WISE MONEY

Ironically, today is Labour Day in the US and in Canada which means very little work will be done anywhere.
Going back to Friday, the stripped out version of the non-farm payrolls figure produced much stronger employment numbers than had been anticipated.

The market now feels that removing the seasonally volatile short-term Government hirings gives a much more relevant picture of the employment situation.

Accordingly, August private payrolls were reported to have grown by 67,000 (against the consensus figure of 40,000) whilst the July number was revised up from the previously reported -131,000 to -54,000.

Economists quickly concluded that, although the US economy continues to face problems ahead, and that the unemployment rate will likely remain stubbornly high, Friday’s employment report is an important step in the right direction, and should weaken the case for additional quantitative easing on the part of Federal Reserve.

Today’s subdued market is likely to set the tone for certainly the early part of the week with only a light amount of data scheduled and no policy changes anticipated at any of the 3 Central Bank meetings over the coming days.

Following the additional easing measures decided upon at the emergency meeting on 30th August, the market expects the Bank of Japan to maintain its policy settings tomorrow morning.

Market focus will continue to be on the seemingly inexorable appreciation of the Yen and what the government is going to do to try and suppress it.

The Reserve Bank of Australia is also expected to maintain the status quo on rates given the unexpectedly low CPI figure for the 2nd Qtr of the year.

Yesterday was an eventful day for the euro as it made significant gains versus both Sterling and the Dollar. The British Pound hit a 3 week low against the Euro as the UK Manufacturing PMI came in well below expectations at 54.3 in August following a reading of 56.9 in July.

Nationwide house price data out overnight was also disappointing so we may see Sterling remaining on the back foot today.

Robust economic readings in both China and Australia overnight, spurred on demand for higher-yielding assets prompting the Dollar and Japanese Yen to fall against most of their major counterparts.

Australian GDP surprised strongly on the upside at 1.2% q/q, against the anticipated 0.9% q/q. This coupled with better than expected manufacturing numbers in China have led the market to the risk on trade.

Next on the menu for markets to digest is the US payrolls data tomorrow. Despite the ADP jobs report revealed a surprise 10k decline the employment component of the ISM manufacturing survey strengthened to 60.4, leading to an improvement in August manufacturing payrolls.

Ahead of the payrolls release the US data slate today largely consists of second tier releases including July pending home sales, August chain store sales, weekly jobless claims, and factory orders. It is worth paying particular interest to jobless claims given that the four week moving average has been edging higher, suggesting renewed job market deterioration.

The consensus is for a 475k increase in claims, which will still leave the 4-week average at an elevated level.

Global markets are in the doldrums and with decreased trading volumes and a lack of positive data there has been little to prevent a downward path this week. The Dow is down 2.23% on the week and just over 6% on the month, slipping below the critical 10,000 level (closing yesterday at 9,985). S&P and Nasdaq have followed suit heading into the end of the month 6.7% and 6% down on the month.

In the UK the FTSE clawed back from the 6 week low of 5070 seen on Wednesday but is still 3.50% down on the month.  In Asia, the Nikkei and Hang Seng haven’t bucked the global trend also down 5.5% and 2% on the month.

Yesterday the Labor Department in the States reported a reduction in new U.S claims for unemployment benefits. Initial claims for state unemployment benefits fell 31,000 to a seasonally adjusted 473,000, below market expectations for a drop to 490,000.

However this figure did little to support the dollar as firstly the claimant’s number still remains high and there is still a real concern about the recovery of the States after the horrendous week it has had.

Many economists also look at the four week average price of initial claims which is viewed as a better gauge of employment trends; this figure was up slightly by 3,250 from 486,750.

Despite the onslaught of poor data Germany continues to shine as German consumer morale increased for the third month running, hitting its highest level since last October.

The Governor of the Bank of England Mervyn King presented a very down beat assessment of the UK’s growth prospects this week.For the first time he mentioned there was an outside chance of a double dip recession during his inflationary report.

This sent the FTSE down 2.4% to 5245.21 and the pound fell for a third straight day against the Dollar down to a low of 1.5626 giving back all of last week’s gains.

