US Nonfarm Payrolls and Unemployment Rate surprise to the upside. JPY disappears over a cliff.

arket seems to be tiring of weak USD theme, as the USD initially storms higher despite equity rally and bond sell-off.

MAJOR HEADLINES – PREVIOUS SESSION

* Australia Jul. AiG Performance of Construction Index out at 39.5 vs. 42.6 expected
* Switzerland Jul. Unemployment Rate out at 3.9% as expected and vs. 3.8% in Jun.
* Germany Jun. Trade Balance out at 12.2B vs. 10.6B expected and 9.5B in May
* Norway Jun. Industrial Product Manufacturing out at -1.4% MoM vs. -0.8% expected
* UK Jul. PPI Input/Output out at -1.4%/+0.3% MoM vs. -0.8%/0.0% expected, respectively
* Germany Jun. Industrial Production out at -0.1% MoM vs. +0.5% expected
* Canada Jul. Unemployment Rate steady at 8.6% vs. 8.8% expected
* Canada Jul. Net Change in Employment fell -44.5k vs. -15.0k expected and -7.4k in Jun.
* US Jul. Change in Nonfarm Payrolls out at -247k vs. -325k expected
* US Jul. Unemployment Rate falls to 9.4% vs. 9.6% expected and 9.5% in Jun.
* US Jul. Average Hourly Earnings rose 0.2% MoM vs. 0.1% expected
* US Jul. Average Weekly Hours rose to 33.1 vs. 33.0 expected and 33.0 in Jun.
* Canada Jul. Ivey PMI out at 51.8 vs. 54.0 expected and 58.2 in Jun.


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

* US Jun. Consumer Credit (1900)
* New Zealand Jul. QV House Prices (Sun 1200)
* Japan Jun. Current Account (Sun 2350)
* Australia Jun. Home Loans (Mon 0130)
* China Jul. Producer/Purchasing Price Index (Mon 0200)
* China Jul. Consumer Price Index (Mon 0200)
* Japan Jul. Machine Tool Orders (Mon 0600)

Market Comments:

The positive US employment report touched off very unambiguous reactions in equity and bond markets, but the FX reaction has been a real circus. The very first reaction saw the normal reaction of the USD weakening on good economic news, but within a few minutes, the action reversed to USD strength - and then back to weakness and now back to strength as we are writing this a few minutes before the US open. This suggests the market is really struggling to get a grip on what it wants to believe at the moment and whether good US economic news will ever be a reason to buy the greenback. Clearly it shows some caution in playing the . Less caution was shown in the JPY crosses as the bottom dropping out of the bond market sent an unambiguous sell JPY signal. This probably caught a complacent USDJPY market by surprise, judging from the aggravated upside there.

A bit more on the US employment report: seasonal adjustments brought about a fall in the unemployment rate (with 5 of the 6 statistical flavors of unemployment showing a actually showing a rise before adjustment), but there are a number of factors that suggest we need to wait for the September to January time frame to know for sure if we are out of the woods with this employment crisis, as that is the season when the biggest headcount reductions usually take place, if they are going to. For the short term here, the market is uncorking another bottle of Green Shoots champagne, and equities are higher, bonds are lower and the USD is mixed.

It would seem to us that perfection is already largely priced in here for many risk assets and the big risk is that end demand will not coming storming back even if the US job market is stabilizing (and we have reason to believe that it may worsen further in the fall/winter time frame). We doubt whether the market will be able to celebrate this employment report beyond the very shortest term.

Another note about the payrolls: the US has the smallest Nonfarm Payrolls number for a July print (non statistically manipulated) since 2000, when the population of the US Was about 8% smaller than it is now…..

Of most interesting going forward into next week is 1)whether the USD can follow through on its rally today if the world remains in risk willing mode. This has not happened in ages, but the greenback is putting up a fight today. 2)whether today proves the climax in the risk rally (in which case, we would certainly expect the US rally to follow through). One of the key indicators we will be watching today and in the coming week is the US bond market, where the 10-year benchmark yield has crossed above key resistance at 3.75%. That benchmark rallied to 4% at the most recent inflation scare back in June. This rise of rates will be an interesting set up to next Wednesday's FOMC meeting.

