- One story and one story only is dominating markets this morning: the better-than-expected July employment data. Equity futures jumped after the July payroll reading and the leading indices are sustaining gains in early trading. Commentators and talking heads are dissecting the data ad nauseam; the question now is whether today's numbers are a sign of lasting economic improvement or just another false dawn. Note that in a speech yesterday evening President Obama said the payroll losses for July had been cut in half, while a Goldman Sachs economist sent around a note predicting a 250K loss - in fact neither were far off the mark of -247K (prompting all sorts of conspiracy theories). July nonfarm payrolls showed their first improvement since April 2008, and fell by fewer than 300K for the first time since last August, while the decline in manufacturing payrolls was half the expected amount. The annualized unemployment rate fell to 9.4% in July from 9.5% in June, marking its first drop since April 2008.
- Even with Obama telegraphing the jobs numbers, Treasury prices still moved sharply lower post data. Yields have moved higher across the curve and are holding most of the knee jerk gains. The long bond is holding around 4.6% and the 10-year is consolidating at 3.85%. Short term yields moved up as well sending the 2-year above 1.3% for the first time since the better than expected May jobs report jolted markets. Similar to a previous spike move seen in Fed fund futures, expectations of a more aggressive Fed next year are rising. The March 2010 fed fund future now prices in better than a 50% chance the Fed hikes rates as much as 50 basis points early next year. Bernanke and crew have been pretty stern that rates are likely to remain low so markets will be watching closely to see if this hawkish sentiment holds or quickly dissolves as it did back in June.
- In other news, AIG reported its first profit in six quarters, beating estimates by a wide margin. Revenue was $10B higher than the year-ago figure. Results from the firm's various operating units showed marked improvement, with double the operating income in general insurance and operating losses in financial services cut by a factor of ten. AIG's CEO said the primary drivers of the results were reductions in net realized capital losses, primarily due to the decline in other than temporary impairments, and insisted the company's business has stabilized. Share of AIG had risen by more than one third over the last two trading session on anticipation of the results; the name was up nearly 20% this morning before dropping to +10%.
- In currencies, the payrolls data put fundamentals back in the saddle, although commentators warned that the unhappy marriage of aversion & risk appetite will doubtlessly get back to work sometime soon. Initially the USD and JPY were softer against the major European and commodity-related pairs as risk appetite rose following US payroll report that the worst of the recession has passed. EUR/USD retested its historical pivot point of 1.4430 before the dollar rallied aided by interest rate sentiment. The jobs numbers has put some upward pressure on rates, with the March Fed Fund Futures coming in around six basis points and now pricing in a 50% chance the Fed raises rates 50 bps early next year. Dealers are noting that the USD rally stemmed from the Euro Dollar futures pit, with the March 2010 contract registering a massive 14 bps range. The yen exhibited weakness across the board and was probing a key technical point against the USD at the 96.70 area. Dealers are saying the break of the one-year down trend line could help the USD/JPY re-establish itself above the historical pivot point of the 95 level, which would likely suit the goals of Japan's MoF and the BoJ.
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