Wednesday, March 30, 2011

Jobs Preview!

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By Mike Conlon | March 30, 2011

This morning the ADP employment change figures came out showing a gain of 201K jobs which was slightly lower than the expectation of 208K. This seems to be good enough for the markets to continue to plow higher to start the morning, ahead of Friday’s all-important Non-Farm Payrolls Report.

The weak Dollar story continues to drive markets and the market is willing to suspend its disbelief that anything can derail the move higher. This includes risk.

One potential risk event is the slow but sure deterioration of Euro fundamentals, yet the market’s blind eye to the problems resurfacing only masks what is taking place. S&P joined the downgrade party and lowered ratings on Portuguese debt, though this went largely unnoticed. Also, the Irish bank stress tests could show that the government may need to take control over all banks. Yet the market’s singular focus on the potential for a rate hike shows little appreciation for risk.

Let’s also not forget the Japanese nuclear crisis and the Libyan civil war as potential risk events.

Overnight, Asian equity markets were up big-time, following the lead of yesterday’s US stock market gains. Commodities are mostly flat, after yesterday’s reversal in oil prices. Yen weakness continues.

In the forex market:

Aussie (AUD): The Aussie is mostly higher as the risk appetite appears to be strong to start the US session. Yesterday, the Aussie put in a new all-time high vs. USD. (Click chart to enlarge)


Kiwi (NZD): The Kiwi is also higher across the board catching a lift from the rebound in the MSCI Pacific Equity Index despite a report that showed building permits declined nearly 10%. While this is likely to be the result of the earthquake, expect this number to pick up in the ensuing months.

Loonie (CAD): The Loonie is also higher across the board as oil prices are fairly steady around $105. The Canadian raw materials price index came in higher than expected showing that inflation may be creeping higher.

Euro (EUR): The Euro is mostly lower though not as low as one might expect given the risk specific to the Euro zone. Downgrades, stress tests, and high yields should all be reason for concern, yet in the global currency beauty contest the Euro is slightly more attractive than USD. (Click chart to enlarge)


Pound (GBP): The Pound is mostly higher after the index of services reading came in and showed a gain vs. last month’s decline. In addition, the CBI reported sales figure came in much better than expected, showing signs of life for the UK consumer.

Dollar (USD): The Dollar is mixed, trading lower vs. the commodity bloc but slightly higher against the rest. The ADP jobs figures were good but not great, though expectations were higher. Friday’s NFP will let us know where we really stand in the jobs picture and the reported unemployment rate will be interesting if enough people have dropped out of the workforce to warrant a lower number.

Yen (JPY): the Yen continues to weaken with G-7 support and the correlative effects of higher stock prices. Industrial production figures came in better than expected last month, showing that the Japanese economy may have been improving prior to the earthquake.

This Friday’s NFP number will very important as it will show whether of not the employment picture is starting to show meaningful improvement. Everyone knows that QE2 is going to end soon so if the economy can’t stand on its own two feet then we may be in for major trouble.

The selling that is bound to ensue after the Fed removes the punch bowl could be exacerbated if some of these risk events start to unfold negatively. It seems as though the “wait and see” approach to the global economy leaves too much room for error, and my hope is that we see enough improvement in jobs to support economic growth.

But just remember, hope is not an investment strategy!

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