Crude Oil Strong on Stimulus Hopes

Crude prices edged up despite weak data from China as investors were hoping for stimulus plans from the Federal Reserve. In the earlier trading, crude prices were pressured by the weak trade data from the world second largest oil consumer of China. Statistics released on Monday showed that Chinese imports fell 2.6 percent year on year in August, far below the expectations of a 3. 5 percent rise. Meanwhile, exports grew 2.7 percent, also missing the forecasts of a 3 percent increase. But investors were hoping that more and more economic darkening signs will trigger another round of quantitative easing from the Fed.

In the Middle East, Saudi Oil Minister Ali al-Naimi said on Monday Saudi Arabia was concerned about the high oil prices and would take necessary steps to increase outputs. But he thought the rising prices were “simply not supported by market fundamentals. Just a few months ago Saudi Arabia became the number one producer of oil.  Prices earlier declined on comments by Saudi Arabia’s oil minister, that supply and demand fundamentals do not justify current high prices.

Crude oil futures recovered during closing trades, ending modestly higher as traders weighed evidence of lagging demand for the commodity in China and the likelihood of potential stimulus in the United States.

U.S. crude rose 12 cents on Tuesday, or 0.12 percent, to settle at $96.54 a barrel, after slumping to $95.34, with the session peak of $96.63 only 2 cents above the $96.61 200-day moving average. U.S. crude futures edged up on Monday, settling a few cents higher, as supportive expectations that the U.S. Federal Reserve would act to stimulate the economy countered pressure from weak Chinese data that raised concerns about demand for oil.

China’s crude oil imports declined 12.5 percent in August from a year earlier to the lowest daily rate since October 2010, while implied oil demand in the country dropped to 8.92 million barrels per day (bpd), underlining sputtering domestic demand as the global economic outlook darkens.

Natural gas futures closed higher for the first time in four sessions, driven by technical buying after last week’s slide and expectations for another light weekly inventory build.

Front-month gas futures on the New York Mercantile Exchange ended up 13 cents, or 4.8 percent, at $2.812 per million British thermal units after trading between $2.647 and $2.835.

Whats Up With Gold, Silver and Copper

On Tuesday morning base metals are trading substantially down at the London Metal Exchange taking cues from the equities. This morning Asian markets have also retreated following US trading on Monday. However, markets still saw glimmers of hope that China’s central bank would take actions due to its weak economic data, showing that copper imports for August declined 2.9 percent month on month in the face of sluggish downstream orders and weakening financing demand.

China remains the biggest problem at this point, the ECB seems to have tamed the EU for the time being and the FOMC is an odds on favorite for new QE later this week but China has not been immune to the global economic problems and they have landed flat in their laps at a very bad time.

Last week the Chinese President introduced an all new program of infrastructure construction to help kick start the slowing economy.

China’s industrial production remained at 8.9 percent last month from a year earlier, lower than market expectations while early morning New Yuan loans have increased and may provide recovery in base metals prices as the day progresses.

Copper rose to its highest level in four months on Monday, driven by the increased likelihood of more economic stimulus in China and the United States, two of the world’s top consumers of the metal. Building on Friday’s nearly 4 percent surge, copper prices pushed higher in relatively stronger volumes, after weaker import and industrial production data over the weekend from China reinforced expectations that Beijing will soon adjust policies to lift an economy mired in its softest period of growth in three years. In the United States, disappointing employment numbers last week increased the chances that the Federal Reserve will move this week to launch another round of bond buybacks, known as quantitative easing (QE), to stimulate the world’s largest economy, according to a Reuter’s poll.

From the eurozone, markets eagerly await the German Court ruling and Greek never ending drama as traders take profits as the shared currency has been posting smart gains in the last four trading session and may also support weakness in base metals during the day. A German constitutional court will rule on Wednesday whether Germany can contribute to the European rescue fund, which plays a crucial role in the European Central Bank’s plan to fight the region’s debt crisis.

As anticipations over QE3 measures have recently increased, longs have entered markets actively, but this kind of price increases is rather unstable from fundamentals perspective. In addition, rebounds in base metals have gradually neared resistance levels, and hence investors should be cautious that rebounds might be short-lived as of now.

Yesterday’s data showed that the US consumer credit has declined in first 11 months and has further added weakness in metals while the Japan machine tools are likely to remain weak. In the US today, the US small business confidence may improve slightly due to hopes of QE and general election nearing while the trade deficit of US may widen due to higher crude oil prices weakening the dollar.

While precious metals continue to trade strongly with gold and silver holding to recent record highs.

Precious metals edged higher today, paring losses from the previous session, with investors awaiting a key German ruling on the eurozone’s bailout fund and a U.S. Federal Reserve decision on possible measures to stimulate the economy. The chances of a QE3 announcement this week have jumped after disappointing U.S. employment data last Friday, sending spot gold to above $1,740 for the first time since end of February. Scrap continued to flow into Asia’s physical gold market as prices remained buoyed by market expectations for more stimulus measures.

Gold eased on Monday as investors took profits, but the metal stayed near a six-month high after last week’s disappointing U.S. payrolls data boosted hopes that the Federal Reserve could unveil new stimulus as early as Thursday. Gold rebounded on Tuesday and remains strong in Asian trading on Wednesday morning.

Silver futures prices have drifted lower at the early Globex on the back of weak Asian equities. Silver is more affected by the Chinese data then gold as it is two faced, industrial and precious metal.

Euro Bulls Taking a Breather

The Euro was pressured early in the trading session after almost reaching a three-month high last week against the U.S. Dollar. Bullish traders seem to be taking a break after last week’s release of a plan by the European Central Bank’s plan to buy bonds. Additionally, skeptical investors are expressing concern that the debt crisis is still a threat to the Euro Region. 

