Cannon Trading Blog

The excellent US January jobs report out Friday heightened expectations that the Fed will have the confidence to raise interest rates later this year, even as the rest of the world grapples with weakening economies and spiraling crises. US short-term interest rates jumped after the jobs data while the ten-year US Treasury yield rose nearly 30 bps to 1.94% from 1.65%. The US Dollar surged while precious metals slid lower as rates popped up. Europe spent much of the week convulsed by the Greek crisis and distracted by diplomatic maneuvering surrounding the Ukraine conflict. As the Greek government began talking details of a new financial plan with European officials, the ECB cut Athens off from its cheapest available funding for its struggling banks. The PBoC’s delivered its first Reserve Requirement Ratio cut since May 2012 after China’s January manufacturing PMI contracted for the first time in two years and non-manufacturing PMI hit a one-year low. The Shanghai Composite saw its second week of losses, while for the week the DJIA gained 3.8%, the S&P500 added 3% and the Nasdaq rose 2.4%.

Every aspect of the US January jobs report telegraphed strength. The headline nonfarm payrolls widely beat expectations at +257K v +228Ke while the November nonfarm reading was revised to 423K from 353Ke. The unemployment rate rose to 5.7% from 5.6% as one million additional people decided to start looking for work in an improved environment. Wage growth saw its strongest rise since November 2008 (helped in part by over 20 states enacting minimum wage hikes that went into effect in January). The labor force participation rate rose to 62.9% from a nearly four-decade low of 62.7% prior, while the number of people who changed status from “not in the labor force” to employed saw the biggest jump ever.

Greek Finance Minister Varoufakis went on the road this week to press his case for a new Greece deal in European capitals. He got little sympathy, with nearly every single EU partner demanding that Greece stick to its prior agreements through an extension of the current bailout program. The ECB sent a clear signal midweek by refusing to accept any more Greek government bonds as collateral for loans, forcing Athens to use the ELA facility for short-term liquidity, at a cost of 1.5% compared to 0.005% for the repo facility. The decision effectively grants the ECB the ability to turn off the country’s funding on short notice and increases the pressure on the Greeks to cut a deal before the Feb 28th deadline when the current program expires. EUR/USD came into the week below 1.1290, shot as high as 1.1530 on Tuesday, then fell back to around 1.1300 to close out the week.

Continue reading “Futures Levels & Economic Reports 2.10.2015”

There was a sense of wariness in global markets this week as participants moved beyond ECB easing to mull over the Greek government turnover, some upsetting corporate quarterly reports, and the Fed’s steady course toward rate hikes. Syriza’s victory in Greece was widely expected, and focus is now on how Athens and the Eurozone can work out a new deal that allows both sides to save face. The FOMC decision on Wednesday strongly suggested that the Fed is on track for rate liftoff later this year after upgrading its growth assessment to “solid” from “moderate”, though it did acknowledge that “international developments” are being watched closely. Meanwhile, corporate giants like Microsoft, Caterpillar, and ConocoPhillips saw losses as they grappled with the strong dollar and weak oil prices. The US 10-year yield fell to new 2015 lows below 1.70%, levels not seen since 2012. The first look at US fourth quarter GDP was good, not great (+2.6% versus final Q3 +5.0%), although consumption remained strong. US durable goods orders were not pretty, while in China, December industrial production contracted 8%, twice the November decline. The Shanghai Composite lost ground on the week for the first time in nearly three months, while the DJIA fell 2.8%, the S&P500 declined 2.8% and the Nasdaq lost 2.6%.

In Greece, the anti-bailout Syriza swept into power in elections last Sunday with an overwhelming 10-point lead over the ruling New Democracy party. Syriza took 149 seats, just shy of the 151 required for an outright majority, requiring it to recruit the right-wing, anti-bailout Independent Greeks party (with 13 seats) as coalition partner. Syriza’s mercurial leader Alexis Tsipras said the election marks the end of bailout agreement for Greece and cancels austerity. The new government immediately began preparing to cancel certain privatization deals and met with EU Commissioner Dijsselbloem to discuss a new deal with Europe. The euro sank on the news, with EUR/USD touching 1.1100, although it rebounded toward the 1.13 handle later in the week.

Central bank calibration continued this week. The Singapore Central Bank (MAS) joined the currency wars with an intermeeting policy easing on Thursday. In the first unscheduled announcement in 13 years, the MAS cut its 2015 headline CPI forecasts while also lowering the slope of SGD policy band, sending the currency to its weakest levels since 2010. The Reserve Bank of New Zealand adopted a more cautious stance, tightening bias and also introduced the possibility of a rate cut as its next policy move. In Europe, the Danish Central Bank cut its CD rate for the third time in two weeks, to -0.50% from -0.35%, as the Danes struggle to maintain the EUR/DKK peg. Analysts say the DKK trading band could be widened soon if the pressure on the euro continues. Finally, the Russian Central bank took its one-week auction rate down to 15% from 17%, in what analysts called a highly political decision.

Continue reading “Market Recap & Futures Levels 2.03.2015”