Private-sector jobs in the U.S. fell by 10,000 last month, according to a national employment report published by payroll giant Automatic Data Processing Inc. and consultancy Macroeconomic Advisers. Economists had expected ADP to report a jobs gain of 17,000 in August. The estimated change in employment for July was revised to a gain of 37,000 from an increase of 42,000 first reported.  The ADP survey tallies only private-sector jobs, while the Bureau of Labor Statistics’ nonfarm payroll data, to be released Friday, include government workers. Economists surveyed expect that continued layoffs of government workers hired temporarily for the Census will mean a drop of 110,000 jobs from total August nonfarm payrolls. Among those economists forecasting private-sector jobs within the BLS data, the median projection is for a gain of just 28,000.

More strong economic news from Asia improved the mood in financial markets, and saw gains for risk assets and currencies, with the Japanese yen and Swiss franc losing ground vs. the majors. China said growth in manufacturing quickened in August from July’s performance, which was the slowest expansion since early last year. The government purchasing managers index rose to 51.7 from 51.2, beating expectations of a rise to 51.5. The separate HSBC PMI showed a return to growth in August after contraction in July the index rose to 51.9 from 49.4. The report may allay some fears about the pace of slowing of the Chinese economy. Nevertheless, it is clear that growth is slowing, and even though inflation ticked up recently, in our view the PBOC is unlikely to look at tightening measures until next year. Australia, one of the main beneficiaries of Chinese growth, reported that the economy grew at the fastest pace in three years in the second quarter. GDP climbed 1.2% in Q2 from the previous three months, when it expanded by a revised 0.7%. The pace of growth was quicker than the 0.9% expected, and was in large part down to exports of iron ore to China – overall exports rose 5.6% in the quarter and added 1.1 percentage points to GDP, while household spending was also a significant contributor. From a year ago, the economy grew 3.3%, more than the 2.8% expected. The Reserve Bank has held rates steady for the past three months on concern about slowing global growth, and an index of manufacturing today suggested that it may be affecting current activity – the AIG/PWC performance of manufacturing index fell to the lowest level in five months. South Korean exports increased for the 10th straight month in August, and did nothing to change the sense that the Bank of Korea will potentially hike rates in the next quarter. Exports rose 29.6% from a year earlier in August, up from 28.3% growth in July, though slower than expected. Imports climbed 29.3%, leaving a trade surplus of $2.1 billion. Indian manufacturing expanded in August, though at a slower pace. The HSBC/Markit PMI reading fell to 57.2 from 57.6.

The euro-zone unemployment rate remained at 10% for a fifth straight month in July, indicating that despite strong economic growth in the second quarter, the recovery has yet to result in the creation of a significant number of new jobs.  The European Union official statistics agency Eurostat said Tuesday t hat 15.833 million people were without jobs across the 16 nations that use the euro. That is more than the combined populations of Greece and Ireland, two of the euro zone’s most troubled members. Eurostat said the number of unemployed fell by 8,000 from June, but was up by 668,000 compared with July 2009. The unemployment rate was in line with economists’ forecasts.

The Federal Reserve has taken steps to avoid a passive tightening of policy by preventing a contraction in its balance sheet.   Judging from Bernanke’s speech at Jackson Hole last week, the Federal Reserve has adopted what traditionally would be called an “easing bias” and although the precise trigger may be being debated, many expect that continued poor US economic data will prompt the Fed to take additional measures.  Japanese officials are providing additional monetary and fiscal support.  The BOJ yesterday expanded a special lending facility by JPY10 trillion (~$117 bln) and the government indicated it will draw down its budget reserves by almost JPY1 trillion to boost jobs and investment. 

