13:24 ET
Canadian Week Ahead: A busy calendar will help fill in the growth outlook, although the BoC's definitive statement that policy is "appropriately accommodative" suggests that the week's data may ultimately have little impact on the policy outlook. The July trade balance highlights (Thur), with a $5.7 bln surplus expected (median $5.6 bln) amid projected price related dips in export and import values. Housing figures will also be of interest, with a projected 1.0% m/m gain in July building permits (Mon), a 190.0k unit starts pace for August (Tue) and a 0.1% rise in the July new home price index suggestive of housing market stability at relatively subdued levels following recent cooling. Labour productivity (wed) and capacity utilization (Fri) round out the calendar. Productivity is expected to grow 1.5% q/q (saar) or 0.4% q/q (sa) in Q2 thanks to a pullback in hours worked while a further erosion to 79.5% is projected for capacity utilization. Nothing is scheduled from the BoC until Governor Carney's September 25th speech.
12:56 ET
Treasury Option Action: more long squaring has been reported via the options side, though Treasury futures appear to be consolidating now just above session lows as the stock market rebound stalls. Bearish sellers of 120 strikes on Dec 10-year futures were noted. Earlier at the very short-end some 30k in Dec "mid-curve call spreads" on euro$ interest rate futures were sold, followed by another 20k sold, in some fairly "massive" long liquidation that contributed to the sell-off and corresponding pop in yields. The 10-year cash yield jumped 10 basis points to 3.65% before pulling back under 3.63%.
12:12 ET
U.S. Jobs-GDP Divergence Continues With Gusto: The August jobs report revealed a big unemployment rate pop to 6.1% and payroll weakness both via an 84k August drop and 58k in downward back-revisions. Yet, last month's workweek drop was revised away, to leave an upside surprise in the hours-worked data alongside steady wage growth that continues to imply ongoing GDP gains -- at least for now. See our report.
12:06 ET
Treasury Action: yields have bounced sharply from lows as the bond bulls take profit, taking the rebound in stocks from at face value heading into the weekend. The 2-year yield has popped 15 basis points from post-payrolls lows to highs near 2.24%, while the 10-year yield has jumped a smaller 10 basis points from lows to 3.65%. The curve has flattened sharply as a result in a bearish flattener, narrowing 3-4 bp to +142 bp. Earlier reports on the options side of bearish positioning into the rally suggested that the smart money was betting the rally had come "too far too fast" this morning.
12:05 ET
FX Action: USD-JPY is back over the 107.00 mark, after putting in a floor of 105.51 after the jobs report earlier. Dealers continue to note thin liquidity, and the move higher has apparently been on low volume overall. U.S. equities have bounced considerably from session lows, helping the greenback, while oil prices are down over $2/bbl, now on the $105 handle. From here, reported Japanese selling over the figure may keep upside contained into the close.
11:51 ET
U.S. equities have pared some losses after storming 1.5% lower led by the tech sector after the last brick in the wall of worry this week was cemented in by the jump in the jobless rate above 6.0%. The NASDAQ comp is now down just 1.0%, lagged marginally on the downside by the S&P and Dow. The drop in NYMEX crude to the $105 bbl zone on global growth fears may be providing some relief. Outside of the obvious jobs data, negativity was promoted by Goldman which downgraded its outlook on Merrill to a "conviction sell" and warned of more write-downs. Likewise, Nokia cut its Q3 market share outlook, adding to woes in tech. The only bright spot was on the M&A front, after Samsung expressed interest in making a bid for memory chip maker SanDisk and Altria is considered a purchase of UST. Quicksilver also surged 9% after stronger than expected earnings. Lehman may also be nearing a deal to spin off its real estate and asset management units to KKR or Blackstone for $5 bln.
11:13 ET
Bund Recap: Bund futures have extended gains in the afternoon on the back of weak U.S. labor data, which also weighed on stocks. Much weaker than expected German July industrial production, which fell 1.8% m/m (median -0.2%), already provided support in the morning. Meanwhile ECB officials tried to play down the impact of yesterday's collateral changes As of 15:05GMT, the December 10-year Bund future is up 79 ticks at 115.50. In the cash market the 10-year Bund yield is down 9 bp at 4.20% and the 2 year yield is down 11 bp to 3.94%. By comparison the DAX is down 2.43% as of 14:52GMT.
11:03 ET
Gilts Recap: Gilts have risen throughout the day, underpinned by stock market losses, dovish ECBspeak, weak German industrial production figures and below forecast U.S. nonfarm payrolls data. The domestic agenda was light however. The December 10-year Gilt future is up 81 ticks to 112.91. The 2-year cash yield is down 8 bp to 4.31% and the 10-year yield is down 9 bp to 4.36%. FTSE 100 was down 1.49% as of 14:33GMT.
10:54 ET
U.S. swap spreads have been surprisingly subdued in the latest episode of investor panic as stocks have plunged to round out the week amid deleveraging, mortgage distress, global slowdown and now weak U.S. payrolls. The 10-year swap spread has actually declined about 2 basis points the past couple sessions to the +67.5 bp (mid) area, in contrast to other signs of risk aversion rising like the jump in the UBS risk index and the yen rally. The spread bumped out briefly to the +68 bp area following the dour payrolls print before narrowing again.
