Today’s fundamental news on the economic calendar is, of course, dominated by the Non Farm Payroll figures in the US due for release in around 2 hours time, but as always there are other news items around, not least the reverberations from the G20 communique of last night. My personal view on this circus is that the devil is, as always, in the detail, and once the market has blown away the froth from the top of the cappuccino the true substance will be revealed, with the realization that virtually nothing as changed. The concept of getting 20 people to agree to anything is laughable, let alone embark on any concerted action, particularly so when political leaders are subject to the vagaries of their populace and the prospect of losing their power and privilege will always be uppermost in their minds. As I have written many times before as Warren Buffett says “until the tide goes out no one knows who’s swimming naked”. The G20, in my view, achieved nothing as it failed to address the fundamental problem which is identifying and ring fencing the bad debts still in the banking system and until this poison has been eliminated (or least identified) the global economy will continue to stall and possibly slide into depression. If you are interested in learning about this further you can do no worse than follow Hernando de Soto who explains this clearly and succicently.
Back to today and this morning in Europe we had 2 items of news both which came in better than expected, namely German import prices at -0.1% against a forecast of -0.3%, and final services PMI numbers which saw a positive rise to 40.9 against a forecast of 40.1. Until the NFP figures are released markets will be remain subdued and consolidate sideways, and the likelihood for this afternoon is that these numbers will come in worse than expected if they follow the pattern of the ADP numbers released on Wednesday which showed a further 35k job loss from the previous month. The difference between the two data sets is that ADP is a payroll service and as such uses the data collected from their customers to arrive at an overall employment estimate for the month, either up or down and is really at the cutting edge and is therefore considered an excellent guide of what is actually happening in the private sector. The Non Farm Payroll figures are issued by the Bureau of Labor Statistics and in effect measure the same thing are derived in a different way, and often have to be revised. The question is which horse do you back, and for traders it depends on your view of the ADP numbers as to whether you trade the news or not as the case may be. The key thing to remember is that even though the numbers may be bad, or worse than expected, everything at the moment is relative, and like many currencies it is often down to a decision of the lesser of several evils. All we can say for certain that we can expect a very lively trading session. My personal recommendation for trading the news is to wait for the first 5 to 10 minutes for the market to settle, and then to trade in the opposite direction to the initial reaction of the market. Whilst this can never guarantee success from experience it does provide a better than even chance of capturing some pips.
At the same time the unemployment rate is also released and confirms the increase in the number of people not working and is forecast at 8.5% against a previous of 8.1% Whilst the number is obviously heading higher the market also takes into account the rate of change and may react positively if this is perceived to be slowing.
Coupled with the above the average hourly earnings data is also due for release and this is expected to be flat at 0.2%. As if we didn’t have enough on the fundamental news front this is followed at 15.00 GMT by another red flag indicator from the ISM which is the non manufacturing PMI data which is generally considered a leading indicator with a forecast of 41.9 against a previous of 41.6. The ISM is a survey of purchasing managers who are asked to rate business conditions and is considered a leading indicator. Any figure above 50 shows an economy in expansion and anything below is considered contraction. This number has recently been creeping upwards leading many commentators to think that the US economy may start to recover later this year.
The week rounds off with speeches from 3 separate FOMC members, the last of which is the most important with Ben Bernanke delivering a speech entitled “The Fed’s Balance Sheet” or perhaps should be entitled I wish I’d learnt how to use a spreadsheet!!
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