G3 Recap 4-01-11

Main Items:

  • NFP improved to 216k vs 190k expected and 192k previously. UE declined to 8.8% vs 8.9% expected and previously.
  • Hourly earnings were weak, remaining flat MoM vs +0.2% expected. Weekly Hours increased to 34.3 as expected from 34.2 previously
  • ISM Manufacturing declined marginally to 61.2 in March vs 61.1 expected and 61.4 expected
  • Ireland’s sovereign credit rating was cut to BBB+ from A- by S&P.
  • Some Eurozone banks have "tapped out" their ECB borrowing limits and are turning to the more expensive repo markets. Investment banks are privately lending tens of billions of euros to Eurozone banks through repurchase deals after some lenders were left unable to tap the central bank for more money. "The trend paints a much bleaker picture of the European banking system than official ECB figures indicate" Reuters.

Overseas:

  • China PMI Manufacturing improved to 53.4 in March vs 54.0 expected and 52.2 previously. The HSBC measure improved to 51.8 vs 52.4 expected and 51.7 previously
  • South Korea HSBC PMI Manufacturing declined to 52.8 in March vs 53.4 previously
  • Italian PMI Manufacturing declined to 56.2 vs 58.0 expected and 59.0 previously.
  • UK PMI Manufacturing declined to 57.1 vs 60.9 expected and 61.5 previously
  • Swiss PMI declined to 59.3 in March vs 62.5 expected and 63.5 previously.

Commentary:

  • 5y Treasury yields have blown past target levels. With a full hike now priced in for February, it’s definitely time to consider taking profits on shorts. A further sell off of the front end to levels implying a hike by Dec should warrant looking at going long EDZ1 call structures. Dudley said today that even were jobs growth to accelerate to 300,000 per month from March’s "notable" 216,000, there would still be considerable labor market slack at the end of 2012. Model outputs agree. Using data through 2007, a Taylor rule type model which incorporates data momentum is projecting a current Fed Funds rate of -6%. Even assuming a monthly 0.1% decrease in UE and 0.1% increase in core CPI for the next 24 months, the model projects the first hike after December 2012.

  • The sell off in treasuries hit gold pretty hard today. Longer term, however, gold remains an unambiguous long. ETF holdings have continued to increase (although almost all due from demand overseas), speculative futures positioning is now essentially neutral, and implied volatility are at very low levels.
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