Economic reports today have included somewhat better than expected Japanese industrial output (0.3% vs consensus of -0.2%) and retail sales (0.7% vs consensus 0.5%).  However, the strength is not expected to last.  The manufacturing PMI fell to 50.1 in August from 52.8 in July, which is the third consecutive monthly decline.  There a numerous media reports discussing how the strength of the yen is going to force manufacturers to re-locate abroad.  MOF data suggests that since the late 1990s, the foreign sales by affiliates of Japanese companies have exceeded exports from Japan.  Also note that Japan’s auto purchase scheme expires next month and is not expected to be renewed.  However, the year-end expiry of the appliance purchase scheme may be extended, according to local press reports.  Australia also reported stronger than expected data (though it is not aiding the Australian dollar today).  Retail sales rose 0.7% in July, nearly twice the consensus and building approvals rose 2.3% rather than decline by 0.7% as the consensus forecast.  And the current account deficit narrowed sharply in Q2 from A$16.45 bln to A$5.64 bln.   The c/a figure warns that Q2 GDP, due out tomorrow, may be stronger than the 0.9% expected.  The net-export function added 0.4% to GDP, the government’s stats bureau estimated today.  The trade balance swung into surplus of $A6.5 bln in Q2 from a $A3.2 bln deficit in Q1.  

Consumer spending rose 0.4% last month after staying flat in June, according to the Commerce Department. Incomes increased less than expected, up 0.2% after remaining unchanged in June. Economists surveyed expected the data to show income climbed 0.3% in July and spending rose 0.4%.  The economy’s weakness kept prices lower in July. The core price index for personal consumption expenditures, which excludes food and energy prices because of their volatility, rose 0.1% in July from June. The overall PCE price index, which includes food and energy prices, rose 0.2% last month compared to June and increased 1.5% on a year-over-year basis.

At an unscheduled meeting on Monday, the Bank of Japan extended its emergency-lending program in an effort to stem the rise of the yen and support the sluggish economic recovery. In Tokyo, the Nikkei Stock Average ended up 1.8%. Anticipation of a policy response from Japanese officials initially sparked a pullback in the yen, not just against the dollar but on the major crosses as well.  However, Japanese government officials (whether LDP or DPJ) ability to under-whelm the market remains a consistent theme.  At the conclusion of the BOJ emergency meeting, it was announced that the JPY20 bln 3-month bank lending facility would be extended to JPY30 trillion and for 6 months.  There was a single dissent (Suda).  These measures were anticipated by market observers.  Prime Minister Kan indicated that JPY920 bln (~$11 bln) of the budget reserves would be used to finance more stimulus.   The decision to intervene in the government’s (Ministry of Finance) and it is still obviously reluctant to intervene.  It is not just that its experience (2003-2004) was not inspiring, but also the Swiss National Bank did not appear to enjoy any more success with its massive operation earlier this year.  American and European officials are clearly reluctant to join an intervention operation.  That said, if the Japan were to intervene in the foreign exchange market outside of its time zone, it would likely give the funds to the ECB and Fed in which they would use to execute Japan’s instructions.  This would not be the same as coordination.    Note that Kan faces a leadership challenge from Ozawa on Sept 14.  The early newspaper polls show Kan enjoying as much as a 4 to 1 lead over Ozawa who was forced to resign over a funding scandal involving aides a few months ago.   Lastly, tomorrow Japan reports July industrial output figures.  Recall that industrial output fell an unexpected 1.1% in June.  The consensus calls for a 0.2% decline in the July reading.  

European news today has been mixed.  The retail PMI fell below the 50 boom/bust level in Aug (49.7 vs 52.4 in July), but the EMU Sentiment Index came in at 101.8, slightly better than expected and a modest improvement over the 101.1 reading in July (was 101.3).   Apparently largely based on recent comments from BBK’s Weber, who still looks to have the inside track to replace Trichet next year, the Financial Times is playing up the likelihood that at this week’s meeting the ECB announces it will extend its extraordinary liquidity provisions into next year.  The shorter duration operations (1 week and 1 month) do not appear very controversial.  Extending the 3-month facility is somewhat more debatable, but also seems reasonable. Note that the ECB had cautioned that the EMU rebound would likely peak in Q2 and downside risks reemerge in late H2.   In recent weeks, the market has turned less sanguine toward EMU.  This month has seen a record monthly rise in credit-default swaps for Ireland, Italy and Spain.  CDS prices in Portugal rose this month by the most since April, and in Greece the most since June.   While ECB officials may have succeeded in easing the liquidity crisis earlier this year, there remains elevated concerns that solvency issues have not been resolved and the slower growth (in Europe and the world) exacerbates these concerns.   Another threat exists for core EMU members, like Austria and Belgium, in the form of eastern and central European exposure.  Harvard economist Rogoff warned that several eastern European countries may have to restructure their debt.  He specifically cited Ukraine, Romania and Hungary as “potential wobblers”.   While there was little immediate market reaction to the comments, this issue has potential to re-emerge.

