Forex Market Outlook 12/2/11
It’s that time of the month again—jobs Friday and so far the markets have high expectations that the NFP report is going to come in better than expected. 130K jobs are expected to have been added to the economy and the unemployment rate is expected to have remained steady at 9%.
So markets are up higher in anticipation of this release as there is hope that we are turning a corner as an economy. The problem I usually have is that when markets get ahead of themselves early on, there is usually some type of disappointment. But I don’t want to think the worst as it would be a welcome relief to see more jobs added. So I think this could be one time when the market has it right.
Also contributing to higher stock and commodities markets this morning is news out of the Euro zone that despite Merkel’s reluctance to issue a Euro bond, she left the door open by saying that a fiscal union would need to occur first. So in other words, as slight as the possibility is, there is a chance.
PPI data in the EU came in slightly lower than expected so this adds to the belief that the ECB may lower interest rates yet again. New ECB honcho Draghi wasted no time cutting rates upon taking over the Central bank so if inflation stays muted, then that could be the next move.
But inflation does not appear to be muted, with oil prices back to $101.50 and gold back to the $1750 area as a sign that inflationary fears are becoming more real.
The British pound is also higher this morning, most on risk-taking but also because PMI construction data came in better than expected, posting a reading of 52.3 vs. an expected 52.
A lot has been happening in Switzerland lately and I have been largely ignoring them as I hate active central banks like the SNB. This morning, retail sales figures came in worse than expected showing a decline of .2% vs. an expected no change. This falls in line with yesterday’s GDP report which missed by a wide margin showing 1.3% YoY vs. an expected 1.8%.
But that’s not all. Yesterday afternoon a rumor was floated that the SNB could move to negative interest rates. Essentially, they would be charging you to keep money in francs vs. paying interest as way to try to weaken the franc and encourage economic activity. Take a look at today’s chart of the day and you’ll see why I don’t like the currencies run by active central banks!
On the employment front, data released in Canada surprised and halted its rise toward parity temporarily as the Canadian economy lost 18.6K jobs vs. an expectation that they would add 20K. The unemployment rate ticked higher to 7.4% from 7.3% and the Loonie weakened as a result. However, a good NFP number here could reverse that move as it would be game on for risk appetite.
While the market has great anticipation of the NFP release and is expecting a good number, we must not lose sight of the risk that still exists in the marketplace. Geo-political risk is heightening in places like Iran and Egypt, and of course we are not even close to a resolution in the Euro zone.
Yet the markets seem like they want to move higher and maintain this “Santa Claus Rally” into the end of the year so that money managers can close out with gains on the books. Because otherwise it’s been a tough year.
I honestly have no clue as to where this NFP number might be as I am so conflicted this AM so I won’t hazard a guess. Part of me says that the number will disappoint because expectations (and market behavior) are so high, but the other part tells me that things have been getting better despite the political environment here in the US.
Either way I always trade this number the same way: by waiting for the release and then entering a position based on the market reaction to the results. Positioning one’s self ahead of this number is just a guessing game and could have disastrous results as the volatility is usually extreme.