Friday, August 6, 2010

Still (too) many unemployed

Forex Special

The number of people registering as unemployed climbed by 19k to 479k in the last week of July. That’s far beyond the market consensus of 454k. While the markets saved a stronger reaction (possibly) for the report due today, the weekly numbers once again pointed at the weakness of the US labor market. It is believed that the number needs to drop below the 400k mark for the unemployment rate to be substantially reduced. Meanwhile, it hovers usually above 450k for more than half a year, signaling no breakthrough.
Daily Market Snapshot
The market expects that the employment actually fell in July (by 65k, release at 8.30 ET, 14.30 CET) but one needs to remember about the negative impact from Census. As temporary Census workers finish their job, the employment in the public sector decreases. Therefore the private sector will be in focus and the consensus here is at +100k – more than in June (+83k), but still not enough to call the data bullish. Despite a rise in private employment by nearly 600k in the first half of 2010, it remains 7,9 millions below the recession level. A rebound on the labor market remains a key for a revival in the private demand.
DE30 – Dax at new ’10 highs
Industrial orders in Germany rose by 3,2% m/m in June, way above the consensus of 1,4% m/m – another confirmation of buoyant German exports sector. This kind of performance allowed for a sort of divergence between equity markets in the US and Germany. While the Wall Street major indices are still way off their ’10 highs, the German DAX30 just refreshed its high. Doing so, it attempts to move up from the 3-months triangle, possibly offering a further encouragement for the local bulls. However, a decoupling is not full, of course – such positive scenario still requires at least neutral labor market data from the US. On the German front, we have industrial output scheduled for today (6.00 ET, 12.00 CET, expected at +0,8% m/m).
Daily Market Snapshot
Wheat – Russia ban exports, prices continue to soar
The wheat market got red hot in July, after the US Agricultural Department presented lower forecast of supply for incoming season. It got even hotter yesterday, after Russia – a large exporter - announced a 4-months ban on exports. The price shot up to 840c per bushel, whereas it was below 430c in the first half of June! However, in our judgment prices already overreacted to the fundamental situation on the wheat market. Even with the supply lower, the deficit is not huge by historical standards and inventories (due to large oversupply from past two years) will remain around a long-term historical average. While in a short-term a speculative rally may last, one should remember that this kind of rally in early 2008 caused an oversupply in recent two years which in turn depressed prices. 
Daily Market Snapshot
Events to watch – employment in the US, employment in Canada
The mentioned payrolls report is obviously carrying the most of weight today. On top of it and the German output data, investors are awaiting the data from UK (output and PPI, 4.30 ET, 10.30 CET, expected at +0,2% m/m and 4,9% y/y respectively) and Canada (employment, 7.00 ET, 13.00 CET, exp +15k; PMI, 10.00 ET, 16.00 CET, exp 55,6 pts.)


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