In his Quarterly Inflation Report King highlighted that they are nowhere near considering an exit strategy, nowhere close to increasing interest rates and have now left the option open for renewed quantitative easing should the need arise.

This negative sentiment overshadowed the positive UK unemployment data which fell as the economy added workers at the fastest pace since 1989.

Unemployment as measured by the International Labour Organization fell 49,000 to 2.46 million in the three months up to and inclusive of June.

Employment jumped 184,000 to 29 million. Overnight sterling has shown relative strength versus the euro, moving over 1.5% against the single European currency and hit a high of 1.2182.

On Friday, US Employment fell for a second straight month in July as more temporary census jobs ended, as private hiring rose less than expected, pointing to an stunted economic recovery and a potential requirement for further quantitative easing. The main points were as follows: Non-farm payrolls fell 131,000 the Labor Department said on Friday, as temporary jobs to conduct the decennial census dropped by 143,000. Private employment, considered a better gauge of labor market health, rose 71,000 after increasing 31,000 in June.

The government revised payrolls for May and June to show 97,000 fewer jobs than previously reported. Analysts polled by Reuters had forecast overall employment falling 65,000 and private-sector hiring increasing 90,000.

The unemployment rate was unchanged at 9.5 percent in July for a second straight month, just below market expectations for a rise to 9.6 percent.

It was a similar sentiment in the UK as both consumer and business confidence dipped again.

The most recent purchasing managers’ index from the services sector indicates that, while growth continues business expectations have suffered a fall of about 10% since Spring. Friday’s PMI data showed a rise in cost of 5% which is rather high and pulls inflationary pressures into focus.

The other area of alarm for most is the idea that whilst interest rates remain low and are expected to stay as such until 2011 there seems to be greater comment around the fact that when they start to move they are likely to move quickly.

It is still a very fine balance to control inflation, implement spending cuts and tax hikes whilst in the meantime not cause a double dip.

The general market view seems to be that interest rate rises back towards more ‘normal’ levels can only be implemented if the economy grows confidently the idea of pushing an already fragile economy back into recession is simply not palatable.

US non farm payrolls are one of the most important data releases in the money markets since jobs- preferably good ones, are the lifeblood of any economy.Today sees the June release of the figures, with an estimated 508,000 jobs added in May, by far the largest estimate ever. Adding over 500,000 jobs to the economy would hearten even the biggest bears and, you would think, be strongly positive for the Dollar.

But there is much more to this number than meets the eye. Firstly, the ranges of forecasts are the broadest ever, with the lowest coming in at 100,000 jobs added and the highest at 750,000.

Given the past records of the economists making the forecasts (the average ‘miss’ is 70,000 jobs) we could be looking at the largest forecast error on record as well. The problem then becomes deciding what will happen to Dollar after the release.

A huge ‘miss’ of 200,000 means the US would still have added over 300,000 jobs in May but the Dollar may still fall on the back of it. If the forecasts are correct and we see a gain of over 500,000 (as said before the largest ever). If the market has priced this in we may see no move at all.

The conclusion? What seems like extremely bullish data at first glance may be the largest but also the strangest and most confused NFP data ever.

The Euro is retesting lows seen two weeks ago as data from the ECB showed Eurozone banks depositing record amounts of cash in the ECBs overnight facility.

Increasing worries over loan losses and sovereign default means banks would rather keep funds at the Central Bank than lend it out in the inter-bank money markets. Alongside the jittery banks, European consumers continue to hang on to their cash instead of spending, with retail sales figures again disappointing.

After the money markets closed on Friday, Spain’s debt rating was downgraded by the ratings agency Fitch from AAA to AA plus with outlook stable.

The move seemed to have been priced into the market with very little movement in the price of the Euro over the extended weekend, but as the European trading session got underway on Tuesday, the Euro has come under renewed pressured and is now trading below 1.22.

