US Jobless Numbers: A Lag in a Lagging Indicator?
The markets didn’t hold any real surprises yesterday as they continued to trade in a narrow range throughout the trading day. Overnight, the Asian markets sold the dollar, as good economic data from Japan and some promising data out of Australia convinced traders the global economic recovery is still underway. While Europe and the US continue to focus on the debt crisis in Greece, the Asian region continues to perk up. But I’m getting ahead of myself; let me get back to what happened in the markets yesterday.
The early data releases here in the US were a bit confusing, as Durable Goods Orders in January jumped 3%, double the expected increase of 1.5% and well above December’s number, which was adjusted up to 1.9%. But much of this big increase came from large plane contracts, and the more important Ex-Transportation number unexpectedly fell 0.6%, the most since August. We also got more bad news regarding the housing market, as the average prices fell 1.6%. The Labor Department followed these numbers with the weekly jobs report, which showed that an additional 22,000 workers applied for unemployment last week, raising the weekly number to 496,000.
We have all heard the administration’s constant reminders that the jobs numbers are a lagging indicator, and the economy will recover well before any improvement is seen in the jobs numbers. But eventually we have to see some improvement in jobs, right?? If the US economy started to ‘turn the corner’ last year, and is expected to grow 3.1% (NABE’s numbers) in 2010, shouldn’t we start to see some improvement in this data? Instead, the weekly jobs numbers are back on the upswing after bottoming late last year.
The data yesterday morning didn’t really give traders a clear picture of the state of the US economy, so the currency markets remained in a fairly tight trading range. The only currency that moved more than 1% versus the US dollar yesterday was the Japanese yen (JPY), which had appreciated 1.2% as I left for home. But when Tokyo got into the market, they sold the yen and pushed it lower. The Japanese have a long history of currency intervention, and the selling certainly had that feel.
But traders also got some help from data released in Tokyo, which showed that Japanese retail sales unexpectedly rose. Retail sales jumped 2.6% from a year earlier, and another report showed Japanese manufacturers increased production at the fastest pace since May. Factory orders rose 2.5% in January from a month earlier, the 11th straight gain. Increased Asian demand (mainly from China) has helped to offset reduced demand from Europe and the US. This supports what we have been saying for several months now, that Asia will lead the rest of the world out of recession, and that increased demand from China will propel global growth no matter what happens here in the US.
So overnight, the dollar was sold along with the Japanese yen as investors moved back into ‘risk trades’. This is the new name for carry trades, but it is the same old story. Investors move out of the low yielding currencies of Japan and the US and into the higher yielding currencies. The main benefactors of this move overnight were the South African rand (ZAR), Brazilian real (BRL), and the New Zealand dollar (NZD).
The rand was the biggest gainer as both gold and platinum moved higher. The Brazilian real moved up versus the US dollar as the central bank announced a return to reserve requirements which were in place prior to the global credit crisis. The move unwinds anti-crisis measures the policy makers put in place at the end of 2008. Currency traders pushed the real up after the announcement, predicting that the central bank will probably raise interest rates next month as the economic outlook improves. Interest rate differentials will continue to be an important driver of currency prices in 2010, and Brazil has one of the largest yield differentials to the US dollar.
Australia was also up a bit overnight as a report showed that banks increased lending in January and business investment rebounded in the fourth quarter. This data convinced traders that the nation’s policy makers would likely raise borrowing costs next week, pushing the yield differential versus the US even higher. With the carry trades back on, the Aussie dollar should benefit dramatically from any interest rate increase. Especially with US rates remaining near zero for an extended period.
Today we will get a revised look at fourth quarter GDP, which surprised everyone when it was reported to have risen 5.7%. The economists don’t expect any revisions to this strong number. Economists really don’t expect any negative data this morning, as they also think the Chicago Purchasing Manager number and U of Mich. Confidence numbers will be positive. Finally, we will see Existing Home Sales, which are expected to have risen slightly after December’s record decline. The extension of the federal tax credit is predicted to have stabilized this number, but it sure didn’t help the new home sales numbers we got on Wednesday! After those terrible new home numbers, I think this existing home number has a pretty good chance to surprise the markets in a negative way.
The currency that has been getting beat recently is the pound sterling (GBP) which is now down nearly 6% versus the US dollar in the past month. While the media has been focusing on the euro’s problems with Greece, the pound sterling has been dropping like a rock. The pound has been coming under pressure as investors have focused on the UK’s budget problems. As rating companies take a closer look at Greek’s ratings, the UK’s record deficit has many worried that their ratings may be adjusted as well. At 12% of GDP, the UK deficit is on par with that of Greece. Even Spain has a better number than the UK. Not good news for the pound sterling!
To recap… Data released yesterday didn’t give traders a clear indication of the US economy… Japanese investors took the dollar lower as money was moved into higher yielding currencies… Brazil and Australia will look to raise interest rates, benefitting their currencies… And the Pound Sterling is under pressure as their deficits are equal to those of Greece…