10:45 ET
FX Action: USD-JPY boosted by London names squaring up in to the weekend. Price action remains choppy, with the pair moving 10 pips at a time on very limited volumes. The balance of interest is on the buy side at the moment, with the JPY crosses and USD-JPY moving higher since the post-NFP data volatility. Overall, the fragile risk profile and global growth concerns should dampen carry trade activity, which will benefit JPY. Near-term focus is on 106.00 and 105.80 bids ahead of 105.50 option positions. Quasi-official interest and other Asian sovereign accounts are mooted to have an interest in to this region, while leverage funds and proprietary accounts continue to leave offers from 107.00-10 and 107.30-50.
10:26 ET
Canadian Bonds: Canadas took the Ivey PMI plunge in stride, with the 2-year yield holding steady at 2.69% and the 10-year unchanged near 3.45%. While the 21.4% plunge in the headline index was notable given that it ran counter to the index's seasonal pattern and left the PMI at the lowest level since December 2007's 45.9, the index does tend to see big m/m swings that do not imply similar moves in other key indicators. Indeed, while the sharp pull-back in the Ivey is consistent with expected deterioration in business and consumer sentiment, the recovery in August employment and a stable 6.1% unemployment rate suggest that underlying economic growth retained some momentum during the month.
10:24 ET
Oil Action: October NYMEX crude is on session lows of $105.72, down $2.17/bbl on the session. Sources say the market is eying Tuesday's trend low of $105.46, and a break there is expected to open the door for a test of the $100 mark.
10:11 ET
FX Action: USD-CAD popped from 1.0625 to 1.0665 in the immediate aftermath of the 10:00 EDT Ivey PMI data, and the N.Y. options cut, as earlier noted expiries at 1.0600 rolled off. Buying was seen from U.S. investment houses, and from here, sources expect 1.0620-70 to contain into the weekend.
10:08 ET
U.S. MBA mortgage delinquency data was pretty bleak and won't help improve the weak tone on stocks much. The Mortgage Bankers' Association reported that loans entering foreclosure hit a record 1.19% in Q2 (vs 0.99% in Q1 and 0.65% a year-go). Actual foreclosures marked a record 2.75% in Q2 (vs 2.47% in Q1, 1.4% year-ago), while the Q2 delinquency rate (3-months in arrears) hit 6.41% the highest since 1979 (vs 6.35% Q1, 5.12% year-ago). The list goes on to detail similar results for subprime mortgages and prime mortgages, but the sobering message is just the same.
10:05 ET
Canada's Ivey PMI plunged to 51.5 in August, falling well short of expectations (median 61.0) after the 65.5 reading in July. The employment index rose to 53.0 from 46.3. Prices fell to 72.7 from 80.9 while supplier deliveries improved to 40.2 from 36.4. Inventories fell to 55.6 from 60.8. The decline in the index runs counter to the usual seasonal trend for this month (the index has typically risen in August) and leaves the PMI just above the key 50.0 expansion/contraction level, consistent with ongoing moderation in Canadian growth.
10:00 ET
An uptick on euro$ interest rate futures was all but assured by the damp employment report, though the short-dated rate contracts are off their knee-jerk highs set in the immediate wake of the dour data. The Dec-08 contract is 1.5-ticks higher at 97.09 compared to session highs of 97.15, while the deferred are mostly in positive territory as Fed policy calls revert to a more neutral profile from a bias toward tightening. Activity on the options front has been brisk, with one house a bearish seller of 20k "calls" on the Sep-09s, while others sold 10k in Dec-08 "call butterflies" and 10k in Sep-09 "calls." Yet this bearish activity appears to be also fading the rally, similar to earlier reported action on Treasury futures. On the chart front, so long as the 97.09 area holds there is risk of another run-up to test 97.15-19, but failure there should relegate the contract back down to 96.90-84 congestion. See Euro$ futures.
09:49 ET
FX Action: JPY losses were exaggerated by BoJ rate checking rumours, which was behind the USD-JPY spike up to 106.90 and the EUR-JPY bounce up to 153.10 versus post-data lows of 150.62. BoJ checking market conditions is not unusual, but the thin liquidity conditions and strong Japanese support in USD-JPY ahead 105.50 and EUR-JPY at 150.50 was a factor in the market speculation. More likely is the market was overstretched to the downside in anticipation of a move on stops, which exaggerated the reversal once these levels held.
09:42 ET
FX Action: Cable's rally stalled amid good offers reportedly being left at 1.7740 with European names. GBP-JPY and GBP-JPY short covering interest also aided the Cable tone, although the underlying trend is still skewed to the downside. A heavy U.K. calendar next week will see focus turn back to production and price pressures, which should set the sterling tone.
09:41 ET
Fed Policy Outlook: the persistent weakness in job growth and the continued rise in the unemployment rate will clearly cap talk of Fed tightening at the two pre-election FOMC meetings. Where Fed policy goes from there will depend on the degree to which commodity prices can decline, the degree to which real growth indeed slows in Q4, by the path by which the huge gap between output growth and job growth is eventually closed, and by the condition of the financial markets. We continue to assume that the Fed will take its first opportunity to unwind some of the excessive easing of early-2008, though this is probably unlikely to occur before year-end given the sharp up-trend in the jobless rate. We'll look for a quarter point tightening in January as a shot across the bow. We also suspect the Fed will want take back its easings with more alacrity compared to the two years it took them to reverse 2001 easings. See Fed policy outlook.
09:39 ET
Oil Action: October NYMEX crude is well off its overnight lows of $105.76, and is currently trading down 18 cents/bbl at $107.71. Supply concerns are supportive of prices, as OPEC continues to talk about a production cut, while the market assesses production shut ins from hurricane Gustav. In addition, hurricane Ike could be visiting the Gulf of Mexico next week, and as a result, downside potential for oil prices could be limited into the weekend.
Friday, September 5, 2008