Industrial Production is the volume of items produced in Japan ‘s mining and manufacturing industries. All products, whether sold domestically or abroad, are included in the calculation of industrial production. Industrial production is highly sensitive to the business cycle and can often predict future changes in employment, earnings, and personal income. For these reasons industrial production is considered a reliable leading indicator that conveys information about the overall health of the Japanese economy.  With a decrease for June of 1.1%, it will be important for Japan to recover in this sector in an effort to build on potential growth prospects.

• Tuesday August 31^st, 2010 Euro German Employment (755 GMT)

The employment rate and change come out simultaneously.  The rate is the percentage of individuals in the labor force who are without a job but actively seeking one. The change is the actual number of persons getting jobs. A higher Unemployment Rate is generally a drain on the economy. Not only does it mean that resources are not being fully utilized, but it also results in lower consumer spending as there are fewer workers receiving paychecks. Note: The unemployment rate generally moves slowly, so changes of only a few tenths of a percent are still considered significant. Also note that the unemployment rate does not account for discouraged workers.   German has continued to show robust signs of growth despite a weaker periphery and a lackluster US.  For economist to believe that the core can hold up the periphery, German job growths most lead the way.  This number should be a market mover.

• Tuesday August 31^st, 2010 FOMC Meeting Minutes (1800 GMT)

The general information surrounding the minutes are recognized given they where announced in the FOMC statement during post the actual meeting.  Rates will remain low for the foreseeable future and given the recent disappointing string of US economic data, nothing else should be expected.  The Fed did mention a renewal of potential easing measures, which included bond buying which will become clearer when the minutes are released to the public.

• Wednesday September 1^st, 2010 Australia Gross Domestic Product (130 GMT)

GDP is the market value of all final goods and services produced in Australia during a specific period. The growth rate of GDP is used as a broad gauge of the overall economic health. Robust GDP growth signals a heightened level of activity that is generally associated with a healthy economy. However, economic expansion also raises concerns about inflationary pressures, and strong GDP growth may induces the Australian central bank to raise interest rates in order to combat inflation. As a result, positive GDP readings are typically bullish for the Australian dollar, while slumping GDP growth is usually bearish. The headline figure for GDP is an annualized percentage growth rate.  It will be important for the RBA to see a leveling off of GDP growth rates, so curtail the recent string of tightening that has taken place for all of 2010.  A number that is above expectations will push the Australian dollar higher, and test higher resistance.

• Wednesday September 1^st, 2010 US ISM Manufacturing (1400 GMT)

The ISM Manufacturing Survey is valued for its timeliness, and indeed, during waning boom cycles analyst point out that ISM tends to be one of the biggest market moving economic releases. The reasoning lies within the ISM’s Prices Paid and Employment subcomponents. These components reflect sentiment towards inflation and labor conditions – two of the market’s most significant health indicators. Given that the ISM’s timeliness, the information gleaned from such components precedes other market data (like Non-Farm Payrolls or CPI), making the ISM a significant indicator. The headline figure is expressed as a diffusion index based on survey responses. For each category (production, new orders etc.), the index is calculated by adding the percentage of executive responding “higher” with half the percentage of “no change” responses, and subtracting the percentage of “lower” responses. The ISM manufacturing indicator is the aggregate of the results for all categories.  Manufacturing has been the one bright spot for the US economy, and it will be important for the ISM to meet analyst’s expectation otherwise the S&P 500 will push through the 1030 level.

