Will NFPs Confirm US Recession Fears Or Lead The US Dollar To Rebound?

On Friday, US non-farm payroll figures will be reported and are anticipated to point towards recessionary conditions in the US economy, and the markets have been fraught with uncertainty ahead of the news. The previous NFP release in January came in at a shocking decline of 17,000 jobs, and with the most recent ADP employment change down 23,000 jobs, there are concerns that NFP's will show a negative reading once again.

7-Mar US Non-Farm Payrolls (FEB) (13:30 GMT; 08:30 EST)
Expected: 25K
Previous: -17K

Unemployment Rate (FEB) (13:30 GMT; 08:30 EST)
Expected: 5.0%
Previous: 4.9%
What Are The Markets Facing?

On Friday, US non-farm payroll figures will be reported and are anticipated to point towards recessionary conditions in the US economy, and the markets have been fraught with uncertainty ahead of the news. The previous NFP release in January came in at a shocking decline of 17,000 jobs, and with the most recent ADP employment change down 23,000 jobs, there are concerns that NFP's will show a negative reading once again. The ADP report showed that the manufacturing and goods-producing sectors posted net job losses and while the services sector continues to add workers, though at a far slower pace. Further evidence of deterioration in the services sector was seen in the ISM non-manufacturing index which held below 50.0, indicating contraction, for the second consecutive month. Last week's initial jobless claims rose 19,000, an increase for a second straight week and the highest since October 2005. Negative NFP data would lend support to the view that current economic weakness is slowly making its way from Wall St. to Main St. via the labor market as the US consumer makes up 70 percent of the economy. Indications of labor market weakness would lend support to the Federal Reserve to cut rates sharply at its next meeting March 18th. Expectations call for at least another 50bp cut to the fed funds rate, though traders are ramping up speculation of a whopping 75bp reduction to 2.25 percent.
Bonds - 10-Year Treasury Note Futures

Treasuries recently ran into resistance at 118-25, after recent recession fears weren't enough to push bonds high enough to retest its January 23 high of 119-05. However, with the market-moving NFP report set to be released on Friday, anything can happen. A surprisingly weak figure could lead Treasuries to punch above near-term resistance as traders move to price in a 75bp cut by the Fed on March 18. On the other hand, an improvement in line with or greater than expectations could help weigh the contract down towards the 117 level.

FX - EUR/USD

Although the Nonfarm payroll report is expected to show an increase of 25 thousand jobs, recent economic data suggest a weak labor market. Wednesday's ADP employment change was reduced by 23 thousand jobs while the ISM Non-Manufacturing Index showed a contraction - it came in below 50 - yet improved over the previous month. A shrinking labor market would further lend support to the Federal Reserve to cut its key interest rate at the banks next meeting March 18th. The markets are expecting at least a 50bp cut to 2.50 percent, but if NFPs fall negative, traders will quickly ramp up speculation of a 75bp cut. On the other hand, a better than expected result could lead expectations to shift in favor of a relatively mild 25bp reduction, which could lead the US dollar to surge in a relief rally

Equities - Dow Jones Industrial Average

The Dow Jones Industrial Average is struggling to hold above support at the 12,000 level, as the reemergence of a markedly bearish tone weighs stocks down. A return to risk aversion in the markets has weighed heavily on global stock markets, as fears of additional subprime-related losses and the impact of a possible US recession lead investors to flock to traditional safe-haven securities like Treasuries. If Friday's NFP report shows another contraction in jobs in February, the news could lead the Dow to open below the critical 12,000 level. On the other hand, a surprisingly strong figure could support the Dow for a bit longer, though the trend for the index remains very much to the downside as MACD remains bearis

Source : Actionforex.com




Treasuries Gain After Traders Add to Bets for Fed Rate Cuts

By Wes Goodman
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March 7 (Bloomberg) -- Treasury notes gained, pushing two- year yields to the lowest since 2004, on speculation rising unemployment and widening credit-market losses will force the Federal Reserve to cut interest rates by 0.75 percentage points.

Two-year notes rose for a third day before a U.S. government report that economists say will probably show the jobless rate increased to a two-year high of 5 percent last month. Treasuries also gained as the cost to protect Asian corporate bonds from default climbed to a record, encouraging investors to seek the relative safety of government debt.

``The economic situation is getting weaker,'' said Hiromasa Nakamura, who helps manage the equivalent of $29.2 billion in Tokyo at Mizuho Asset Management Co., part of Japan's second- largest bank. ``The Fed has to cut. The rally will continue.'' Treasuries will outperform government bonds in the U.K., Europe, Japan and Australia in the coming months, said Nakamura, who correctly forecast the rally in U.S. notes last year.

Two-year yields fell 7 basis points to 1.46 percent as of 12:53 p.m. in Tokyo, according to bond broker Cantor Fitzgerald LP. The price of the 2 percent note due February 2010 rose 4/32, or $1.25 per $1,000 face amount, to 101 1/32. A basis point is 0.01 percentage point.

Futures contracts on the Chicago Board of Trade show a 98 percent chance the Fed will lower the 3 percent target rate for overnight lending between banks by three-quarters of a percentage point by its March 18 meeting, compared with 68 percent odds a week ago.

The jobless rate in the U.S. probably rose in February to 5 percent, matching December's level as the highest since late 2005, based on the median estimate in a Bloomberg News survey of economists. Payrolls increased by 23,000, compared with an average 95,000 a month last year, the survey showed.

`Not Over Yet'

The cost to protect corporate bonds in Asia from default rose the most since gauges tracking the prices started in 2004. The Markit iTraxx Australia Series 8 Index surged a record 20 basis points to an all-time high of 178 basis points, ABN Amro Holding NV prices show. The index is comprised of contracts that provide insurance in case borrowers fail to pay.

Fed Bank of St. Louis President William Poole said yesterday the pain of mortgage-market losses is ``not over yet.'' New York Fed President Timothy Geithner, also speaking yesterday, said the central bank may need to keep interest rates low for ``some time.''

Fed policy makers may trim borrowing costs before the next scheduled session, just as they did on Jan. 22 when the cut between meetings, said John Ryding, chief U.S. economist with Bear Stearns Cos. in New York, in an interview yesterday on Bloomberg Radio.

Inter-Meeting Move

``The Fed may well have to act inter-meeting,'' he said. ``My best guess is we'll see a big move on March 18.''

Demand for the safety of government debt rose as the MSCI Asia Pacific Index of regional shares fell 2.4 percent.

Treasuries rose yesterday on concern that the Fed may be unable to prevent credit-market losses from deepening.

Investors sought government debt as Citigroup Inc. said it planned to pare its U.S. residential unit's mortgage and home- equity holdings by about $45 billion over the next year.

Ten-year securities yielded 2.09 percentage points more than two-year notes, the most in almost four years, on speculation further interest-rate cuts by the Fed will stoke inflation as commodity prices soar. Oil traded at a record of $105.97 a barrel in New York.

The difference in yield between 10-year notes and similar- maturity Treasury Inflation Protected Securities widened to 2.55 percentage points on March 5, the most since August 2006, based on closing levels. The spread reflects the rate of inflation traders expect for the next decade.

Source : Bloomberg.com