One factor affecting the Euro was the failure by the Greek coalition to reach a deal on 11.5 billion Euros of spending cuts. Furthermore, later this week, a German court is expected to rule on its participation inEurope’s permanent bailout fund.

Some traders are putting the blame on overbought technical conditions after last week’s sizable rally. The lack of clarity and exposure to event risk this week because of the U.S. Federal Reserve meeting are also encouraging investors to take a cautious stance.

The Euro has seen limited upside action today after European Central Bank President Mario Draghi fueled a sharp rise in the currency last week when he said the central bank would make potentially unlimited purchases of government bonds from distressed countries. Despite the weakness, the currency is being underpinned by the possibility of additional stimulus from the U.S. Federal Reserve.

Contributing to the uncertainty is the expected ruling byGermany’sConstitutional Courtregarding challenges to the country’s participation in the European Stability Mechanism, or the ESM.

The GBP/USD is showing a slight upward bias in a follow-through rally after Friday’s surge was triggered by a weaker-than-expected U.S. Non-Farm Payrolls report. Traders are now shifting their focus on this week’s Federal Open Market Committee decision which could decide the fate of the dollar. This decision will take center stage because the Committee may give more clues as to when the central bank will begin another round of quantitative easing.

The lack of fresh fundamental news and a slightly better U.S. Dollar is holding November crude oil in check. Traders have not been kind to crude oil lately despite the weaker Greenback. Last Friday’s poor employment report suggests a weakening economy which could curtail demand for crude oil. This week’s supply and demand report along with the Fed announcement are likely to move the market. Until then volume could be light and trading activity reduced. 

December Gold bulls are taking a break following Friday’s massive rally. Technically overbought conditions are one of the reasons for today’s weakness. Some traders are paring positions ahead of this week’s Fed meeting as they await more information regarding the impending decision to implement another round of stimulus. The lack of clarity is likely to keep traders on the sidelines for a day or two. 

The EUR/USD Fundamentally

Since the close on Friday there were still some interesting headlines from Europe. French president Hollande announced measures (mostly tax hikes) to meet the 3.0% deficit target in 2012. Press on a new complaint filed with the German constitutional court on the EMU bail-outs illustrates that the issue is not off the political calendar in Germany. However, for now the impact on EUR/USD trading is limited. Global markets today are focusing on poor Chinese imports. This continues to fuel the hope for more policy stimulation, not only in the US and in Europe, but also in China. Last week China introduced a massive infrastructure rebuilding plan to help get the economy back on track. Also the PBoC began laying the ground work for a stimulus program

 In theory, these pleadings should be a (slightly) further negative for the dollar. EUR/USD is seeing some very limited profit taking after the strong rally at the end of last week. The pair is again changing hands below the 1.28 mark. (Just a bit lower)

Later today, the calendar in both the US and Europe is rather thin. The French and Greek production data and the final Italian Q2 GDP are interesting, but no market movers. A similar claim can be made for the Troika briefing on Portugal. Markets will also continue to keep an eye on additional comments from German policymakers on the ECB bond buying plan.

Investors will also look forward to other events that are expected later this week. On Wednesday there are parliamentary elections in the Netherlands and the management of the EMU debt crisis is an important issue in the election campaign. The same day the German constitutional court is expected to rule on the Euro bailout fund. On Thursday, the focus will be on the Fed policy decision. The chances on more and substantial Fed easing have grown after last Friday’s payrolls report. The expectation for such a scenario will probably prevent any sustained rebound of the dollar before the Fed decision.

Let’s face it the EUR/USD will make very little moves before the FOMC announcements except for traders positioning themselves before the release. The odds are now over 3-1 that the FOMC will introduce additional QE, and this is already being factored in the dollar.

Last but not least, there is an EU/Eurogroup meeting at the end of the week.  The meeting probably won’t yield a high profile result. However, after the ECB fiat, EU policymakers now have to do their job on the framework/conditions to activate no new aid mechanism. This can yield again an interesting debate. So, from a EUR/USD perspective, there is again a lot of event risk. After last Friday’s strong gains, some consolidation, profit taking on EUR/USD can be expected. Dissonant comments from EU policymakers after the ECB decision and some uncertainty in the run-up to the Dutch elections and the German Court ruling might provide an excuse for this. However, we don’t expect a big leap higher in the dollar ahead of the Fed meeting, also not against the euro. At least for now, the focus is on the dollar side of the story. So, any EUR/USD correction will probably be limited and attract renewed dollar selling.

Fundamentals of the Forex Market September 10, 2012

The dollar index fell to a 4-month low, weighed down by gains in euro, after ECB took measures to lower borrowing costs for Spain and Italy. Greece officially entered the 5th year of recession and now that the ECB has relieved pressure on the euro, the troika will get back to dealing with Greece, Spain and Italy which should be the focus this week until the big day arrives for Mr. Bernanke on the 13h

The dollar index, which measures the greenback against a basket of six currencies, fell by 1.1% to 80.182 from 81.089 in late North American trading Thursday.

The euro touched a near 4-month peak against the dollar, after a report showed a smaller-than expected rise in US non-farm payrolls in August, setting the stage for the Federal Reserve to pump additional money into sluggish economy.

ECB President Mario Draghi backed up his promise to do whatever it takes to preserve the euro, unveiling a new and potentially unlimited bond-buying program aimed at lowering painfully high borrowing costs for stressed member states.

The euro rallied to a 8-month high against the Swiss franc, trading at 1.2085 on mounting speculation that Swiss National Bank will raise the floor it imposed on the currency pair, although many players were skeptical any move was imminent. The euro is trading at 1.2789 down slightly in the Asian session.

