulting in a broad global equity and commodities sell off, and a jump in equity and FX volatility. The risk asset selling began following the news that the Conference Board revised its leading economic indicator for China to reveal a 0.3% gain in April compared to 1.7% increase initially reported earlier.

Given that this indicator has not been a market mover in the past it is difficult to see how it had such a big impact on the market but the fact that the release came at a time when the mood was already downbeat gave a further excuse to sell.

The damage to markets was exacerbated by a much steeper drop than forecast in US consumer confidence, with the index falling to 52.9 in June, almost 10 points lower than the consensus expectation. Consumer confidence remains at a relatively low level in the US, another reason to believe that the US economy will grow at a sub-par pace.

Renewed economic and job market worries were attributable for the fall in confidence, with an in increase in those reporting jobs as “hard to get” supporting the view of a below consensus outcome for June non-farm payrolls on Friday. Further clues will be derived from the June ADP jobs report today for which the consensus is looking for a 60k increase.

A run of weaker than forecast US data releases over recent weeks have resulted in a softening in the Fed’s tone as revealed in the last FOMC statement as well as a fears of a double-dip recession. There will not be any good news today either, with the June Chicago PMI index set to have recorded a slight decline in June, albeit from a high level.

There will also be attention on the release of the US Congressional Budget Office (CBO) 10-year budget outlook, which will put some focus back on burgeoning US fiscal deficit and relative (to Europe) lack of action to rectify it.

European worries remain a key contributor to the market’s angst, with plenty of nervousness about the repayment of EUR 442 billion in 12-month borrowing to the ECB. Demand for 3-month money today will give clues to the extent of funding issues in European banks given that the 12-month cash will not be rolled over.

Elevated risk aversion will keep most risk currencies under pressure, with the likes of the AUD, NZD and CAD also suffering on the back of lower commodity prices. The AUD has failed to gain much traction from a purported deal being offered to miners including various concessions to the mining industry. Much will depend on the reaction of mining companies, and despite the concessions there is importantly no reduction in the 40% rate of the tax.

Equity markets, especially the performance of Chinese stocks will give direction today but a weak performance for Asian equities points to more risk being taken off the table in the European trading session. EUR/USD will now set its sights on a drop to support around 1.2110 ahead of a likely drop towards 1.2045. Having dropped below support around 88.95 USD/JPY will see support coming in around 87.95.

Asian currencies also remain vulnerable to more selling pressure today, with the highly risk sensitive KRW looking most at risk in the short-term, with markets likely to ignore the upbeat economic data released this morning. USD/KRW looks set to target the 11 June high around 1247.80. Other risk sensitive currencies including MYR and IDR also face pressure in the short-term. TWD will be slightly more resilient in the wake of the China/Taiwan trade deal but much of the good news has been priced in, suggesting the currency will not escape the downturn in risk appetite.

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What To Watch This Week

May 24, 2010 — Mitul Kotecha

The end of last week proved to be a calmer affair than the preceding few days. There was some encouraging news on the Greek front, with Germany finally approving its share of the European Union (EU) aid package whilst Greece appeared to be on track with its budget deficit reduction as the country recorded a cash deficit of EUR 6.3billion in the first four months of the year, a 42% reduction compared to a year earlier. EU officials also agreed on tougher sanctions for countries breaching austerity rules.

There were plenty of negatives to offset the good news however, as European business surveys including the German IFO index and flash eurozone purchasing managers indices (PMIs) revealed some loss of momentum in growth as well as increased divergence. European banking sector concerns intensified as the Bank of Spain was forced to take control of CajaSur, a small savings bank holding 0.6% of total Spanish banking assets, which faced difficulties due to distressed real estate exposure. Its woes highlighted the problems faced by many Spanish savings banks due to property market exposure.

US data releases this week will confirm that economic recovery gathered steam in Q2. May consumer confidence data is likely to record a small gain, due in large part to improving job market conditions, whilst the Chicago PMI is set to retrace slightly in May, albeit from a healthy level. Both new and existing home sales are set to record gains in April, the former following a sizeable gain in March although the drop in house prices likely to be revealed by the Case-Shiller index will continue to fuel doubts about the veracity of the turnaround in the US housing market.

In Europe there is not much in terms of first tier releases and highlights include sentiment data such as German Gfk and French consumer confidence indices, and the May French business confidence indicator. The data are likely to be mixed, and as indicated by last week’s surveys will reflect a relatively healthy Q2 2010, but a worsening outlook for the second half of the year.

In the absence of UK data today there will be plenty of attention on the details of plans by Chancellor Osborne to cut GBP 6 billion from the budget deficit. The measures will be small change ahead of the emergency budget package on June 22nd when much bigger cuts are expected. Nonetheless, the first step today will be a crucial test of the new government’s ability to convince ratings agencies and markets that it is serious about reducing the burgeoning fiscal deficit.