• Thursday September 2^nd,, 2010 EMU GDP (900 GMT) and Central Bank Interest Rate Decision (1145 GMT)

The GDP is a measure of the total value of goods and services produced by Euro-zone nations. GDP is the most comprehensive measure of economic output and provides key insight as to the driving forces in the economy. Due to this report’s lack of timeliness and because data on GDP components are available beforehand, the actual GDP figure is usually well anticipated. But given its overall significance GDP has the tendency to move the market upon release, especially if it upsets expectations. The GDP growth rate serves as a broad indicator for the health of Euro-zone economies. Robust GDP growth signals a heightened level of economic activity, which is generally positive.  Follow the GDP by nearly 3 hours will be the ECB decision on interest rates.  The ECB is expected to leave rates unchanged at 1%, but their statement on potential QE to help the periphery is what the market is interested in hearing about.

• Friday September 3^rd, 2010 US Employment Report (1230 GMT)

The nonfarm payrolls released by the US Department of Labor is one of the most important data releases, and given the current attention that is being given to employment and job creating in the US, this report will be a significant release. The report presents the number of people on the payrolls of all non-agricultural businesses. The monthly changes in payrolls can be excessively volatile.  Along with the current report, where the change is expected to be somewhere near a positive 55 thousand jobs, reversions could play a large role in how the market reacts.  Additionally, the market will also need to digest the unemployment rate that currently stands at 9.5%, as well as the average work week and the hourly wage.

Not surprisingly, Bernanke pledged that the Fed would do all that it can to ensure the recovery in the US continues.   He also outlined possible steps that the Fed could take, and largely reflect unconventional measures that the market has already been talking about.  These step include:  additional purchases of longer-term securities, modifying FOMC communication suggesting rates to stay low for even longer than previously anticipated, and reducing interest paid on excess reserves (IOER) to encourage bank lending.  He noted that there are pros and cons to all three, but added that if deflation risks were to rise, the cost-benefit tradeoffs could become significantly more favorable for some of the Fed’s tools.  Bernanke also said that the recent decision to keep the size of its balance sheet steady “should promote financial conditions supportive of the recovery” and that “additional purchases of longer-term securities would be effective in further easing financial conditions.”  However, he acknowledged further balance sheet growth would raise concerns about an exit strategy.  With regards to modifying the language in the FOMC’s statement, Bernanke was unsure whether the Fed’s intent could be conveyed with sufficient precision.  Regarding a change in the IOER rate, Bernanke noted that rates are already near rock-bottom and so further reduction in IOER rate would have only a small marginal impact.

While Friday’s Q2 GDP revision to 1.6% is going to get the headlines, analysts are quietly marking down Q3 and Q4 expectations. Economist consensus has Q3 and Q4 growth at 2.5% and 2.6% annualized currently.  However, the July data has so far come in very disappointing and we foresee H2 markdowns if this trend continues.  Business investment in plant and equipment was one of the positive surprises in Q2, and Q3 is likely to show slowing in this category in light of weak durables data for July.  Some analyst believe that his 2.0-2.5% Q3 forecast is dependent on robust business investment, and that if data is weak in August, he may have to mark it down to 1.0-1.5%.  This sort of trend would tend to support the risk off trading environment, and we note that currency and equity volatility tend to pick up in September and October and so the near-term outlook is dicey for risk assets.

The euro saw another bounce vs. the dollar during the Asian session but was again unable to significantly breach the 1.27 area.  Stronger than expected German GfK confidence may have helped, along with the return of some calm in the peripheral bond markets.  The overall GfK index rose to 4.1 vs. expected 4.0 and a revised 4.0 (was 3.9) previously.  The meeting of major global central bankers at the Jackson Hole symposium in the US has dampened some of the jittery selling of risk assets and currencies, amid hopes that policy-makers will reaffirm commitment to policies that support the global economic recovery. Given divergence being seen this week between the euro (firmer) and peripheral spreads (wider), something has to give.

