Friday's employment data provided the sort of material improvement that investors have been waiting for. November non-farm payrolls data was an order of magnitude lower than consensus estimates and crept tantalizingly close to positive growth, while the November unemployment rate fell to 10%. The employment picture was complemented by gains in wages and hours worked. Administration officials tried to tamp down expectations after the data while many other commentators reiterated that job growth, when it arrives, would likely be anemic. Credit Suisse's chief economist said the jobs data were likely a "rogue" positive blip, a common occurrence ahead of the trough, affirming his expectation that the bottom for the US labor market won't arrive until February or March.
Bank of America took a big step toward normalcy this week, selling $19B in common equity as part of its plan to buy back warrants from the US Treasury and pay back its $45B in TARP funds. The pricing and sale went off without a hitch, and shares of BAC were up 5% or so on the week, leading the US banking sector higher. This leaves Citigroup, Wells Fargo, and PNC as the last leading banks in which the government holds a large stake. Normalcy remains a long way off for AIG, however, although the firm closed out two off-balance sheet transactions, cutting the debt it owes to the New York Fed by $25B. The deals pave the way for IPOs for the firm's American Life Insurance (ALICO) and American International Assurance (AIA) units or possible third party sales.
November same-store sales were broadly worse than expected. The International Council of Shopping Centers (ICSC), which tracks chain store sales, reported that November results were "disappointing," coming in at -0.3% y/y, compared to its expectation of +3-4%. Abercrombie & Fitch and Children's Place swung back to big declines after surprisingly good performance in October. The Limited and Ross Stores did better than expected while the Gap was in line. Warehouse rivals BJ's and Costco both missed expectations, although both improved on October's performance. Department store names were notably behind expectations, with the exception of Kohl's and Nordstrom. Despite these dismal showings, many retail executives said Black Friday sales were at or above last year's levels. Many sector watchers believe that retailers will be forced to resort to more discounting to get shoppers spending again.
Treasury yields steadily climbed higher this week as the hysteria surrounding Dubai World's debt crisis subsided. Knee jerk selling in response to Friday's jobs data saw yields make their biggest intraday increase since the summer. The benchmark 10y Note took a stab at the pivotal 3.50% mark, while the long bond moved as high as 4.43%. The short end - the most sensitive part of the curve to changes in rate policy - was hit with even more vigor. The 2y note moved above 0.85% while Fed Fund futures began to fully price in easing by the end of next summer.
Midweek, several top tier brokerage houses on both sides of the Atlantic issued investment and asset allocation recommendations for 2010. One noticeably constant theme was a pessimistic outlook for government bonds. While analysts differed on specifics, there appears to be an emerging consensus that some of the dynamics that have underpinned resilience in government bonds in 2009 (flight to quality, deflationary fears and low rates) are fading away. As markets begin to expect central banks to begin tapping the brakes, flattening of yield curves seems almost inevitable in 2010.
Dissipating fears of contagion from Dubai put the greenback on the defensive as the week began and rising risk appetite kept the dollar soft as global equity markets responded well to positive economic data and central bank comments. The dollar managed to close out the week on a more positive note in the wake of the much improved US employment data.
The Japanese Yen was the main focus for currency traders for most of the week. The yen initially firmed against the major pairs after BoJ Governor Shirakawa stated that the central bank was prohibited by law from buying foreign currency-denominated bonds to influence FX rates. Nevertheless, a "unified front" has been building between the Japanese government and the BoJ, with both signaling that measures are needed to curb yen appreciation. An emergency BoJ meeting on Tuesday raised expectations that intervention was imminent, but the official statement from the meeting underwhelmed markets. Subsequent meetings took place all week long, fueling intervention rumors. Speculation swirled after dealers said top Japanese financial official Tamaki met with US Treasury officials in Washington to exchange ideas on wide range of issues. Tamaki declined to elaborate on the exact nature of the meeting. In a speech Japanese PM Hatoyama commented that the strong yen cannot be left "as is," although he conceded he was unsure whether the strength was a temporary or lasting phenomenon. The key level for USD/JPY pair was the 88.00 level, which acted as support throughout the summer period. A move above 88 might provide an ideal situation for intervention, given recent rhetoric, lower interest rates, technical overstretch and market participants positioned long JPY. There was decent demand in the Friday session for year end 92 strike USD calls.
Two key factors influenced price action in the EUR/USD this week. The first was an alleged binary option in effect all week, with 1.4850 to 1.5150 as the parameters. The second was Thursday's ECB meeting. There was some expectation that the ECB might ratchet up rhetoric regarding its exit strategy, but in the end neither Trichet's comments nor the ECB staff projections for growth and inflation gave any indication the central bank was in a hurry to raise interest rates. Note that the governing council did say it would discontinue its 12 month lending operations (through midweek a staggering €517B has been lent to banks this year) after a third and final offering on Dec 16th. Trichet took pains to point out that out that no signals on conventional monetary policy can be inferred from its actions, and that liquidity would remain "extremely abundant."
The Swiss Franc was also a topic of conversation. Dealers noted that the outperformance of Swiss data might lead the Swiss National Bank to step away from its intervention strategy in EUR/CHF and allow CHF to strengthen in order to counter recent trends in the Swiss economy. The SNB's Roth reaffirmed that the central bank would "decisively counter" franc appreciation and remained vigilant on currency developments.
Gold continued to hit fresh all-time highs on speculation that China's demand for the precious metal is growing. A London Times article noted that China will likely become the world's biggest gold consumer, vaulting ahead of India. Demand in 2008 was 395.6 tons, said senior figures in the China Gold Association, but the total figure by the end of 2009 could be well over the 450-ton mark. In addition, there was continued press speculation that China might be the next central bank to build its reserves with the metal. Note that PBoC Deputy Governor Hu warned this week of a bubble in precious metal markets, pledging that the central bank would not invest in "bubble assets."
On the data front in China, the November manufacturing PMI reading was somewhat disappointing (55.2 v 55.7e). Notably, the new orders component saw its first decline in four months (58.4 v 58.5 prior), and new export orders fell markedly (53.6 v 54.5 prior). Note also that Franklin Templeton analyst Mark Mobius warned that markets in Mumbai, India or Shanghai, China could be "the next Dubai," citing debt and liquidity concerns.
The Reserve Bank of Australia extended its rate tightening cycle for a record third straight month, raising cash rate by 25bps to 3.75% as expected. The central bank largely reiterated the language for the prior month's statement, recognizing the improvement in the global economy and repeating its goal to keep inflation close to target. The RBA did note that the impact of early fiscal stimulus is fading and that unemployment may continue rising.
In other Japan news, Japanese government spokesman Hirano alleviated concerns that the Finance Ministry would consider selling some of its US Treasury holdings to finance additional budget outlays, while Finance Minister Fujii stated he continues to oppose raising government debt issuance to pay for further stimulus. Policymakers continued debating the details of the expanded budget going into the weekend, with deputy PM Kan noting that the package is nearly complete. A fresh report from the Japanese press floated a ¥24T figure for the new budget plan, well above prior estimates.
Trade The News Staff
Trade The News, Inc.
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