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| Daily Jurojin - Monday, June 8, 2009 |
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Monday, June 8, 2009 Dollar reversal or merely a pullback?The May employment report sent shockwaves across global markets as investors wondered why the reading was well out of whack with expectations. The loss of about 345,000 jobs in May was well short of the 525,000 reading as forecast by the market.Price action, or perhaps it would more accurate to see reaction, was priceless. By the end of the day the equity market had given back all of its euphoric gains as investors realized that, while it was a pleasant surprise to see fewer workers fired, the fact remained that the hatchet was clearly being deployed liberally around the nation's human resources departments. The 9.4% unemployment rate remains the outlier in terms of statistics and leaves us poised to now reach double-digits during the fall. It didn't respond to the lower number of firings apparently because more boomer-generation workers joined the labor market needing to reline their nests to protect their delicate eggs. Lemmings were running wild around the interest rate pits in Chicago, one after the other leaping repeatedly off anything that remotely resembled a cliff. The yield curve had some very interesting moves. First, Eurodollar futures, which track cash lending prices fell sharply and such was the magnitude of the sell off that in the space of a day the market completely reversed its expectations for lower interest rates. Rather it shifted to raise the roof with the question of when the Fed might start raising prices. Right now, the market is pricing in interest rates at about 1.4% by the end of 2009 compared to its official target range of zero to 0.25%. Second, bond prices also fell quite sharply sending yields dramatically higher across the yield curve. The yield at the benchmark 10-year are of the curve rose from 3.71% to 3.86% before the last bear had quit the room no Friday. If you told us you couldn't smell 4% before the end of this week, we'd fire you!! But the biggest impact from Friday's data was to be found at the two-year part of the curve, where prices dropped like the proverbial stone. Its yield surged twice as much, rising 35 basis points from 0.95% to 1.30%. The impact was to flatten the shape of the yield curve from 275 bps to 254 bps. That was an unexpected event and one that was out of character for recent moves in the yield curve. Recently investors have started to bump up 10 year yields as they reacted to better economic data and this force that distance across the curve to widen. The yield at the two-year remained almost artificially low courtesy of overseas Asian central banks repositioning lots of their surplus cash at relatively short positions on the curve. The impact has been to insulate the short end of the curve from the prospects of economic recovery. This brings us to the quirkiest and longest awaited aspect of Friday's report. In the moments after the report, the dollar was momentarily dumped out of sight. However, the reaction was merely the tail end of what has become a very old story in which the dollar has seemingly lost its impetus precisely because investors no longer feel they need to reach for the safety harness of the dollar as the economy recovers. Yet Friday hammered home two points. The first of which is that the U.S. economy, thanks to the large fiscal stimulus is likely to emerge from recession first. The second is that the Europeans have little fiscal stimulus to speak of. On Thursday last week the ECB outlined plans during the course of the next 12 months for buying corporate bonds with a face value equivalent to around 0.6% of Eurozone GDP. Compare that to the 12% and 10% spent by the respective governments of the U.S. and the U.K. Whether U.S. fiscal rectitude repels recession and prevents a more furious future path for job losses is certainly open for debate. But spare a thought for Europe who has as deep a recession as in America, growing employment strains, a marginally tougher monetary stance because its central bank doesn't believe in wearing anything remotely off the shoulder, and practically nothing in terms of fiscal stimulus. As euro currency bulls mulled over this scenario with their coffee on Friday morning they swiftly checked the yield curve, which was again moving more and more in favor of the dollar. The prospect for a rapid recovery from Chapter 11 for the entire U.S. economy if you will, found the dollar a lot of friends. One of two things happened on Friday. Either the dollar created a large pullback for both the euro back under $1.40 and the British pound now firmly back under $1.60, or else it created a reversal of trend. The next several days will make for interesting trading as investors mull which it is to be. The Supreme Council of the Secret Order of Jurojin |
