Dollar Firmer Ahead of Jobs Report

Highlights
The US dollar is trading with a firmer tone after selling off subsequent the announcement of QEII and weakening for the past two days.  An unexpected fall in eurozone retails sales added to the downside of the euro.  The euro earlier capped out around the 1.4249 level subsequently falling throughout the day. The pound weakened to 1.6180 following weaker-than-expected PPI data, coupled with weak equity performance.  Despite, the non-event from the BoJ Japanese capital inflows continue to increase keeping demand for the currency elevated.  Short-term security demand from foreigners, again, outstripped the demand for Japanese stocks and bonds.  According to the MOF, the weekly total was ¥496 bln nearly double last week’s level.   Elsewhere, Canadian October employment was weaker-than-expected with an addition o f 3k jobs (compared to the market consensus of 15k)  but the weakness in CAD is more related to dollar strength than the weak jobs report.

Asian stocks rose, led by a rise in the Nikkei, on better-than-expected earnings news. The Nikkei was up 2.8% led by a strong outperformance of tech stocks (up 4.1%) and industrials (up 3.1%).  The Shanghai Index was up 1.3% led by a 2% gain in financials with consumer goods lagging, up by only 0.5%.  Overall, the MSCI Asia Index was up 1.3%, while stocks in India, Malaysia and Singapore were closed for holiday.  European stocks declined as banking losses and weak economic data weighed on sentiment.  The Euro Stoxx 600 declined 0.2% led by a 1% loss in financials, though health care stocks were up 0.3%.  Meanwhile, the Dax and FTSE were both down 0.2% led by a decline in telecommunications and financials.   US futures are most down ahead of the jobs report.

Japanese bonds were flat with the yield on the 10-year up 1bp.  At the same time UK 10-year Gilts were up 2bp following the weaker-than-expected PPI.  10-year German bund yields were down 1bp following the weaker-than-expected retail sales.  On the eurozone periphery Greek yields are up 7bp ahead of the first round of the election set for 11/7/10 followed by a 6bp increase in Spanish yields as talk of a Spanish bank having liquidity issues surfaced.  Meanwhile, US Treasuries are mostly flat with the 10-year unchanged and the 2-year up 1bp. 

Currency Markets

The Federal Reserve’s QEII is clearly the dominate development this week.  Yet we continue to monitor events in Europe that could in the coming period rival or even supersede the US developments.  Tensions continue to rise in the peripheral of Europe.  The EU decision to endorse Germany’s initiative for a permanent crisis mechanism to be embedded in the Lisbon Treaty that will ensure that the private sector and not German tax payers will bear the burden addressing excessive debt situations.  Ireland is finding little reprieve after yesterday spending cuts and tax increase announcement.  There have been some miscues as well regarding when the 4-year fiscal plan will be unveiled and now it looks to be after the Nov 25 by-election.  While Ireland is funded through the middle of next year, Irish 10-year bonds are lower for the 9^th consecutive session, with yields up 60 bp this week alone (German 10-year yield in comparison is off 15 bp).  Greece holds local elections this weekend and the risk is that opposition to more austerity grows.  On Nov 15 Eurostat is to revise last year’s budget figures, likely pointing to a higher deficit.  The IMF has indicated that around 5 bln euro of swaps could be shifted to the government.  With its own IMF/EU program, meaning it will not be forced to the EFSF, and no need to go to the markets to raise funds, it is noteworthy that Greek bond yields have risen 50 bp this week and an incredible 244 bp since Oct 13.  Portuguese bonds are faring a bit better today, but the 10-year yield is up 50 bp on the week.  Spanish bonds are under greater pressure today.  The government reported industrial production was -0.8% year-over-year compared with +3.2% in Aug (not seasonally adjusted).  Spain’s premium over Germany is at its highest level since July (a little over 200 bp).   Italian bonds are also heavy following the IMF’s report that more austerity may be needed.  These developments are taking place amid continued talk that the European central banks may have stepped up their sovereign bond purchases.  Contagion risk and implications for ECB policy will likely become more important market talking points. 

According the market consensus the US jobs picture soon begin to brighten up.  In fact, this report is expected to be the first rise is private payrolls since May.  The jobs report is notoriously difficult to forecast but recent anecdotal evidence supports the view that any surprise would be to the upside, leading to a risk taking and a dollar selloff.  On the other hand, stronger than expected data could lead to a stronger dollar as investors become more bullish on the US economy and therefore favor taking long positions.  Look for the euro to test the 1.42 and if breach may be a sign of further upside potential. Furthermore, the market consensus is for a 60k increase in nonfarm payrolls and 80k in the private sector. Only 6k in Census temporary workers remained on the books in September, leaving a likely government payroll drop in the restrained 10k area, alongside an assumed 70k rise in private payrolls that is just short of the 77k average gain over the last five months.

Eurozone September retail sales dropped 0.2% m /m, after already falling 0.2% m/m in August. The renewed contraction is somewhat disappointing as the market consensus expected an increase of 0.1%.  Still, September data meant retail sales rose 0.4% q/q in Q3, up from 0.0% q/q in Q2, which supports expectations for a positive Q3 GDP number. Sales were up 1.1% y/y, down from 1.3% y/y in the previous month.  EUR/USD drifted lower throughout the day making new Friday lows at 1.4117 and finally dropping below yesterday’s closing level of 1.4207.

U.K. October output PPI came in weaker than expected and September figures were revised down sharply, due to reclassification of series. Factory gate prices were up 0.6% m/m and rose 4.0% y/y, compared to consensus of 4.4% y/y, and versus a revised 3.8% y/y in September (initially reported at 4.4%).

Upcoming Economic Releases

At 8:30 EST / 12:30 GMT the US reports the October jobs report.  The expected change in payrolls are highlighted above  but the overall unemployment rate is expected to remain unchanged at 9.6%, while the average m/m hourly earnings are expected to increase to 0.2%.  At the same time the average weekly work week is expected to remain unchanged at 34.2.  Pending home sales are released at 10:00 EST / 14:00 GMT followed by consumer confidence.   Events: Host of Fed officials (Lockhart, Plosser, Hoenig, Fisher, Bullard, Lacker) slated to speak or moderate panels throughout the day.  Bank of Canada Governor Carney speaks at 3:00pm / 17:00 GMT.