Cliff Wachtel's  Instablog

Now What? Does Quiet News Week Mean Further Rally, Consolidation, or Pullback?

Note: The below is a brief summary of the full version. Those seeking details on the markets and instruments discussed below should refer to the full length version. Use this for an overview or to get an idea of what you want to look at in more depth in the full length version, at:http://fxmarketanalysis.wordpress.com  

The S&P 500 gained every session this week, with the bulk of the gain coming on Thursday following solid results from Cisco (CSCO) and a surge in nonfarm productivity. The much talked about stock market correction continues to fail to materialize with the S&P 500 just 2.9% from its 2009 highs and up 60% from its march low.

Amazingly, US large cap stocks chopped around yet managed to close slightly higher despite much worse than expected overall US employment data which seriously undermines the current US recovery picture.  The smaller cap indexes got away with only modest losses. Given the light news week ahead, it will be interesting to see how markets open next week after having had a weekend to digest all the news of last week.

Friday was all about the monthly jobs report. Key Points:

They came in a bit worse than expected (-190K versus -175K expected) but investors could handle that, since positive revisions from prior months more than made up for this month's shortfall.

The unemployment aspect of the household survey came in at 10.2%, leapfrogging expectations of 9.9% and topping that 10% level that everyone feared could get here. That is the worst showing since 1983.

The households survey (more indicative of small business jobs creation) shows small business and job creation is not happening-bad because this is where much of the initial job recovery can occur.

After trending down, average weekly hours remains stagnant at 33 hours per week, suggesting plenty of excess capacity remains to be absorbed before new hiring begins, typically once the figure gets above 36 hours/week.

See the full version for more analysis of stocks and the US employment reports.

Gold

Gold glittered last week as IMF's gold sales to the Reserve Bank of India spurred speculations on gold purchases by other central banks. This optimism, accompanied by continuation of low rate policy in the Fed, ECB and BOE, sent the yellow above 1100. Low interest rate environment benefits gold as it reduces the opportunity cost for owning the yellow metal.

Investors' risk appetite diminished further after the US Labor Department reported unemployment rate soared to 26-year high at 10.2%.

Oil

 WTI crude oil plunged to as low as 76.71 after US employment data disappointed the market last Friday. Given the struggles of the USD lately, this decline is mostly a matter of doubts about underlying demand vs. supply.

Compared to last week's packed calendar, this week's is much lighter, especially for the most widely traded currencies, the USD, EUR, GBP and JPY.

Will A Delayed Reaction to US Employment Reports Spark the Long Awaited Pullback in Stocks and Other Risk Assets?

 US Dollar Outlook: Bearish Long Term, Though Ripe For a Short Term Bounce

-    US non-farm payrolls disappoints, unemployment rate at 26-year high of 10.2

-    ISM Manufacturing Survey surprises at 55.7, reflecting continued improvement

-    The Federal Reserve leaves rates unchanged, retains dovish wording that rates would remain “extremely low” for an “extended period.”

-    USD's decline appears lower than economic fundamentals and interest rate speculation would alone suggest. We suspect this gap between speculative and fundamental interest will close sooner than many expect as the dollar rises with the eventual pullback in stocks and other risk assets.

-   The US unemployment reports Friday cast doubt on the meaning of the recent US GDP gains. With 70% of that GDP based on consumer spending, and consumers getting poorer and spending less, it's clear that the Q3 figure was indeed due to unsustainable government spending than to a genuine recovery.

-    Key Events: Thursday Unemployment claims w/w, Friday Trade Balance, UoM Consumer Confidence

Euro May Regain Fundamental Control with its Own With GDP Numbers

Euro Outlook: Bearish, Likely to Move Along With Stocks for Near Term

-    Will Euro-zone GDP allow the EUR to move on its own merits?

-    The ECB gives no guidance on rate hikes, but Trichet supports a stimulus reduction.

-    The EURUSD looks overextended from a fundamental, interest rate and technical perspective. Still, as long as risk appetite hangs on, so will the EUR.

-    Conflict between up-trend for the EURUSD and reversal for the risk appetite driving it.

-     Tuesday German ZEW Sentiment, Friday Euro zone Flash GDP.

Yen Awaits Risk Appetite Reversal

Yen Outlook: Bullish due to coming risk aversion and signs of expansion, but growth signs may give it a chance to benefit from risk appetite

- Japanese Finance Minister Fujii: fill the tax short-fall with more debt issuance

- The interest rate outlook grows more extreme for USDJPY, yet the yen is holds its strength

- Does short-term USDJPY chop obscure a possible coming reversal?

-  Key Events: Wednesday Core Machinery Orders

No "Great Expectations" From Dickens' Homeland & THAT Makes For Possible GBP Breakouts Versus The Euro, US Dollar

Pound Outlook: Neutral/Bullish Near Term

-    Events:  Tuesday Trade Balance, Wed. Claimant Count, BoE Gov speaks, Inflation Report

-    Rallies on Bank of England monetary policy of "only" another £25 bln QE

-    Pound likely to continue appreciating versus Euro, though EUR likely to see rates increase sooner

Swiss Franc May Rise with Risk Correction –Or Not

Swiss Franc: Outlook Bearish/Neutral

- Events: Thursday ZEW sentiment, SNB Board Member Jordan Speaks, Friday PPI m/m

- Swiss Unemployment Rate at Highest in 11 Years

- Consumer Prices Drop For the Eighth Straight Month

Options Markets Pricing in Risk of USDCAD Rallies As Unemployment, and Possible Risk Aversion Could Boost the Pair

CAD Outlook: Bearish based on receding chance of rate increases, pullback expectations for oil, stocks

-    Key Events: Monday Housing Starts, Friday Trade Balance

-    Canadian Unemployment unexpectedly rises

-    Canadian Dollar outperforms on buoyant risk appetite

Trading on Risk Sentiment Alone Now That Rate Hikes Expected

AUD Outlook: Bearish

- Key Events: Monday Home Loans, Thursday Employment Change, Unemployment Rate

- Australian Lending Unexpectedly Shrinks, Threatening Recovery

- New Home Sales See First Drop Since May, Says HIA

- Inflation Hits Decade Low in Q3, Rate Hikes Still Expected

- Business Confidence Surged to Highest in 15 Years, Says NAB

- Producer Prices Drop Most on Record on Currency Gains

- With Bullish Expectations Priced In, Only Steady or Rising Risk Appetite Likely to Support the AUD, Leaving Risk to the Downside

Bollard To World: We're Not Australia

NZD Outlook: Bearish along with other risk currencies given the extended risk asset rally

- Key Events: Thursday Retail Sales

- New Zealand unemployment rate rose to a nine-year high of 6.5%

- New Zealand technical outlook points toward bearish potential