Data Flow Begins In Earnest: NFP Is Week's Finale

Includes: FXE, UDN, UUP
by: Ralph Shell

The first full week in 2014 promises to be one of meaningful reports. We got started today with a number of European PMIs which showed most of the major Euro economies held their own, at around unchanged levels. This was followed by reports in the UK and the US which showed their economies might be slowing. In the UK, the Services PMI dipped to 58.8, down from last months 60 and the expected 60.3.

The US data was like wise disappointing. Non-Manufacturing Composite was 58.8 less than last month's 60 and the expected 60.3. Of greater importance was the slide in New Orders. According to Zero Hedge:

"The most notable development in today's release in addition to the slide in inventories from 54.0 to 48.0 (impacting Q4 GDP) was the tumble in New Orders, down from 56.4 to 49.4 - back to contraction territory: this was the first contraction in the New Orders index since July 2009 after 52 consecutive months of growth."

On Tuesday the US and Canadian Trade Balance reports are important, providing clues to the rate of recovery in these two countries. Of greater importance, however, is the European CPI estimates. Expected is CPI of 0.8, less that the ECB target of 2.0%. Further the EU M-3 Money Supply released last week was only 1.5%.

The danger here is that the EU is dangerously close to lapsing into deflation. The last thing that heavily indebted EU nations can withstand is deflation. This results in the repayment of sovereign debt with a higher valued currency.

Dear money used to pay off accumulated debt must be avoided. ECB President Draghi is certainly aware of this danger but the Germans continue to look in the rear view mirror for signs of the rebirth of inflation. Now ninety years after runaway inflation in the nineteen, and deflation looming, they are concerned with the wrong threat.

On Thursday there is an EU Interest statement which is expected to be unchanged at a record low .25%, followed by a Draghi Presser. Will the ECB recognize the deflation threat and just what might be the Draghi solutions? Will he do what ever it will take to avoid deflation?

Unemployment numbers will also be released this week. On Wednesday the EU will be released and is expected to be 12.1%, and will be followed on Friday by the expected US number of 7%.

The weekly finale is the always unpredictable NFP report. This month it is expected to come in at 195K new hires. We normally wish to wait for the NFP and then look for a trade, but this is a busy data week. With the possibility that the ECB President might be forced to act because of the deflation threat, we are inclined to sell the euro versus the USD in the 1.37 area. If the trade does not show profit ahead of Friday it will be best to liquidate, and wait for the NFP report. As always manage your money.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.