The yen remains softer after Japan officials this week intensified their jawboning about possible intervention measures.  However, today’s trading is due more to risk appetite returning than to actual intervention fears. Any intervention would likely be unilateral and thus likely to be ineffective.  The Jackson Hole Symposium brings together senior central banking officials from around the world, but those looking for any concrete cooperation are likely to be disappointed.  Given that officials in Europe have had trouble coordinating policy this year, how can markets expect an even greater degree of international cooperation?  No, for now it’s clear that G3 policy-makers (US, Japan, euro zone) are at this point acting to maximize their own utility (unless we were to see another big leg down in the global economy).  For now, it’s steady as she goes. The strong yen is simply not the threat to global growth that it might once have been (see 1995, when G7 issued statement calling for orderly reversal of the weak dollar/strong yen), and so it’s unclear why the US or Europe would be dragged into intervening.  And as the SNB can tell the BOJ, unilateral FX intervention is highly unlikely to do much except slow the move, not reverse it.

The yen was softer today as Japan officials fanned speculation about possible intervention measures. Finance Minister Yoshihiko Noda said that the government would consider “appropriate action” on the currency, and that movements had been “one-sided.”  Late yesterday saw verbal interventions on the yen from both Noda and Prime Minister Naoto Kan, who said “steep currency gains are undesirable,” initially to no effect whatsoever.  Their stance has changed noticeably from earlier in the week when they were at pains to point out that Kan and BOJ Gov Shirakawa hadn’t even discussed the possibility of intervention. Any BOJ intervention would likely be unilateral and thus ineffective.  A parallel can be drawn with the Swiss National Bank, whose unilateral interventions to weaken CHF this past year may have slowed the move but did not reverse it.  It was only when market sentiment improved in July that EUR/CHF staged a strong bounce, but even that has reversed as safe haven flows pour into the Swiss franc.  Japan had a further reminder of the tough economic environment, when figures showed export growth slowed for the fifth straight month in July. Exports rose 23.5% y/y, down from June’s 27.7% y/y rate.

The euro was initially boosted by stronger than expected German IFO index of business confidence for August. The overall index rose to 106.7 vs. expected drop to 105.7 from 106.2 in July.  The current assessment component rose to 108.2 vs. expected 107.5 and 106.8 actual in July while the expectations component fell to 105.2 vs. expected 104.3 and revised 105.6 (was 105.5) n July.  However, markets are coming to the conclusion that a strong Germany and a weak periphery really is not good for the single currency, as divergences will only highlight the structural problems in the coming months.  Indeed, concerns about the periphery are likely to remain heightened after Ireland late yesterday had its long-term credit rating cut one notch to AA- by S&P.  The agency cited the high cost to the government of supporting the domestic banking sector as a major factor, which it estimates to be as much as EUR50 bln vs. previous estimates of EUR 35bln.

Gloom has taken hold of the markets, and so the usual suspects (USD, JPY, CHFand Treasuries are benefiting.  While economic prospects in the major countries appear to be on the slide, the yen continues to benefit, and the announcement yesterday that the Japanese PM and Bank of Japan chief had not discussed intervention is also lessening any objections to drive the yen higher for the moment.  More official jawboning was heard today by Japan officials, but given the boilerplate nature of those comments, they did little to dissuade markets from taking the yen higher. EUR/JPY is trading at levels not seen since 2001, and even stronger than expected euro zone data did little to bolster the single currency, despite new industrial orders jumping 2.5% m/m in June vs. 1.5% expected and an upwardly revised gain of 4.1% (was 3.8%) in May. 

