Friday August 6, 2004 - 11:36:01 GMT
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US OPEN MARKET POINTS 08-06-04
Why Payrolls May not Matter
Is Putin turning into Pinochet? The Yukos saga is quickly becoming a tragicomedy as ever changing government decrees threaten to shut down Russia’s number one oil producer whose daily output is greater than that of Libya. Troika Dialog, the Russian research house, writes, ”The decision to start collection at the very core of Yukos' production reveals the government's true motives; unless this is a bluff, it is after Yukos' assets, rather than collection of a debt. There will, we think, come a point after which there will simply be no incentive for the Kremlin to deal. Rather alarmingly, this point may have already been reached." If the Russian government succeeds in derailing Yukos and takes its output offline, the end result will affect every major market in the world threatening US economic expansion and greatly damaging the USD bull case. Oil, which yesterday closed at a 21 year high of 44.44, hit 44.73 in overnight trading on Nymex as a fire in BP refinery in Texas- the third largest in the nation- further panicked the market. The price of oil now stands within a hair breath of the 45 handle and ever closer to the psychologically frightening $50/bbl level.
If oil continues its relentless rise, the NFP number even if it surprises to the upside, may not be much of a boon for dollar bulls. With wages stagnant, tax refunds spent and home equity lines tapped out, US consumers have no choice but to curtail discretionary spending to pay their gas bills. Yesterdays data showing a second straight month of slowdown in retail spending (3.1% vs. 5.5% average in five months prior) may be the first evidence of this depressing dynamic. If this trend persists it will have negative consequences not only on consumer demand but on corporate hiring as higher oil will raise costs and hurt company profits.
The doomsday scenario is by no means a foregone conclusion. The Putin government faced with worldwide outrage may yet relent and allow Yukos to continue operating. OPEC may indeed bring 1M additional barrels onto the market. And finally as the Gartman letter points out yesterday, US total crude inventories are now at 80M barrels above their 5 year average. Should the geo-political issues cool off, the risk premium in oil will collapse and prices may fall below $40/bbl. If NFP prints materially better than the consensus 240K and oil recedes from its Himalayan highs, the dollar bulls just may have something to cheer about as 1.1900 EUR and 1.8000 GBP could be well in sight.
Key Overnight Developments
- EUR Industrial Production falls –1.9% mirroring last nights decline in Factory Orders as foreign demand dries up
- CAD Employment increases only 8.7K vs. consensus 30K as full time jobs decline by 38.8K
FX Spot Overnight
- EUR typical pre NFP range of 20 pips trading 2060-2080
- JPY slowly trades off the highs set in Asian session at 111.90 to 111.50
- GBP marking time at 8240 ahead of payrolls
- CHF dollar finds strength at 2730 and trades up all the way to 2760
12:30GMT – (8:30 AM EST) USD Non-Farm Payrolls (July) Expected at 240K, Previous 112K
12:30GMT – (8:30 AM EST) USD Unemployment Rate (July) Expected at 5.6%, Previous 5.6%
18:00GMT – (2:00 PM EST) USD Consumer Credit (July) Expected at $4.0Bn, Previous $8.2Bn
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