Treading water until tomorrow’s important US data

Markets were zigging and zagging today as EU news tilted to the negative side. We saw a strong US weekly jobless claims report, but tomorrow’s US employment report and ISM non-manufacturing are the next key event risks.

There was a bit more bad news than good out of Europe today. Spain and France were both out selling debt at auctions today. Spain reached its maximum targets in auctions of medium term debt, and although yields were sharply lower than at previous auctions, yields rose rather sharply intraday in the wake of these auctions as demand was rather tepid and the ECB involvement (and impending LTRO at the end of this month) was seen as key factors as well. The French auction was more of a success, but the latter factor was doubtless still in play. The yield on the French 10-year dropped well below 3.00% and looks to close at the lowest levels in about three months.

Elsewhere, the EU’s finance minister head Juncker was out complaining in an interview that the measures taken at the January 30 summit on fiscal discipline were “largely insufficient” and said that much more work remained to be done at the next summit at the beginning of March. And in Spain, the latest unemployment claims report for December saw 177k new claims, the highest monthly tally since early 2009. This in a country that needs to cut its budget deficit from 8% of GDP (and with tax revenues at around 20% of GDP, that means cutting some 40% of outlays or raising taxes AND cutting outlays when unemployment is well above 20% and the latest quarterly data shows the country tilting into recession) . There has been so much focus on Italy, which is somewhat fair from an absolute-size-of-debt perspective, but the dynamics in Spain are rather more disconcerting in terms of the action needed to slow the pace at which the fiscal imbalances are worsening.

But weakness in the Euro and weakness in riskier currencies against the USD was relatively mild today after the very strong session yesterday that included a bit of follow-through into the early European session before a correction set in.  A dose of strong US weekly jobless claims data also helped the USD lower, with the continuing claims number particularly impressive at a post-Lehman bankruptcy low (of course the unemployment rate for that month was 6.1% vs. 8.5% now.)

Looking ahead
Bernanke is out testifying before a house budget committee today – this one slipped under our radar a bit and there hasn’t been much noticeable anticipation of the speech (perhaps because most of those watching Bernanke speak are instantly put to sleep?) . Normally, we await Bernanke’s semi-annual testimony on the US economy and the Fed’s monetary policy (the so-called Humphrey Hawkins testimony) before both the Senate and the House on two consecutive days in mid-February to early March, but we’ve not seen that testimony on any of our standard calendars just yet, so this appears to be something else. Regardless, watch out for the Chairman’s rhetoric today just in case.

It looks like markets want to use the excuse of tomorrow’s US employment report and/or ISM non-manufacturing survey as a trigger for their next move. While some of the data this month has been very encouraging, particularly on the manufacturing front out of the US, let’s also recall that we saw a shockingly back consumer confidence number on Tuesday, a very troubling sign relative to the generally upbeat mood that is increasingly the consensus. The consumer did not have a strong Christmas shopping season, either, so the jury is still out on whether the strength of US data has peaked for a time. On a sentiment basis, it is interesting to come across an article like this one from Bloomberg, that discusses how many strategists have now turned bullish, even those that were formerly rather bearish.

Stay careful out there and let’s see how we end the week as we have poked at key support levels in for the USD, including in EURUSD (1.3210/40), AUDUSD (major 1.0760 resistance) , USDCAD (parity to 0.9950 200-day MA)and USDJPY (76.30/00).

Chart: USDCAD
USDCAD has had a look at the 200-day moving average over the last few days as Canada and the US are both set to report their December employment data tomorrow. Looking across a number of USD pairs, it feels like we are at a pivot point area, where the USD either makes a stand at one of its last major support levels or, if it fails here, faces fairly significant further losses in the weeks ahead. From here, it’s all down to whether the US recovery is sprouting deeper roots, whether the blinders remain on in the Euro Zone as it faces down its debt crisis and whether the market continues to believe in the magic of QE morphine. Is it time to fight the Fed or time to go with the flow?



Be careful out there.


Economic Data Highlights

• Australia Dec. Building Approvals out at -1.0% MoM and -24.5% YoY vs. +2.0%/-22.1% expected, respectively and vs. -17.5% YoY in Nov.
• Australia Dec. Trade Balance out at +1709M vs. +1200M expected and vs. +1343M in Nov.
• Switzerland Dec. Trade Balance out at +2.07B vs. +2.5B expected and vs. +2.95B in Nov.
• Spain Unemployment claims rose +177.5k vs. +127k expected and  +1.9k in Dec.
• Norway Jan. Unemployment Rate rose to 2.8% as expected and vs. 2.4% in Dec.
• UK Jan. PMI Construction out at 51.4 vs. 52.5 expected an 53.2 in Dec.
• Euro Zone Dec.  PPI out at -0.2% MoM and +4.3% YoY vs. -0.1%/+4.3% expected, respectively and vs. +5.4% YoY in Nov.
• US Jan. Challenger Job Cuts rose 38.9% YoY vs. +30.6% in Dec.
• US Q4 Nonfarm Productivity out at +0.7% QoQ vs. +0.8% expected and vs. +1.9% in Q3
• US Q4 Unit Labor Costs out at +1.2% QoQ vs. +0.8% expected and vs. -2.1% in Q3
• US Weekly Initial Jobless Claims out at 367k vs. 371k expected and vs. 379k last week
• US Weekly Continuing Jobless Claims out at 3437k vs. 3535k expected and 3567k last week
• US Weekly Bloomberg Consumer Comfort Survey out at -44.8 vs. -45.0 expected and vs. -46.4 last week 

Upcoming Economic Calendar Highlights (all times GMT)

• US Fed’s Bernanke to testify before House Budget Committee (1500)
• Australia Jan. AiG Performance of Service Industries (2230)
• US Fed’s Fisher to Speak (0015)
• China Jan. Non-manufacturing PMI (0100)
• China Jan. HSBC Services PMI (0230)