The action in the Aussie has been rather uninspiring since yesterday, considering the strength of risk appetite here and the RBA mentioning overnight that the next rate move may be an increase.

Chart: USDJPY
USDJPY exploded through resistance on the US employment report after inconclusive ranging over the last couple of weeks. The move will need a continued sell-off in bonds in coming sessions to maintain support and drive it through the Ichimoku cloud to higher levels.

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Producer Price Index

The Producer Price Index (PPI) is a measure of the average level of prices of a fixed basket of goods received in primary markets by producers. The monthly PPI reports are widely followed as an indication of commodity inflation.

The PPI is considered important because it accounts for price changes throughout the manufacturing sector.

The PPI is often followed but excludes the food and energy components as these items are normally much more volatile than the rest of the PPI and can therefore obscure the more important underlying trend.

Studying the PPI allows consideration of inflationary pressures that may be accumulating or receding, but have not yet filtered through to the finished goods prices.

A rising PPI is normally expected to lead to higher consumer price inflation and thereby to potentially higher short-term interest rates. Higher rates will often have a short term positive impact on a currency, although significant inflationary pressure will often lead to an undermining of the confidence in the currency involved.

Payroll Employment

Payroll employment is a measure of the number of people being paid as employees by non-farm business establishments and units of government. Monthly changes in payroll employment reflect the net number of new jobs created or lost during the month and changes are widely followed as an important indicator of economic activity.

Payroll employment is one of the primary monthly indicators of aggregate economic activity because it encompasses every major sector of the economy. It is also useful to examine trends in job creation in several industry categories because the aggregate data can mask significant deviations in underlying industry trends.

Large increases in payroll employment are seen as signs of strong economic activity that could eventually lead to higher interest rates that are supportive of the currency at least in the short term. If, however, inflationary pressures are seen as building, this may undermine the longer term confidence in the currency.

Durable Goods Orders

Durable Goods Orders are a measure of the new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. Monthly percent changes reflect the rate of change of such orders.

Levels of, and changes in, durable goods order are widely followed as an indicator of factory sector momentum.

Durable Goods Orders are a major indicator of manufacturing sector trends because most industrial production is done to order. Often, the indicator is followed but excludes Defence and Transportation orders because these are generally much more volatile than the rest of the orders and can obscure the more important underlying trend.

Durable Goods Orders are measured in nominal terms and therefore include the effects of inflation. Therefore the Durable Goods Orders should be compared to the trend growth rate in PPI to arrive at the real, inflation-adjusted Durable Goods Orders.

Rising Durable Goods Orders are normally associated with stronger economic activity and can therefore lead to higher short-term interest rates that are often supportive to a currency at least in the short term.

Retail Sales

Retail Sales are a measure of the total receipts of retail stores. Monthly percentage changes reflect the rate of change of such sales and are widely followed as an indicator of consumer spending.

Retails Sales are a major indicator of consumer spending because they account for nearly one-half of total consumer spending and approximately one-third of aggregate economic activity.

Often, Retail Sales are followed less auto sales because these are generally much more volatile than the rest of the Retail Sales and can therefore obscure the more important underlying trend.

Retail Sales are measured in nominal terms and therefore include the effects of inflation. Rising Retail Sales are often associated with a strong economy and therefore an expectation of higher short-term interest rates that are often supportive to a currency at least in the short term.

Housing Starts

Housing Starts are a measure of the number of residential units on which construction is begun each month and the level of housing starts is widely followed as an indicator of residential construction activity.

The indicator is followed to assess the commitment of builders to new construction activity. High construction activity is usually associated with increased economic activity and confidence, and is therefore considered a harbinger of higher short-term interest rates that can be supportive of the involved currency at least in the short term.

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