Following the massive positioning adjustments of the last week markets will look somewhat calmer over coming days but risk aversion is likely to remain elevated, suggesting little respite for most currencies against the USD. The recent moves have left net aggregate USD positioning registering an all time high according to the CFTC Commitment of Traders data, in the latest week, but after the slight retracement lower in the USD index, it is set to make further gains over coming days.

It was notable that EUR and GBP looked more composed at the tail end of the week whilst attention turned to the liquidation of long positions in CHF, AUD, NOK and SEK. These risk currencies are set to remain under pressure but there will be little respite for EUR which is set to drift lower, albeit a less aggressive pace than over recent weeks and a re-test of EUR/USD technical support around 1.2296 is likely. GBP/USD has showed some resilience over recent days but remains vulnerable to further downside pressure, with 1.4310 immediate support.

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Optimism dissipates

January 23, 2010 — Mitul Kotecha

Markets have been highly fickle so far this year. Optimism about strong recovery led by China – recall the fact that disappointment from the surprisingly weak US non-farm payrolls report in December was outweighed by strong Chinese trade data – has dissipated. Instead of rejoicing at China’s robust GDP report last week, which revealed a 10.7% rise in the fourth quarter of 2009, investors began to fret about whether China would have to move more aggressively to tighten monetary policy. Fuelling these fears was the release of Consumer price data which showed inflation rising above expectations to 1.9% YoY in China.

If such fears were not sufficient to hit risk appetite, US President Obama’s plan to limit the size and trading activities of financial institutions dealt another blow to financial stocks. The plan followed quickly after the Democrats lost the state of Massachusetts to the Republicans and managed to shake confidence in bank stocks whilst fuelling increased risk aversion. Meanwhile, rumblings about Greece continue to weigh on markets and Greek debt spreads continued to widen even as global bond markets rallied.

Following the US administration’s plans to restrict banks’ activities the fact that the rise in risk aversion was US led rather than broad based led to an eventual pull back in the dollar which helped EUR/USD to avoid a break below 1.40. Risk trades including the AUD came under pressure as risk appetite pulled back. A drop in commodity prices did not help. The AUD was also hit by news that Australia’s Henry Tax Review would look to tax miners in the country. As a result AUD/USD dropped below 0.90 though this level is likely to provide good buying levels for those wanted to take medium term AUD long positions. The one currency that did benefit was the JPY which managed to drop below sub 90 levels.

The aftermath of the “Volker Plan” will reverberate around markets this week keeping a lid on equity sentiment. Meanwhile Greece will be in the spotlight especially its bond syndication. A bad outcome could be the trigger for EUR/USD to sustain a move below 1.40 though it looks as though it may find a bottom around current levels, with strong support seen around 1.4029. The German IFO business survey for January will be important to provide some direction for EUR and could be a factor that weighs on the currency if as expected it reveals some loss of momentum in the economy.

Aside from the Fed the other G3 central bank to meet this week is the Bank of Japan but unless the Bank is seen to be serious about fighting deflation, USD/JPY may remain under downward pressure against the background of elevated risk aversion. Below 90.0 there does appear to be plenty of USD/JPY buyers however, suggesting that further upside for the JPY will be limited. USD/JPY will find strong support around 88.84.

Much will depend on the key events in the US this week including the Fed FOMC meeting and the President’s State of the Union speech. USD bulls will look for some indication that the US government is serious about cutting the burgeoning budget deficit. Also watch out for the confirmation vote on the renomination of Bernanke as Fed Chairman which could end up being close. There is a heavy slate of data to contend with including new and existing home sales, consumer confidence, durable goods orders, the first glance at Q4 GDP and Chicago PMI.

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Speculative dollar sentiment worsens

September 2, 2009 — Mitul Kotecha

Data releases continue to fail to inspire markets despite the continuing run of better than expected numbers. In the US the Chicago PMI reached the critical boom/bust level of 50.0 in August whilst the less closely followed Milwaukee PMI surged into expansion territory at 56.0.  This revealed some upside risk to the ISM manufacturing index which duly beat consensus coming at 52.9 in August.  The fact that positive data is failing to lift markets is a sign of fatigue and stock markets appear to be running out of fuel.

From an FX perspective these developments will not be sufficient to provoke a break out of well worn ranges. Risk trades remain in favour but the momentum is limited. The prognosis does not look as positive for the dollar as the generally improving environment for risk will play negatively. Speculative sentiment (CFTC Commitment of Traders IMM data) has indeed worsened for the dollar; IMM data revealed net dollar short positions increasing sharply in the latest week, with market positioning worse than the 3-month average.

Much will depend on the US jobs report on Friday but until then the dollar is likely to cling to the weaker end of ranges. I believe that the dollar index will avoid dropping below its August 5th low of 77.428. The main exception to dollar weakness appears to be sterling where sentiment has become more bearish recently. This was reflected in the IMM report in which aside from the dollar, the pound has also been a loser and the only other currency for which speculative appetite worsened.

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