Euro sentiment wasn’t helped after Olli Rehn, EU commissioner for economic and monetary affairs, said that any slowdown in Asia would have a “serious negative impact on economic growth in Europe” while Nobel laureate Joseph Stiglitz warned of a double dip risk in Europe, adding to negative sentiment.  Stiglitz also touched on the theme of deficit-cutting in Europe as a big risk to growth, something Moody’s highlighted in its comments yesterday.  Sterling came under pressure after Martin Weale of the MPC was quoted saying the UK faces a ‘real risk’ of a second recession and that the possibility of another financial crisis ‘can’t be regarded as trivial.’ In the Times of London interview he admitted he was comfortable with current policy. The BOE cut its growth forecast for 2012 in its most recent inflation report earlier this month to 3%, down from 3.5% in May and Weale’s words reinforce the sense gained from the minutes of last MPC policy meeting that there is no indication of the Bank moving towards an exit strategy. Cable’s break through 1.5475 opened the way up to test support at 1.5325, and with the trend remaining bearish.  Indeed, sterling underperformed the euro for a change today, with EUR/GBP rising for the first time in 5 days.  Weale’s comments may keep sterling on its back foot for now, as recent market optimism regarding sterling is getting beat up a bit in this risk off environment.

The euro was soft during most of today’s trading session.  Weaker than expected European PMI data for August did the euro no favors.  Germany’s manufacturing PMI slipped to 58.2 vs. a forecast 60.5 and 61.2 in July, though the services index rose to 58.5 vs. 56.3 expected and 56.5 in July. For the euro zone overall, the manufacturing PMI fell to 55 vs. 56.1 expected and 56.7 in July while the composite PMI fell to 56.1 from 56.7 in July.  Since Germany’s impressive Q2 growth results, confidence about European growth prospects has been fast draining away.  The end of last week saw the French government cuts its forecast for growth in 2011 to 2% Friday, down from 2.5%; European Central Bank governing council member Axel Weber suggested continued fragility in the financial system when he said the ECB should extend unlimited lending to banks through the year-end, and only then begin work on exit strategies; and the specter of Europe’s sovereign debt stresses return with the European Commission’s demand for Greece to cut spending even further. Greece cannot avoid some sort of debt restructuring, and the bond and CDS markets seem to bear this out.  When the global backdrop was more supportive, markets could overlook the warts on euro zone periphery, but now that risk appetite is drying up, those flaws look extremely worrisome.  Key EUR levels to look for are around 1.26 (50% retracement level of the June-August euro rally) and then around 1.2430 (62% level). 

The yen has continued its recent gains.  The way higher was smoothed after it was acknowledged that Japanese Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa had not discussed possible intervention measures today while having a conversation about the economy and the yen.   Swiss franc firms as SNB signals little willingness to intervene.

Australian dollar stabilized after trading softer due to weekend elections ending in a likely hung parliament.  Early results with 75% of the voted counted show a dead heat between ruling Labor (72 seats) and opposition Liberal-National coalition (70 seats).  We note that 2 independents that won seats have expressed opposition to the resource tax.  The Greens won 1 seat but 5 seats are still too close to call.  Absentee ballots may prove to be decisive, as final results won’t come out for another up to another 10 days.  Hung parliament for the 150-seat body suggest the Greens and/or independents will play king-maker.  Liberal’s Abbott has pledged to rescind the controversial tax if elected, and so a Liberal victory is the most bullish outcome for Australian markets.  AUD vs. USD will be tricky to trade given the recent swings in risk on/off sentiment, but we remain confident that our long AUD/short NZD trade recommendation remains in play despite the election uncertainty.  With news of Potash board rejecting BHP Billiton’s hostile bid, there was other M&A news today as Australia’s biggest brewer Foster’s saw its shares surge after a press report that UK-based SABMiller may make a GBP7 bln ($10.9 bln) bid for its beer division.  Foster’s announced back in June that it was planning to split its wine and beer business lines.

Whilst we do our utmost to provide you with ontime and relative content I am sure you can appreciate that occasionally things do not quite go as planned and this alas is one of these occasions. We of course will do our best to ensure this does not happen again in future and we will be releasing next weeks binary options trading opportunities as scheduled.

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‘Happy Trading”

David