Sterling hit a 3-1/2 month high versus the dollar; tracking gains in the euro against the dollar, after the European Central Bank unveiled plan to lower high euro zone borrowing costs. The Sterling was supported by a round of positive eco data, including an above expectations PMI release while the rest of Europe reported below forecast. The GBP is trading at 1.5994 after breaking through the 1.60 range on Friday.

Japan’s government could run out of money by the end of November, the finance minister warned, even after an emergency spending deferral to cope with opposition parties’ obstruction of an expenditure-enabling bill.

Jun Azumi warned the opposition that further delays could threaten the economy’s recovery from last year’s earthquake and that the unprecedented 5 trillion yen ($63.3bn) spending delay would give the government only limited breathing room.

On Monday morning Japanese eco data disappointed markets once again showing.  Japan posted a current account surplus of 625.4 billion yen in July, the Ministry of Finance said on Monday, down 40.6 percent on year. The headline figure blew away forecasts for a surplus of 485.6 billion yen and an annual decline of 52.0 percent. That follows the 433.3 billion yen surplus and the 19.6 percent annual contraction in June.

The trade balance came in at a deficit of 373.6 billion versus forecasts for a shortfall of 439.5 billion after posting a surplus of 112.0 billion in June.

Exports were down 7.4 percent on year to 5.118 trillion yen, accelerating from the 1.5 percent annual contraction in June. Imports collected 1.9 percent on year to 5.491 trillion yen after easing an annual 1.2 percent in the previous month.

The JPY continues to remain too strong damaging the economy, while the BoJ seems to do nothing.

Prime Minister Yoshihiko Noda has vowed to achieve 1 percent inflation in Japan within one year, as part of his pledges to become re-elected head of the ruling Democratic Party. Noda will draw up plans to beat deflation and revitalize the economy. He also aims to carry out reforms to achieve a society without nuclear power generation. The USD/JPY is trading at 78.23 on Monday.

Monday Morning Market Update September 10, 2012

Australia’s building industry shrank in August at the fastest pace in 11 months, led by a slump in apartments and weaker engineering construction as resource industry demand wanes, a private gauge showed. The construction performance index fell to 32.2 last month from 32.6 in July. The AUD remained strong trading at 1.0368 on the weakness in the USD on hopes of stimulus

Last week in the US, President Barack Obama, a day after getting his highest approval rating in more than a year, was confronted by a worse-than-expected slowdown in the job market that threatened to undercut enthusiasm for his re-election.

Treasury yields rose for the first time in three weeks as European official’s detailed plans to curb the region’s debt crisis and investors braced for more stimuli from the Federal Reserve as the US economic recovery falters. Thirty-year bond yields climbed the most on concern the announcement of a third round of debt buying at next week’s Fed policy meeting may lead to an acceleration in inflation.

Although the weakness in the jobs data was hailed by traders and speculators as it was the final puzzle piece needed to secure support for additional QE by the FOMC at its meeting on September 12-13th. Odd makers are now making book at more than a 66% chance of stimulus from the Feds.

European stocks posted the largest weekly advance since June as European Central Bank President Mario Draghi outlined an unlimited bond-buying program to regain control of interest rates and stem the sovereign debt crisis. The new Outright Monetary Transaction program for buying bonds and sterilizing them through the ECB is being accepted positively by politicians and economists around the globe.

UK stocks advanced, extending a two-week high for the FTSE 100 Index, as industrial production surged by the most in 25 years. Last week was a positive week for UK eco data, with PPI and PMI reporting above forecast.

Asia’s benchmark stock index posted its first advance in three weeks as shares rallied by the most in nine months on Sept. 7, after the European Central Bank unveiled a bond-buying program and China boosted stimulus measures.

This morning the Japanese releases were negative showing a continued slow down, each month Japan releases all of its data at one time.

Chinese President Hu Jintao said a slowdown in exports is putting downward pressure on the world’s second-biggest economy, and he pledged to boost domestic demand and promote more balanced growth. Over the weekend China began its monthly data dump, with pretty lackluster results, overall showing that the government efforts to turn around the declines have not helped so far. There is more and more reason to believe that the Chinese government will follow the US with stimulus of its own.

The Chinese President noted that the economy faces “notable downward pressure,” signaling more stimulus may follow approvals for subway and road projects as the government kicks off a huge infrastructure program.

In the commodities markets gold rose by 0.17% after US Federal Reserve’s last meeting showed many members favored more stimuli unless the pace of the economic recovery picks up. Gold’s fall after seven-day advance is the longest such streak since June.  Some physical “buying” of gold from Europe this week drenched the bullion price, while the amounts have been “quite small” so far. Silver also increase by 0.82%.

Oil fell by 0.05% for the first time in three days in New York on concern eased that rising economic worries faltering demand of oil will be a passé, however a cause of concern’ as US Federal Reserve is all geared for a next round of easing.

Copper fell by 0.10% and traded near the lowest on hopes that Chinese Government will initiate some relief stimulus to provide some force to the Chinese economy in the near-term.

U.S Dollar Drops due to US Employment Report

The U.S. Dollar dropped sharply after a weaker-than-expected U.S.employment report increased the odds of additional quantitative easing by the Federal Reserve. The decline in the Greenback boosted the Euro and the British Pound to their highest levels since mid-May. Gold futures are trading at price levels not seen since March; however crude oil futures remain range bound. 

Earlier today, the Labor Department said the U.S.economy added 96,000 jobs in August. This was well below economist pre-market estimates of 125,000. The weak number reinforces expectation of additional quantitative easing by the Fed; therefore, the today’s market action is reflecting the thought that the central bank will have to soon begin its third major bond-buying program. Since this action will in effect put more liquidity into the system, the U.S. Dollar is under pressure. 

