Saturday, 6 July 2013

Debt Markets Respond to NFP Report

Ralph Shell, Excel Analyst

Excel Markets Safe Trader Demo Account Contest, July 2013Often, the Non-Farm Payroll (NFP) Report is the most important report of the week, and a game-changer in many markets.  Friday, July 5, the report grabbed the headlines - 195,000 new jobs - which was 30,000 more than expected, and the number from last month was adjusted upwards by 20,000.  Details of the report, however, are less glowing than the headlines.

According to the Dept. Of Labor Household Survey, there was an increase of 360,000 part-time jobs in June to a record 28,059,000.  Full-time jobs for the month were down 240,000.  Again, the increase in part-time jobs was concentrated in low paying sectors:  Leisure and Hospitality accounted for a 75K increase, followed by 37K in Retail, and 23K in Health.

Some people claim the increase in part-time unemployment is caused by an Obamacare mandate that all companies that employ over 50 people must provide healthcare for their employees.  Since a full time employee is classified by the government as anyone working over 30 hours per week, many employers have reduced the hours of employees, making them part-timers.  Further, business owners have probably postponed decisions to expand their business, fearful of Obamacare costs.  This provision was originally schedule to be implemented in 2014, but members of both parties have called the plan a 'train wreck' and have now postponed this provision until 2015, after the next election.

Regardless of the report's details, some of the investment houses have expressed their opinion the Bernanke taper will commence in September. This has sent shock waves through the debt markets.  US 10-year bonds are up to a 2.71% yield from 2.44% on Wednesday.  Rates are creeping up elsewhere.  Despite claims that the euro zone and UK bonds will be kept low, the yield is up 47 basis points in the UK, Italy 29, France 24 and even Germany is up 21bp.

The yield on US Treasuries is almost a full percentage point higher than the yield of the ten-year in Germany, 1.72%.  The premium for the German debt is prompted by the perception it is the most secure in the euro zone, and there are European investors who are fearful of the currency risk when moving money outside the euro zone.

But how secure, really, is the German economy if her neighbour's economies are crumbling?

Just as the 99bp discount Germany under the US 10-year looks too wide, also is the 76bp discount for Germany under the yield of the UK gilts justified?   Continuing, with the French economy in total disarray under the hapless Hollande, how long are their ten-year bonds going to yield 2.29%, a big discount to the yield of both the US and the UK paper?

Several weeks ago I spent some time in London and the beautiful countryside in Sussex. London seemed to be bustling with activity, and I noticed numerous building cranes indicative of construction activity.  There were abundant signs of wealth in the country. Friday's Market Watch claimed that London was the home of more multimillionaires ($30 million or more) than any other place in the world.  A total of 4,296 of the super-affluent live there.

Last week was a good week for the USD, (UUP,UDN) as it gained against all of its significant others. Both the euro and the pound closed the week poorly, with the euro checking out the 1.28 handle.

Click to Enlarge EURUSD Weekly Forex Chart

The pound, at 1.49 versus the USD, (GBPUSD) looks like it should be finding support around this level.  Take out the 1.49 support and who knows where we are headed?   Last week's COT report showed the specs were long the euro and short the pound.  The euro did gain against the pound for the week but at the current level, .86, we are inclined to sell the euro and buy the pound.

Click to Enlarge GBPUSD Weekly Forex Chart

As always, be mindful of your money.
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