On EUR/USD and over 1.18 against Sterling. The Spanish PM is facing mounting pressure to push through long awaited labour reform laws, with unemployment running at over 20% and huge amounts of pressure being applied by Spanish labour unions, we are entering a critical phase for Spain.

The recent ECB stability report has forecast further write-downs for European banks.

Sovereign debt contagion will spark a second wave of loan losses of greater magnitude than the £200 billion already written off up to December 2009 according to the report.

The ECB has also continued in its purchase of government debt, Portuguese, Spanish and Greek bonds have all been soaked up in the continuing effort to alleviate some of the fiscal strains affecting them.

David Laws, newly appointed Chief Secretary to the Treasury, resigned over the weekend over fresh MP expenses irregularities. Mr Laws has been replaced by Danny Alexander, a key member of Mr. Clegg’s negotiating team.

The news has caused concern in the markets because of the timing of the announcement and the nature of Mr Laws role in implementing the Governments policy of reducing the Budget deficit, temporarily at least putting downward pressure on Sterling.

The Reserve Bank of Australia kept interest rates on hold, a decision widely expected and already priced into the market. But the Aussie is coming under further pressure since the big move a couple of weeks back.

As continuing fears over the 40% super levy on mining companies gather momentum, it is still unclear if the large miners, widely expected to gain at least some concession in the deal, will get anything at and will have to bite the bullet and pay up.

Data revealing China’s housing market continues to overheat has also increased the downside pressure on the Aussie, since China is the main buyer of the raw materials that Australia produces.

Stock markets around the world suffered further falls yesterday as investors continued to unwind risky positions and move into calmer waters.

The problems in the Eurozone have been the driving force behind the huge market movements we have seen across the currencies over the past few days.

China has been powering the world’s economy over many years, but with Europe its largest customer, investors fear a European induced Chinese slowdown would derail any economic recovery.

Hedge funds are reported to be reversing positions to preserve capital, most notably in the Aussie dollar pairs, which have seen large swings in value over the past few days.

Disappointing economic data yesterday from the USA showing a surprise increase of 25,000 in jobless claims and poor Eurozone consumer confidence figures exacerbated the negative sentiment in the market yesterday.

Sterling fell to its lowest level in 13 months against the Dollar driven by the rush into the safe haven rather than anything Sterling based.

Retails sales showed a third straight month of increases, a positive bit of data for the UK that was shrugged off very quickly by the market. Sterling sentiment remains weak, so expect the Pound to come under further pressure as risk is taken further off the table.

Last night, the US Senate approved the financial reform bill after lengthy negotiations. The legislation, penned as a response to the Credit Crunch will, amongst other things, stop deposit taking banks from trading on their own accounts (proprietary trading) and allow the government to seize control of a failing firm that is judged to be systematically important.

We will have to wait on the fine print, but this will almost certainly have large implications for the markets because the biggest players (the banks) will be forced into restructuring. The added uncertainty of how this will work is adding to fears over the Eurozone.

The Liberal Democrats are holding the country to ransom while an unelected leader of the Labour Party remains Prime Minister.

It is a measure of Gordon Brown’s loose grip on reality that he sought to depict his decision to stand down later this year as a noble act of self-sacrifice made in the national interest. The truth is that this was an act of quite staggering cynicism based on naked party advantage.

With the incomprehensible connivance of Nick Clegg – whose reputation will surely never recover – Mr Brown is effectively seeking to nullify the result of last week’s general election. Blinded by his tribal loathing of the Conservatives, he is ready to risk everything – and the Daily Telegraph used that term advisedly – to keep David Cameron out of Downing Street.

This unelected leader of the Labour Party will remain Prime Minister, even though his party secured two million fewer votes and 48 fewer seats than the Tories.

He will then hand over at a time of his choosing to a new Labour leader. At that point, the United Kingdom will find itself governed by a Labour prime minister the country has not elected, succeeding a Labour prime minister neither the country nor his party elected. Even by Labour’s standards, this is self-serving and unscrupulous.

Mr Brown talked yesterday about the importance of a strong and stable government at a time of grave economic crisis. Yet he is seeking to concoct with the Liberal Democrats a governing coalition that will be inherently unstable and weak. A Lib-Lab pact cannot deliver a majority in the new House of Commons.