Besides the disappointing non-farm payrolls number, the U.S.unemployment rate also declined to 8.1% from July’s 8.3%. Although this drop is expected to be used for political reasons, it is not a positive development for the economy since the drop was triggered because people dropped out of the workforce.

 

Before the dollar even began its aggressive descent after the jobs data was released, the Greenback was under pressure because of fresh stimulus measures from China. This news drove up demand for higher-yielding assets. 

In addition to expectation of additional stimulus, the EUR/USD was still being bolstered by Thursday’s announcement by European Central Bank President Mario Draghi detailing the central bank’s plan to buy an unlimited amount of Euro-Zone government bonds. This news continued to push down interest rates in Spain and Italy. 

The weaker dollar is also driving up the GBP/USD. Talk of relaxing a few of the austerity measures currently curtailing economic growth in the U.K.is also helping to underpin the Sterling. Yesterday, the Bank of England refrained from additional asset purchases. More stimuli would’ve driven the British Pound lower. This news is also encouraging investors to buy the currency. 

October crude oil is under pressure as expectations of a weak U.S.economy are leading investors to believe that demand for energy will remain down. Sellers appear to be controlling the direction of the market despite weakness in the U.S. Dollar. Typically when the Greenback declines, assets priced in dollars rise. Today’s action reflects the fear that inventories could continue to remain high. 

Expectations of additional quantitative easing and the weaker dollar sent December Gold futures soaring to their highest level since March. Upside momentum is strong as investors continue to drive up demand for precious metals. With Europe and China announcing stimulus plans and the U.S.ready to implement another round of quantitative easing, gold investors appear to be pricing in the possibility of inflation in the future. 

The EUR/USD and the Nonfarm Payroll Report

Today, markets are already heading for the next milestone. In Europe, there are only some second tier eco data on the agenda. So, this morning, markets can further make up their mind on the impact and consequences of yesterday’s ECB announcements. For now, the new step of the ECB was not enough for EUR/USD to break above key technical resistance levels. Such a move is still possible but of late markets had already anticipated on yesterday’s ECB message.

So, it is not that evident that yesterday’s step of the ECB will still create enough momentum for EUR/USD to attack the key 1.2693/1.2748  resistance, especially as the activation of the plan might still take quite some time. It will also be interesting to see the reaction from other officials on the ECB action.

This morning Asian markets kept a positive tone. The risk on sentiment was partially supported by yesterday’s ECB announcement. In addition, China said that it would stimulate the economy via construction and infrastructure projects. This was supported sentiment in risk further. However, the impact on EUR/USD is limited. The pair is holding a tight range near yesterday’s close

Different interpretations might cause markets to doubt on the implication of the plan. Later in the session, the focus will turn to the US labor market report. Yesterday’s data were USD supportive, but at that time, the focus was still on Europe. The consensus for today’s payrolls is not that high (130 000). It is far from evident that one (slightly) better than expected will be enough for the Fed the change its view on the need for more policy stimulation.

However, a reasonably good figure might a least trigger some end-of-week profit taking on the recent EUR/USD rally. On the other hand, it would be interesting to see whether a weaker figure will be enough for EUR/USD to go for a further up leg. For now, we don’t preposition for such a move.

Most of today’s focus will be the US nonfarm payroll print, which will have large implications for the USD and the FOMC decision. Traders will begin to position themselves ahead of the release. Based on leading indicators such as the ADP payroll report and the unemployment claims data, it looks like the nonfarm should be pretty close to forecast, which will support monetary stimulus.

Yesterday the ECB today the PBoC push Commodity Prices

Gold traded firmly on Thursday and rose to 6-month high, on news that European Central Bank plans for a potentially unlimited bond-buying program, however positive US economic data capped major gains in bullion. On Friday morning gold tumbled as traders took profits and markets settled after the over reactions of yesterday’s session. Spot gold prices increased 0.5 percent

 Further positive US economic data of jobless claims also added to the gains in the gold prices. The yellow metal touched a high of $1,695/oz and closed at $1,700.9/oz in yesterday’s session

On Thursday global commodities responded to the announcements of the ECB’s “outright monetary transaction” bond program. Commodities soared as traders moved to more risk assets. This morning The People’s Bank of China (PBOC) moved to tighten short-term liquidity in the market, with analyst speculating the PBOC will ease monetary policy soon Xinhua News reports.

According to the news agency, the PBoC has conducted reverse repurchase agreement operations (REPOs) to remove 52 billion yuan ($AU8 billion) from the market. Commonly used by the PBOC, Chinese REPOs are fixed in seven and 14 day periods, with the central bank agreeing to repurchase the bonds greater than the issuing price. The result was a dip in yields for seven-day reverse repos by five basis points to 3.35 per cent, while yields for 14-day reverse repos remained unchanged at 3.5 per cent.

Gold holdings  of SPDR gold trust, the largest ETF backed by the precious metal, increased to 1,293.14 tons, as on Sept 4. Silver holdings of iShares silver trust, the largest ETF backed by the metal, increased to 9,734.23 tons, as on Sept 5.  Holdings of gold-backed exchange-traded funds hit a record high of 72.1mn ounces, or 2,044 tons, by Thursday.

The dollar index, which measures the greenback against a basket of six major currencies, fell to 81.089 versus 81.253 in late North American trading on Wednesday. The US dollar fell against the euro on Thursday, pushing the shared currency to its highest level in more than 2-months, after ECB President said; the ECB is prepared to buy an unlimited amount of sovereign bonds.

Mario Draghi informed that the ECB would buy debt in the open market with a maturity between one and three years and that the purchases would be completely sterilized. He also said that there would be no limits on their quantity.

