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.

The highlight overnight was the release of the minutes from the August 10th Federal Reserve Open Market Committee meeting. Some Federal Reserve officials were concerned that a decision to keep securities holdings unchanged would inadvertently signal an intention to resume large scale asset purchases.

Also, a few policy makers said the economic effects of the decision “would be quite small,” but at the same time, some officials saw “increased downside risks to the outlook for both growth and inflation” and voiced concern that further shocks would cause “significant slowing in growth”.

The debate shows the challenge Fed Chairman Ben S. Bernanke may face in achieving consensus for any additional monetary stimulus to reverse a slowdown in growth and reduce joblessness more quickly.

In a speech last week, Bernanke said “Policy makers haven’t agreed on specific criteria or triggers for further action”.

In other important US economic releases, we had the Conference Board’s confidence index yesterday afternoon which showed that confidence among U.S. consumers rose more than forecast in August; a sign the biggest part of the economy may avoid a slowdown that would derail the recovery.

The Conference Board’s confidence index increased to 53.5 from a five-month low of 51 in July, figures from the New York- based private research group showed. More confidence may help ease concern that consumer spending, which accounts for about 70 percent of the economy, will falter.

As we approach the ECB meeting this Thursday, yesterday’s Eurozone annual inflation reading fell from 1.7 in July to 1.6 in August, coming in well under the ECB’s target of 2%. Inflation looks set to remain muted for the rest of 2010 and into 2011 as European governments implement austerity packages to shore up their sovereign balance sheets.

Yesterday we also saw German unemployment continuing to fall, for the 14 month in a row, slightly better than expected sparking a rally in the Eur/Usd which provided strong support going into the release of the Fed’s minutes. Investors had been keenly anticipating the release of these minutes but were somewhat disappointed as it lacked any new information triggering another move higher for Eur/Usd.

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.

Sales of previously owned US homes dropped more than expected in July to their lowest pace in 15 years implying further loss of momentum in the States economic recovery.  The record drop of 27.2% from June equates to an annual rate of 3.83 million units which is the lowest level since May 1995 and June’s sales pace was revised down to a 5.26million-unit pace.

Markets had been anticipating a tumble of around 12% and so were shocked with the magnitude of this figure.

The US Dollar dropped significantly against the JPY following the news to a new 15-year low of around 83.60.

This prompted more verbal intervention from Tokyo but made little impact however as investors continue to sell USDJPY and are now focusing on the all time lows of 79.75 from 1995.

Investors ploughed money into government bonds, driving down the implied cost of borrowing to record lows in Britain and Germany.  The UK 10 year gilt yield fell to 2.88% which is even lower than that of March 2009  when the BoE announced that it would buy billions of gilts under its quantitative easing scheme.

US 10 treasury yields broke below 2.5%.  Oil followed suit and fell below $72 a barrel yesterday, down for a fifth day after weak US economic data spread gloom about the ability of the US, oils top consumer, to work through record stocks.

These ripples of doubt ran across the globe and caused equities to close down; Britain’s top share index closed lower with UK banks, miners and energy stocks bearing the brunt of the sell-off.  The FTSE ended down 78.89 points (1.5%) at 5,155.95 which is its lowest close since 20th July and unwound the gains of 0.8% which we had seen on Monday.

The dollar strengthened overnight after the Fed took steps to try and bolster the fragile US economy, saying they will maintain their holdings of securities to stop money from draining out of the financial system. In a bid to avoid a double dip recession, The US central bank said it would reinvest between $200-300m of proceeds from maturing mortgage bonds from the first $1.2 trillion QE cycle.

It left its policy rate unchanged and renewed its pledge to keep rates low for an extended period.

Following the fed announcement treasuries surged as markets anticipated a renewed round of asset purchases should the economy slow further.

Figures since the last FOMC meeting in June indicates that the pace in recovery in output, manufacturing, retail, employment and housing has slowed significantly.

However Wall Street fell heavily last night down around 2.5% as investors worried about further debt increases and slowing growth.

Speculation over the announcement of another round of quantitative easing (QE2) at tonight’s Federal Reserve meeting is reverberating around the money markets at present.The consensus seems to be that that additional liquidity will be added to the system through reinvestment of maturing assets already on the Fed balance sheet, rather than return to fully blown quantitative easing.

The recent surge in commodity prices after Russia placed a halt on exports of grain is a worrying development for the Fed, it will need to consider that further down the road after it may find certain parts of the economy experiencing inflation at the same time as others are suffering from rampant deflation.

This is why this Fed meeting is seen as so important– we wait to here which way the inflation/ deflation needle is pushed (unless we end up waiting until next month!).

Sterling continued its climb against the Dollar yesterday as momentum from Fridays disappointing US jobs figures continued in early trading.

But the Dollar has regained some ground this morning after the announcement from the Royal Institute of Chartered Surveyors that UK house prices have declined for the first time in a year.

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.

On Friday, the Dow Jones fell by as much as 120 points after annualised growth in gross domestic product (GDP) was found to have slowed from 3.7% in the first quarter to 2.4% in the second.That came on the back of growth of 5% in the final three months of 2009. The US was initially thought to have grown by 2.7% in the first quarter but that was revised upwards on a day of surprises for economists.

The US Commerce Department also revised downwards GDP figures all the way back to the beginning of 2007.

The second-quarter slowdown led economists to question whether the US might be poised to enter a period of negative growth later in the year, leading to a much-feared double-dip recession.

The Dow Jones fell sharply after the release of the GDP data before recovering ground to settle down 40.72 at 10,426.44 in lunchtime trading. Economists had predicted second-quarter growth of 2.5pc, but their disappointment was compounded by the revised data for the first three months of 2010.

The biggest concern in the City was the size of the downward revisions to previous years’ growth. In 2009 the economy was previously estimated to have declined by 2.4%, but the figure was revised to a drop of 2.6%.

The disappointing growth numbers were compounded by the International Monetary Fund’s (IMF) annual report on the US economy. The IMF said there may be a need for the Obama administration to increase the amount of fiscal stimulus in order to boost the recovery, warning the “outlook remains uncertain”.

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The Bank of England has kept UK interest rates on hold at a record low of 0.5% for the 16th consecutive month and the European Central Bank (ECB) has held eurozone interest rates at a record low of 1% for the 14th month running.
The banks have kept rates low to try and stimulate the economies following the global economic downturn.

Many analysts argue rates need to stay low as governments are cutting back on spending- which undermines growth.

The Bank of England’s Monetary Policy Committee (MPC) also decided not to inject any more money into the economy under its policy of quantitative easing (QE).

The decision had been expected but calls have been growing for an increase in rates to curb inflation.

The National Institute of Economic and Social Research (Niesr) estimated that the economy grew by 0.7% in the three months to the end of June, marking a slowdown from the 0.9% expansion seen in the three months to May.

The minutes of July’s meeting, which will reveal how MPC members voted, will be released in two weeks’ time.

Explaining the ECB’s decision to keep rates on hold, president Jean-Claude Trichet said the eurozone’s economic recovery continued in the first half of the year, adding “we expect the area’s economy to grow at a moderate and still uneven pace, in an environment of high uncertainty”.

The eurozone economy has been in the international spotlight in recent months, with concerns about high government debt levels hitting global stock markets and threatening to derail the economic recovery.

In recent weeks, attention has turned to bank debt, with investors eagerly awaiting the results of stress tests designed to see how well equipped banks are to cope with future financial crises.

Mr Trichet said the tests should “build confidence” in markets as investors learnt how exposed banks were to bad debt. Transparency, he said, would be beneficial.

The results of these tests are due to be published on 23 July.

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.