It will be reliant on the smaller parties – the Scottish and Welsh Nationalists, perhaps the DUP – to secure its business. What will that mean? That the English taxpayer will be expected to keep those parts of the UK in the heavily-subsidised style to which they have become accustomed.

This at a time of economic distress when deep cuts in the public services in England are inevitable. Just as pertinent, England voted decisively for the Tories last Thursday (297 seats to Labour’s 191), yet is to be effectively disenfranchised by the Brown/Clegg stitch-up.

Does Mr Brown realise how dangerous a game he is playing? He has made much over the past couple of years of his devotion to the Union, yet his political scheming will place it under immense strain.

And how exactly is a Labour leadership contest supposed to encourage stability? Campaigns were already gearing up last night. The notion that the challengers to succeed Mr Brown will be devoting their full energy to their ministerial jobs in the weeks and months ahead is, frankly, laughable.

The markets responded to Mr Brown’s pieties about stable government by plummeting. They assessed very quickly just how ramshackle such a cobbled-together coalition will be.

The prospect of swift and decisive action to tackle the deficit evaporated at precisely one minute to five yesterday, when Mr Brown made his surprise statement in Downing Street.

Why is this happening at all? This brings us to Mr Clegg and the Liberal Democrats. They are, in effect, holding the country to ransom in pursuit of a new voting system. An issue that featured nowhere on the list of voter priorities in the general election now dominates the political debate.

And the tail is wagging the dog. Last Thursday, the two parties that were formally opposed to PR, the Tories and Labour, between them polled 19 million votes. The party that supports PR polled fewer than seven million votes. Is this what Mr Clegg means when he talks about the “new politics”? And what is “new” about a deal brokered by three unelected Labour figures – Lying lords Mandelson and Adonis and Alastair Campbell?

Since last Friday we have lived with the fiction that Mr Brown was simply doing his constitutional duty by staying at the helm until a new government could be formed, acting in the national interest.

Now we see that all the time he has been acting in his and his party’s interest, defying the verdict of the electorate by trying to create a coalition of the election losers. This is a bleak day for our democracy.

The euro has continued to crash against the US Dollar, reflecting the continued loss of investor confidence in some European economies.

The euro has fallen to $1.2954 – its lowest level for more than a year.Share markets in Asia also dropped after heavy falls in Europe on Tuesday. The Singapore market was down 1.5% and Hong Kong’s Hang Seng index fell 2.1%.

Investors remain concerned over the debt crisis in Greece, and the fear that it may spread to other economies.

On Tuesday, the Spanish Prime Minister Luis Rodriguez Zapatero was forced to deny rumours that Spain would be next to seek financial rescue, following the agreement of a 110bn-euro ($143bn; £95bn) bail-out package for Greece over the weekend.

Meanwhile Germany’s Chancellor Angela Merkel called on the country’s parliament to back a Greek bail out.

“The future of the European Union and the future of Germany within the EU is at stake,” she told law makers.

Investors have cited Spain, along with Portugal, Ireland and Italy, as the eurozone economies with the most worrying debt problems next to Greece.

Spain and Portugal’s cost of borrowing on the bond markets rose again on Tuesday, reflecting investors’ fears of default.

Spain is of particular concern because of the size of its budget deficit – currently above 11% of GDP – and the weakness in its economy.

Spain has the highest rate of unemployment in the eurozone, at above 20%, and the economy is expected to shrink by 0.6% this year.

On Tuesday, global stock markets also felt the impact of the uncertainty, with the FTSE 100 in London falling more than 2.5% and Wall Street’s Dow Jones index down 2%.

There is also scepticism over the chances of success of the Greek rescue plan, with the necessary cost-cutting measures in Greece proving domestically unpopular.

Today sees the beginning of a huge general strike in Greece in protest at public sector cuts.

Meanwhile Greece’s bail-out package is yet to gain European approval, with the German parliament due to vote on the deal on Friday.