The global economy is in worse shape than it was a few months ago, and there is a risk of a global recession if policy makers on both sides of the Atlantic fail to act, Carlo Padoan, chief economist of the Organization of Economic Cooperation and Development (OECD).

Copper declined, on profit-booking after a 3-day rally, despite supportive news that the ECB will undertake an aggressive bond-buying program to help struggling euro zone countries. LME copper stocks fell for the seventh consecutive session to hit their lowest level since October 2008.

Crude oil prices closed higher but well off the day’s peaks, supported by a drop in US crude oil inventories, strong jobs data and the ECB’s announcement of a bond buying program.

Crude oil supplies fell by 7.4mn barrels to 357.1mn barrels, Gasoline supplies decreased by 2.3mn barrels to 198.9mn barrels and supplies of distillate fuel, which include diesel and heating oil, grew by 1mn barrels to 127.1mn barrels.  

Nymex crude oil prices increased around 0.2 percent yesterday prices touched an intra-day high of $97.71/bbl and closed at $95.50/bbl in yesterday’s trading session.

Natural gas futures closed lower, for the second straight day despite a smaller-than-expected weekly build in inventories, as weather forecasters predicted milder autumn weather for consuming regions. The US Energy Information showed domestic gas inventories rose last week by 28bn cubic feet to 3.402 trillion cubic feet.  NG is trading at 2.76 on Friday morning

The Basics of “Outright Monetary Transactions” and Sterilized Bond Purchases

Yesterday after much hoopla, press and leaks (and I thought the CIA couldn’t keep their secrets) the ECB and Super Mario, introduced their new “Outright Monetary Transaction” bond purchase sterilization program. Does that confuse you, it sure confuses me, and so I decided to take a look at this plan step by step.

A) What will the European Central Bank buy?

The ECB will buy sovereign bonds with maturities dates of up to 3 years with the aim of “protecting an appropriate monetary policy transmission and the singleness of the monetary policy.”

B) Whose bonds will the ECB buy and under what conditions?

The ECB will only buy the bonds of countries that have applied to the EFSF/ESM and accepted a concurrent “macroeconomic adjustment programme or a precautionary programme.” ‘Precautionary programme’ refers to a species of program buried deep in the EFSF’s repertoire of credit facilities whereby a country can apply to the EFSF to arrange a backstop. The stronger the macro economy of the applicant, the fewer the conditions attached to the program.

In order to qualify for these purchases, a country must submit to an austerity program that would be monitored by other European nations and, potentially, the International Monetary Fund. Under the plan, a country would apply to the European Financial Stability Fund for assistance. To be approved, it must come up with an agreed upon plan to lower its deficit and its debts and usually its spending. Once conditions are in place, Draghi said, the ECB can step in to purchase bonds, helping lower rates.

C) Will bonds purchased under OMT be super senior to other bonds by virtue of being owned by the ECB?

No 

D) Is there a limit to the purchases?

No.

E) Will the purchases be sterilized?

Here the ECB was quite specific: “The liquidity created through Outright Monetary Transactions will be fully sterilized.” (see explanation below)

F) What are sterilized bond purchases?

A form of monetary action in which a central bank or federal reserve attempts to insulate itself from the foreign exchange market to counteract the effects of a changing monetary base. The sterilization process is used to manipulate the value of one domestic currency relative to another, and is initiated in the forex market.

Wikipedia explains sterilized intervention as:

Sterilization in macroeconomics refers to the actions taken by a country’s central bank to counter the effects on the money supply caused by a balance of payments surplus or deficit.[1] This can involve open market operations undertaken by the central bank whose aim is to neutralize the impact of associated foreign exchange operations.[2] The opposite is unsterilized intervention, where monetary authorities have not insulated their country’s domestic money supply and internal balance against foreign exchange intervention.

Sterilization is most often used in the context of a central bank that takes actions to negate potentially harmful impacts of capital inflows – such as currency and inflation – both of which can reduce export competitiveness. More generally, it may refer to any form of monetary policy which seeks to hold the domestic money supply unchanged despite in the face of external shocks or other changes, including the flow of capital out of the relevant area (generally, a country).

While markets are perhaps viewing this as the ECB trying to solve the European sovereign debt crisis through the purchase of distressed bonds, instead it reads to us as though the ECB is trying to compel states to accept the structural adjustments that they need. As Draghi said during the press conference, “No central bank intervention is effective without concurrent (fiscal) policy action.” Insofar as the program accomplishes the goal of compelling fiscal policy action, it’s constructive.

It sounds simple, except it is fraught with potential pitfalls.

For one, the ECB is specifically prohibited from financing the debts of member governments. To get around this, Draghi has argued that the ECB has a mandate to conduct a single monetary policy in the 17-member Euro area.

Euro Gives Back Gains after Draghi Press Conference

The EUR/USD experienced a two-sided market this morning as European Central Bank President Draghi’s plan to begin buying sovereign debt failed to generate the anticipated buying interest. In other words, he appeared to deliver what traders have been expecting while bringing nothing new to the table. Today’s volatile trading action suggests “a buy the rumor, sell the fact” situation. This is the typical reaction to news that has been baked into the price action since late July when Draghi vowed to do “whatever it takes” to preserve the Euro.

On Thursday the ECB left interest rates unchanged as expected, but in the press conference following the meeting, Draghi said the ECB would launch an “outright monetary transaction” plan. On Wednesday, news of the program leaked to traders, triggering a rally in the Euro. This rumor turned out to be very close to the plan announced by Draghi at the press conference.

