Preview from Europe: Markets Braced for U.S. Non-Farm Payrolls

U.S. weekly jobless claims crashed through the 600K barrier yesterday for the first time since 1982. But the market took heart from chatter that accounting rules requiring banks to mark assets to market may be suspended. A mid-day turnaround resulted in US indices ending up yesterday by the time of the close.

Today’s Market Moving Stories

• Democratic Senator Harry Reid said he’s got enough votes to pass the Obamalus. A Sunday vote looks likely.
• There are expectations of a big bang speech from U.S. Treasury Secretary Geithner next Monday. He is expected to provide details of the administration’s financial-recovery plan which will likely include guarantees on banks' illiquid assets and possibly the formation of a ‘bad bank’ that would purchase toxic assets from banks. If the grand plan disappoints or underwhelms, it will be lookout below for equity markets and Bank of America (BAC) in particular.
• Irish Finance Minister Brian Lenihan said that the Government is likely to make a decision on the re-capitalisation of the Irish banks in days rather than weeks. Both Allied Irish (AIB) and Bank of Ireland are still haggling with the final details of the expected €8 billion deal. It appears the plan will not be accompanied by an insurance scheme or a bad bank creation.
• More bad news for carmakers. Toyota (TM), whose credit rating has been cut by Moody’s, has tripled its annual loss estimate to $4.94bn, its first loss since WWII. Nissan (NSANY), which is due to report Monday, is seeking a loan from the Japanese government in a sure sign of just how pear shaped things are going for global automakers. Mitsubishi (MMTOF.PK) have already sought some yen. Europeans seem to be faring little better with Volvo (VOLVY.PK) coming in with a loss (on weak truck sales) this morning and some gloomy guidance (though the stock is up). But BMW’s results were a shade better than expected. They even said they’d make a profit for the full year, how novel.
• Those seeking to go long on some stocks may want to look at Douglas McIntyre’s top 10 recovery plays.

Implications Of Yesterday’s Interest Rate Decisions
The pound sterling reacted favourably to yesterday’s decision by the BoE to cut policy rates 50bp to 1.0%, the lowest in history. Further, there was nothing in the statement to prompt the market to change its call for another, and final, 50bp cut at the March meeting.

GBP hit a two month high versus the EUR as the ECB kept rates on hold, with Trichet’s downbeat dovish rhetoric little changed from the January meeting (though he did more or less confirm a ½% cut at their March love in). But the soft underbelly of the Euro remains the inability of the currency’s central bank to grasp the full extent of the abyss into which the Continent is starring. If things are as bad as the picture painted by Trichet yesterday then why didn’t they cut rates NOW instead of worrying about text book “liquidity traps”? Their argument is that it's TOO SOON since the last meeting, trouble is the next one may be far too late.

Equities

• As I mentioned some time ago it looks like Babcock and Brown is toast with common equity holders losing everything (an all too familiar theme).
• Some better tidings from French luxury goods maker LVMH (LVMUY.PK) who are up 5%+ this Friday after they surprised on the upside.
• Another European stock up this AM is Infineon (IFX) (+10%) after a smaller than expected loss.
• Irish airline Aer Lingus passenger numbers just released reflect the dire state of the domestic economy with a sharp fall in those taking the more lucrative long haul flights (down 8.6%). These trends seem likely to persist as the gloom deepens and people retrench.
• Élan (ELN) will be in focus today as BIIB reports its Q4 numbers. Of interest will be any fresh news on Tysabri, commentary from BIIB on Élan’s strategic review, and any further updates about activist shareholder Carl Icahn.

Data Today
The unusual spate of upbeat GBP sentiment may be tested this morning with UK industrial production data for December, which I expect to be softer than its consensus of a 2.3% MoM contraction. With manufacturing surveys firmly negative, it is doubtful whether confirmation of industry’s malaise will prompt a lasting impact on GBP. Indeed, after being hammered for several weeks and being faced with an almost daily procession of bad news, the currency may at last have found a base.

After that, it’s time to prepare for the big one, US nonfarm payrolls and employment report at 13.30 GMT. The economy lost an average of half a million jobs a month in the final quarter of last year, which was the fastest rate of decline in more than 50 years. There is little prospect of any real improvement in the coming months either. Initial jobless claims are above 600,000 a week, while the employment indices in the ISM surveys are still at exceptionally depressed levels. And Wednesday’s ADP survey pointed to private payrolls falling by 522,000. As a rule of thumb most private sector economists add 20k to this to get their forecast as the ADP number excludes government / Federal employment, hence the consensus for today is -540k!

Watch for downward revisions to the previous month’s data and any tick up in the unemployment rate higher than the forecasted 7.5% as this is very politically sensitive. Given that unemployment is a classic lagging indicator and equity markets are in theory forward looking, stock markets have, according to studies, historically bottomed eight months before the trough in unemployment! That’s the good news. The bad news is that most commentators don’t see unemployment bottoming until 2010 so they see equities tracking sideways for 2009.

And Finally… It Seems It’s Bye Bye Dubai

Disclosures: None

Comments

[Erez Attiya:]

What about:
* Senators consensus of modifying the Obama's stimulus plan? (NYTIMES)
* Historically event of women workforce to overtake men workforce? (NYTIMES)
* Toyota's announcement of expecting losses to be THREE TIMES BIGGER then their earlier numbers? (NYTIMES)
* Finally the US Gov gets some outside help for the GM mess from expertises in the fields of law & finance? (BLOOMBERG)
* Ford encountered 4B$ pension costs, what may push Ford for its last operational year before bailing out? (BLOOMBERG)
* Mastercard is the only surprisingly (for better) as overtaking 4th Q estimates? (FORBES)

Have A Good Day!
Erez

Feb 06 05:59 AM

[prudentinve...:]

Interesting video about Dubai. Dubai was an even greater property bubble than any we've had in the US. The speculators from all over the world were flipping condos before they were even built. The sensitivity of the region's economy to price of oil, and to the geopolitical situation in the mideast makes it vulnerable, so it is surprising how many gullible people were sucked in.

The implosion of the Arab gulf economies is not surprising, and will accelerate if oil stays down. This will further damage the global financial system. It has already put Dow Chemical in a squeeze, and I wonder how far Jeff Imelt's ill-conceived plans for GE capital investing $40 billion in Dubai have progressed.

Feb 06 07:48 AM

[kelm:]

7.6% - worse than expected which is consistent with ow the numbers have been gong in this crisis.

is anyone else concerned that the chatter about suspending mark to market is viewed favorably by the market? Increasing opacity into company books is not a plus it is a negative. For a nation to think about doing it on a large scale is a mistake. This seems to me a stark indication of how distorted our thinking is becoming as we grapple with the crisis.

Feb 06 09:12 AM

[morph366:]

Build it and they will come - not any more in Dubai it seems.
Watching the clip I was struck by the number of cliches used to promote the condos that no one seems to want. "Favored by the international jet set" was just one.
Trouble is many of those jet-setters have never even set foot in their condos - having bought them off plan and now nursing large losses. Hard to have too much sympathy for them though

Feb 07 02:29 AM