Systemic Risk Out, Economic Risk In

The +38k jump to 407k in weekly jobless claims was the worst reading since September 17, 2005 (the week following Hurricane Katrina). The less volatile 4-week MA jumped 15.8K to 374.5K, highest since October 2005. Continued claims rose to 2.937 million, the highest since July 17, 2004. The Labor Department did note seasonal difficulties arising from the Easter Holiday. The 400K handle may be revised down to the 390sKin the following week, but the climb remains consistent with recessions than the 360-70s seen earlier.

The report leaves little doubt to whether the US economy is in a recession, and supports our expectations for interest rates to reach 1.0% before year-end. 50 bps in April will take fed funds to 1.75% later this month, leaving 75 bps for the rest of the year is a highly plausible occurrence.

Yesterday's report confirms the markets' false sense of optimism/comfort arising from the lack of "systemic risk" news, ignoring the macroeconomic realities of the financial crisis which are here to stay and spreading.

Revisiting our piece last week about the S&P 500's inability to rise more than 3% above its 50-day moving average, the validity of this pattern may not augur well for the index. The chart above shows that since having reached its record high in October 2007, the S&P500 has had 34cases of failed rebounds. Yesterday's jobless claims report is the fundamental catalyst for the S&P500's failure to regain the 1,380 resistance and find the 1,260 low.

We stated that in order for the index to break this pattern on the upside, it would have close above 1,380-5 level. On Tuesday, the high reached 1,377, still not good enough. The 1,382 level also marks a key trend line resistance, which acts as a pressure point since February 4. Once having failed to breach above 1,380-5, we expect to see a renewed pullback in the S&P500 towards the 1,300, before extending losses to the 1,257 lows.

Friday's payrolls report may act as a key catalyst, fueling the possibility of breaching above the 1,380s in the event of a stronger than expected showing. A weak reading will intensify the selloff in equities in light of the recent failure in the index.

Currency Implications

Considering the persistently strong correlation between risk appetite and the yen--with the currency used to purchase risk (equities, gold and oil) --renewed losses in stocks will refuel the yen and the Swiss franc after these two currencies have suffered from the recent bounce in stocks. The implications for USD/JPY are illustrated in the chart below.

USD/JPY to Peak Out at 103.30s

Just as we write that that the USD/JPY implications from the S&P's failure are negative, the US jobless claims deliver. Similarly, the implications for USD/JPY in the event of this equity failure are for renewed losses towards 102.30, followed by 101.80. Upside remains capped at 102.80.

US Jobless Claims Saves Euro from Poor Data

EUR/USD soars from $1.5520s to 1.5580s on the US jobless claims, which confirm that recession is here and interest rates will likely reach 1.0% before year-end. 50 bps in April will take Fed funds to 1.75%, leaving 75 bps for the rest of the year is a highly plausible occurrence. EUR/USD resistance stands at 1.56020, followed by 1.5650.

The jobless claims figure was alleviates the Euro from the previous selloff, which took place following weak services data. Eurozone retail sales fell 0.5% in February for an annual decline of 0.2%, following an increase of 0.5% and 0.2% m/m and y/y in the prior month. Markets had expected sales to rise by 0.2%. It was the biggest monthly rise in 3 months.

Eurozone services PMI fell to 51.6 in March from February's 52.3, nearly matching consensus forecasts of 51.7. The price index hit the highest in 9 months. Germany 's services PMI fell to 51.8, while Italy 's edged up to 48.8 from 47.2. France 's index slipped to 57.3 from February's 58.2, while Spain 's index tumbled to 40.9 from 46.1, the biggest decline of the series since it was created in 1999.

Poor US Data to Delay Worse for Sterling

Despite yesterday's US weekly claims, we retain our broadly negative assessment for GBP, as we expect next week's anticipated BoE rate cut to open the door for 3 more rate cuts of 25-bp moves. Separately, UK services PMI hit a 6-month low when it fell to 52.1 in March from 54.0 in February, undershooting expectations of a smaller decline to 53.3. The input prices index rose to a record high 66.2 from 65.6.

We expect interim upside to reach $1.9865-70, followed by $1.9920. Friday's payrolls may even call up 1.9990, at which point it will serve as a selling point for the pair ahead of BoE easing. Support climbs to 1.9760 and 1.9810.

Comments

[300mph]

Well, bad payroll number today and markets moving higher. What now?

[bearfund]

No one can reasonably claim that the 80k loss and 5.1% unemployment figures were "already priced in" since the expectations were for significantly better results. So the only conclusion to draw is that prices are being propped up by free money being funneled from the Fed to the proprietary trading desks. Certainly nothing over the past 2 weeks supported more than a dead cat bounce, and we got quite a bit more.

Everyone seems to accept that we're already in recession but most people seem to think it will be short and shallow. But Americans' balance sheets, both public and private, don't support this idea. Many individuals are already raiding tax-advantaged retirement accounts to make ends meet; they have negative net worth and no other assets. What happens when that money runs out, too? That crisis is probably still a year or two away. Corporate balance sheets look mostly ok outside the financial sector but how long can that last? The public debt is completely out of control; further "fiscal stimulus" seems out of the question or at best highly unwise, and at some point the bond market is going to wake up and realise that Treasuries aren't such a hot deal with a negative real yield, spiraling supply, a heaping helping of currency risk and maybe, just maybe, a tiny bit of credit risk. Once all that starts to sink in, the real bear market will get under way, and at that point it's anyone's guess what the powers that be will do in their ultimately futile effort to stave it off. All they can really do is harm but in the short term, who knows? Capital controls? Price floors? An outright ban on shorting? Higher taxes on the "wealthy" and gigantic bailouts for deadbeats and the imprudent seem like givens.

What does all this mean? To me it means long positions in low-risk stocks priced in NOK or CHF, like STO and NVS, plus consumer staples, agriculturals ex-ethanol, gold, oil, and perhaps a few strong balance sheet tech and Brazilian holdings for a chance at a little growth. Finally, open short positions in 3- to 10-year Treasuries after the next Fed rate cut and add to them after any subsequent cuts. Then pray the government doesn't steal it all from you.

[turningpoint]

yes indeed, the S&P500 failed to break 1380 and now its on way down. well done