One reason for the market’s apparent disappointment with the announced plan is that neither Spain nor Italy appears to be willing to cooperate with the provision that they make formal announcements for aid. Another reason for the Euro’s weakness could be disappointment that the central bank did not announce lower interest rates along with the plan as many have concluded that this action could lead to increased economic growth.

The disappointment in the ECB’s announcement sent traders into the U.S. Dollar which put pressure on other currencies. The GBP/USD is also trading lower this morning in reaction to the strength in the dollar. This morning the Bank of England announced that it would keep interest rates at historically low levels as well as refraining from additional stimulus at this time. The Sterling rallied initially after the central bank’s announcement on short-covering. Some traders who were looking for the announcement of additional asset purchases to weaken the British Pound were forced to cover their positions.

The rally was muted by the reversal in the dollar; keep the technically challenged GBP/USD inside of its long-term range. Reports that the government may be preparing to ease some of its austerity measures in an effort to bolster the economy could help to underpin the market over the near-term.

Despite the stronger dollar, both December Gold and October Crude Oil are trading better today. Gold futures rallied after Draghi announced his plan as investors believe it could lead to inflationary pressure. Speculators are also driving up crude oil in anticipation of increased demand from the Euro Zone. They feel that Draghi’s plan could lead to immediate improvements in the Euro Zone because it lifts the veil of uncertainty which may have been holding back economic expansion.

 

The EUR/USD Welcomes Mr. Draghi

The calendar contains several interesting issues. France and, more importantly, Spain will sell government bonds. Especially the latter will be closely watched. The second reading of the EMU GDP and the Germany factory orders probably won’t cause a big market reaction just a few hours before the ECB press conference. Later today, the US ADP labor market report could cause additional volatility and the same is true for the US jobless claims. Tomorrow’s main event is the US Nonfarm payroll report.

Today in the center ring is the European Central Bank meeting and statement by Mr. Draghi.

From a currency point of view, investors will look out whether there is a strong enough commitment from the ECB to buy peripheral bonds. An additional rate cut is probably a euro negative even as it might be supportive for sentiment on risk. The ECB communication on bond buying is some kind of a binary event. So, any prepositioning is highly risky. That said, we assume that the ECB framework on bond buying will be a compromise that is also acceptable for Germany. Conditionality is as such not per se negative, but markets might consider too much emphasis on conditionality as indication that the new system won’t be flexible and forceful enough. To put it otherwise, we are not sure that the message from the ECB will be concrete and strong enough for EUR/USD to move beyond the key resistance at 1.2693/1.2743. However, the devil will be in the details. For example, markets could be more clement short-term if the ECB starts buying Portuguese or Irish bonds.

The sterilization of the liquidity from bond buying should be a euro supportive. (The Fed and the BoE don’t sterilize the liquidity). The ECB crisis strategy will be the key driver for EUR/USD trading today. Of course the US side of the story is only just around the corner, with the payrolls being key input for the Fed to decide on more policy stimulation at the September meeting. So, there is still event risk to come, even after the ECB press conference. The nonmanufacturing ISM might bring the dollar side of the story again into the spotlights. Given the high degree of event risk, we don’t front-run on the decision and keep a close eye on the technical charts to monitor market sentiment.

Asian markets held close to the flat-line. Markets are hopefully looking at the ECB conference, with EUR/USD still holding within striking distance of the recent top.

EUR/USD trading was still technically driven as investors were awaiting the outcome of today’s ECB policy meeting. Recently, investors had reduced euro shorts as they prepared for a big step/change in the ECB crisis management. However, this repositioning ahead of today’s ECB meeting decelerated this week as EUR/USD was unable to break above the post-Jackson Hole top. What no longer could go up, finally came down. So, EUR/USD turned south on Tuesday and this process was extended during morning trade on Wednesday. EUR/USD settled the lower half of the 1.25 big figure.

Once again, there was little in the way of economic news to guide the EUR/USD price action. The final EMU services PMI was weak, but on average it didn’t bring much additional bad news. Technical considerations prevailed. The intraday correlation between EUR/USD and other markets (bonds, equities) was again not very tight. Nevertheless, deepening losses on the equity markets finally pushed EUR/USD to a correction low just north of 1.25. From there, the euro changed course again (this time in lockstep with equity markets). A poor bid in the German Bund auction was seen as an indication that investors still expect big ECB action today. Comments from German Fin Min Schaeuble (he saw the EZ in the same form next year) were also euro supportive. After all, this was just more nervous trading ahead of the today’s key ECB meeting. Early the afternoon, the inevitable quotes from anonymous sources with knowledge of the matter did again their job. These sources were quoted as saying that the bond buying plan would be unlimited. EUR/USD and risky assets jumped higher and the bund was sold. EUR/USD even regained the 1.2599 resistance. So, the recent top at 1.2638 came again within reach. The quotes of course didn’t remove uncertainty on what the ECB will effectively announce today. 

Energy Commodities Focus on ECB

Hope from European Central Bank in today’s meet is holding the market sentiments high. Investors are expecting ECB president Mario Draghi to announce the details of a new bond-buying program for euro-area governments that agree to certain terms. The program will involve unlimited purchases of bonds, which will be “sterilized” to ease concerns about printing money, according to Bloomberg.

 Thus, the effort of keeping the euro safe by ECB policy makers may support the shared currency to remain firm ahead of ECB statements later today.

Oil futures prices are holding above $96/bbl in international market currently driven by higher equity market and positive moving Euro.

Crude oil inventories fell by 7.2mn barrels, gasoline stocks declined by 2.3mn barrels, while distillates inventories declined by 132,000 barrels, as per API report. Expect the US energy department to show declining stocks data from the last week which may again support oil prices to remain high in the US session. With the closure of a good deal of production facilities in the Gulf last week due to Hurricane Isaac, inventories are expected to decline.

