Wednesday, April 2, 2014

Fed Funds, crude and gold in spotlight before Friday's jobs report

By Tory Enerson

The overnight market was relatively quiet leading into this morning’s ADP private payrolls data release. All eyes are on this data with the U.S. Government Jobs report due this Friday. The final days of March and early April have featured the third major speech by the new Fed Chairperson Janet Yellen, a decline in the price discovery of the metals and energy commodity sectors, the quarterly grain planting and stocks report and continued paring of the price of the fixed income markets.

ADP payroll data was released to the tune of 191,000 new jobs for the month just missing the forecasted 195,000 expectation. In addition, the world’s largest payroll service reported a 39,000 job increase revision to last month’s data taking the February headline number from 139,000 to 178,000 (us-usa-economy-employment-adp). While the ADP data represents a relatively small sample size when juxtaposed with the U.S. Jobs report and the correlation has proven to be suspect many times over in the past, it will have some influence on the price discovery heading into Friday’s event. Currently the consensus expectation for Friday’s data is 195,000 new jobs and an employment rate of 6.6 percent.

Yellen did deliver a speech that many pundits have since said was considerably more dovish (more leaning toward continued easy money) than the previous FOMC delivery from last month. She attempted to highlight some of the ongoing issues with the employment situation and the remaining difficulties still lingering. Her point was taken, I believe, a bit out of context as it seemed she was merely trying to temper any irrational exuberance that the market can tend to turn to. Her anecdotal instances highlighted in her speech while relevant, are certainly not the norm. What seems to have been missed in the diagnosis of her words was her continued commitment to the current paring of QE 3 and her reiteration of the possible increase of rates, should the data remain on track, as early as six months after the taper is complete (yelln-hilensrath).

The evidence of this can be found in the price discovery of the fixed income markets, particularly the 30-Day Fed Funds market which is tasked with attempting to be predictive of the Feds overnight lending rate at the time of the contract expiration. The December Fed Funds market sold off rather sharply (indicating potential of higher rates) following last months Fed decision to taper 10 billion and the ensuing press conference showing the Yellen’s commitment to transparency and the current course of action (see the chart below). Following her speech this week, the market did very little to ‘take back’ that move and currently is sitting on or about the recent lows, severely deteriorating the validity of those who claimed this to be such a dovish response from the Chairperson.

We have seen a sustained decline in the Metals and Energies markets. The precious metals (silver (COMEX:SIK14) and gold (COMEX:GCK14)) have been in a range for the past several weeks that the recent move to the downside threatens to breech. While a move to the downside in the wake of rising interest rate talk has been the recent norm, this decline has been decidedly more measured than downward price discovery in the past based on tightening monetary policy (tapering). The gold (more so than the silver) in my opinion is very difficult to label with a particular fundamental inclination. For example, sometimes gold can perform as a flight to quality/safe haven market in times of global strife, sometimes it performs as a fiat currency, sometimes and inflation hedge etc. There are examples where we have witnessed price discovery in both directions in the same scenarios therefore making its fundamental picture cloudy at times. With that being said, these levels appear to be supportive of the price discovery and seem to have weathered the selling storm.

The energies have, though more recently and more abruptly, also seen a decline. The WTI Crude has retreated below $100 per barrel (NYMEX:CLK14) while the RBOB has eclipsed the key 2.85 dollar price as well. Fundamentally the easing global tensions brought on by the Russia/Ukrainian situation seems to have taken the ‘fear bid’ out of the petroleum based energy prices. Yesterday’s API inventories data showed a decline in crude oil supplies of 5.8 million barrels vs. and expectation of a build of nearly 2 million barrels. The bullish nature of that report was tempered by the slightly bearish data on the RBOB contract that reported only a 15,000 barrel build in supplies vs. the expected 2 million barrel decline. The government's EIA is set to be released at 9:30 am CST today. UPDATE: EIA data released showing a draw in crude of 2.4 mb vs. an expected 1.0 mb build and RBOB a draw of 1.6 MB vs. expectation of 1.0 mb draw ( Again we are looking for value at these prices, particularly with the gasoline as we are on the cusp of emerging from one of the coldest winters on record that could produce a record driving season.

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