Crude oil exports from Iran have fallen below the symbolic threshold of 1mn barrels per day, according to an oil shipping tracker, reaching its lowest level in more than two decades as the impact of sanctions deepens. The decline was down to lower lifting from China and India – which have struggled to find tankers to transport Iranian oil due to a European Union insurance ban.

From economic data front, after the ECB we will see activity from the US including weekly unemployment numbers and the ADP jobs projections. And then tomorrow will unveil the all important Nonfarm payroll report. Market will be waiting for ADP data which is likely to improve in a slower pace.

Today session, we are expecting oil prices to react more to the ECB meet decision on its bond buying program and interest rate declaration. Overall, trend till European session is looking more bullish ahead of ECB meet and thereafter Inventory data from US energy department.

Natural gas prices are trading almost flat at $2.800/MMBTU. The US energy department projects that, natural gas storage is likely to increase in a slower pace than prior week, may support gas to trade on higher side. However, as per Commodity Weather Group LLC predicted mostly normal or below-normal temperatures in the eastern and southern U.S. from Sept. 10 to Sept. 14 after hot weather this week. Cooling demand in the U.S. may be 12 percent lower than average from Sept. 11 to Sept. 15, according to Weather Derivatives. This may keep gas prices under pressure ahead of inventory data releases.

Today is all about the ECB keep an eye on Gold

Wall Street ended little on changed on Wednesday, as investors await the outcome of a crucial meeting of European Central Bank officials early Thursday and the latest U.S. employment data on Friday.

The Dow Jones edged up nearly 0.1%, while S&P 500 lost 0.1%. Nasdaq fell 0.2%.  Investors are expecting ECB president Mario Draghi to announce the details of a new bond-buying program for euro-area governments that agree to certain terms. The program will involve unlimited purchases of bonds, which will be “sterilized” to ease concerns about printing money, according to Bloomberg.

Meanwhile, traders are keeping a close watch on all economic numbers ahead of the Federal Reserve’s Sept. 12-13 policy meeting, since the reports will likely influence the central bank’s decision on whether it will announce more quantitative easing. 

European stocks closed mixed yesterday, as reports of unlimited bond buying by the European Central Bank helped support equities despite economic slowdown signals. Only Britain’s FTSE 100 slid 0.2%, while France’s CAC 40 gained 0.2% and DAX in Germany added 0.4%.

This morning Asian indices are trading on a mix note with the Strait Times and the Hang Seng trading lower by 0.2% and 0.1% respectively. However, the Nikkei and Taiwan are up by 0.1% each, while the Kospi and Shanghai are trading in the green by 0.6% and 0.3% respectively. So when I say mixed I really do mean mixed.

Base metals are trading marginally down after yesterday’s gains at LME electronic platform. Even, early morning news indicated that Moody’s credit rating agency downgraded Ireland and Portugal from Aaa to A3 and Baa3 while Goldman Sachs lowered the Chinese growth forecast from 7.9 to 7.6 percent and may continue to weaken metals.

As we expected the ECB would not opt for interest rate cut below 0.75 percent primarily due to near zero deposit rate. Now, if the ECB lowers interest rate then the deposit rate may go below the 0 percent mark. Therefore, the ECB may opt for bond buying but again the largest stakeholder of the central bank the German Bundesbank may continue to oppose with its chief even hinting resignation is likely to keep markets at tenterhook.

From the economics calendar today, the eurozone GDP may contract with a slight improvement in German factory orders, however markets are likely to remain buoyant as investors wait for the details of bond buying program. Later today the US starts to heat up with jobs growth in ADP numbers and unemployment figures ahead of tomorrow’s Nonfarm payroll report.

Mounting on the strongest anticipation on ECB to pledge unlimited bond buying vowing for a euro salvation, the yellow metal is showing strength at the early Globex. The euro is continuing its strength against the dollar and thereby supporting the metal. Expect ECB to keep the interest rate unchanged at 0.75% as they cannot pursue price stability with the fragmented euro area since a change in rate will only be affecting one or two countries at the most.

However, they may be launching a new sovereign bond purchasing program and Draghi needs to unveil the program details. Any deviation from the oath however is likely to be injurious to the euro. Gold is therefore likely to stay firm at least till the European hours after which volatility can certainly be seen.

Silver should see a double whammy today, as a successful bond program could increase manufacturing and production and the demand for industrial metals, while keeping precious metals high.

EUR/USD Rallies after ECB Moves Closer to Stimulus Plan

The EUR/USD reversed course as traders reacted to the news that the European Central Bank may agree to buy distressed government bonds in unlimited quantities. Additionally, in order to prevent this from causing inflation because of a boost in money supply, the central bank said it would sterilize the purchases. The news triggered an intraday rally which sent the currency pair to 1.2621, slightly below last week’s high at 1.2634.

 Traders like the proposal because it would not offend the Bundesbank since it would not require the printing of money. The ECB is also likely to agree that it would not set a public cap on yields.

 The recent weakness in the Euro continued early in the session after the final reading of the August purchasing managers’ index for the Euro Zone services sector was reported at 47.2. This number was down from 47.9 in July and an earlier estimate of 47.5. This news shows a contraction in the economy which probably puts pressure on the ECB to act soon.

 The GBP/USD is also benefiting from the weaker dollar and the ECB news. In addition, the Sterling got a boost from a report showing that theU.K.recession may be easing. Interest rates firmed a little in the U.K. after it was reported that services growth grew faster than estimated in August. This is leading to speculation that the Bank of England may refrain from expanding its bond-purchasing program on September 6.

 Besides beating economist estimates, the news may have caught short traders by surprise ahead of tomorrow’s important monetary policy meeting. All of this being said, the news from the ECB is probably having the most influence on the price action in the British Pound since stabilization of the Euro region will have a bigger impact on the U.K. economy at this time. 

October Crude Oil is trading lower today despite the weaker dollar and forecasts for lower inventory figures on Thursday. Typically, a weaker dollar gives commodities priced in dollars a boost, but this week, traders appear to be hedging themselves ahead of Thursday’s European Central Bank meeting and Friday’s U.S. Non-Farm Payrolls report. Losses are being limited on the thought that refineries drew down supply last week ahead of Hurricane Isaac. 

December Gold is trading mixed-to-flat as bullish traders continue to battle the psychological $1700.00 price level. The weaker dollar is helping to underpin the precious metal but like crude oil traders, gold traders may be standing on the sidelines ahead of tomorrow’s ECB and BOE central bank meetings.

EUR/USD waits for the ECB

Let’s face it, with two marquee events a week apart, market focus moved from Ben Bernanke to Mario Draghi, with little else on their minds. Traders are single mind individuals with short attention spans and blinding focus.

The eco calendar today is again moderately interesting. In the EMU, the final reading of the services PMI’s will be released. After weak figures from the manufacturing sector earlier this week, investors probably expect a further downward revision for this indicator too. However, the impact on EUR/USD trading should be limited. In the US, only some second-tier economic data are scheduled for release. Yesterday, EUR/USD gradually came off the recent top. Recent strength of the euro was at least partially due to short-covering ahead of this week’s ECB meeting. We have the impression that this move has run its course. Trading will probably remain erratic going into the ECB meeting. That said, if the repositioning out of euro shorts is more or less over, EUR/USD might drift still a bit further south as long as there is no high profile news/surprise (e.g. from the US data). Of course, tomorrow’s ECB meeting will be a key factor to decide on the next big move of EUR/USD.

Yesterday there was little news to inspire EUR/USD trading except news and rumors about the ECB programs. There was the usual market talk on disagreements between EMU policymakers but these headlines didn’t affect the euro much. EUR/USD remained well bid with all eyes still on the Thursday’s ECB meeting where chairman Draghi is expected to announce a big step on ECB bond buying. The Eurodollar hovered in a tight range just above 1.26 during the morning session in Europe. In technical/order driven trade, the pair dropped below this big figure in the run up to the restart of US trading and even tested the post-Jackson Hole lows in the 1.2560 area. Once again, the link with the developments in other markets (bunds, equities) was rather loose.

Separate markets followed their own technically inspired dynamics. Later, the market focus turned to the US ISM of the manufacturing sector. The report came out weaker than expected as the headline index dropped from 49.8 to 49.6, while a slight rebound to 50 was expected. The deviation from consensus was small, but the report didn’t bring any objection for the Fed not to proceed with further policy stimulation in the near future. At the same time, US July construction was also reported below consensus at -0.9% M/M vs + 0.4% expected. So, the dollar lost a few ticks across the board and EUR/USD rebounded to the 1.2590 area. There was a small reaction on the bond markets and on equity markets, too. However, the report didn’t really change the course of events.

The pair closed the session at 1.2566, compared to 1.2593 on Monday.

This morning sentiment on risk remained negative in Asia. Of late, the link between risk and EUR/USD was not that tight anymore, but risk-off is also no help for the single currency. This morning it reinforced yesterday’s technical correction of EUR/USD with the pair testing offers in the 1.2525 area. The Aussie dollar is losing further ground as the Q2 GDP was reported slightly weaker than expected (0.6% Q/Q vs 0.7% expected).

Crude Oil and Natural Gas Fundamentals

Wednesday morning, oil futures prices are holding almost flat at $95/bbl with a reaction to the inventory data expectation. As per US energy department crude oil stocks are likely to fall by more than 5 million barrels in the last week along with other petroleum stocks. However, refiners are likely to cut their capacity utilization due to hurricane season. On the other side, largest oil consuming nation US’s vehicle sales has been increased in the last month might be supporting prices slightly.

U.S. crude-oil futures fell Tuesday amid declines in broader markets as worries re-emerged about the economic outlook following weak data on the manufacturing sector. Prices tumbled from positive to negative territory early in the session as investors fled from a poor reading on the U.S. manufacturing sector. While U.S. fuel-product supplies have dropped in recent weeks compared with average levels, signs of weakness in the global economy, particularly in China, have tempered hopes about continued oil and fuel demand. Still, traders, worried about increasing tension in the Middle East, are reluctant to bet on big declines. Rhetoric from Israel and Iran about Iran’s nuclear program has grown more contentious in recent weeks.

ECB president Mario Draghi has said about buying bonds while may go for unchanged interest rate. Thus, ahead of tomorrow’s meet global market is getting skeptical which is showing in the equity market. The shared currency is likely to remain weak ahead of tomorrow’s meet and lower economic data expectation from euro-zone.

From economic data front, PMI numbers from Europe and German are likely to remain under growth which may weigh on the shared currency and weigh on oil prices. Increasing nonfarm productivity with slower pace rise in unit labor cost may support oil prices in the US session on speculation of higher demand on the back of increasing demand from US consumer.

Crude oil prices declined, as concerns about slowing economic growth and curbed demand for petroleum countered hopes for more monetary stimulus from central banks in the United States and Europe.

Global crude oil markets are reasonably well supplied, but there are signs of tightening in refined fuel products, as per the head of the International Energy Agency.

G7 finance ministers have voiced concerns about the effect of high oil prices on the global economy but officials in Italy and Germany last week indicated opposition to releasing strategic petroleum reserves.

Natural gas prices are trading almost flat at $2.854/MMBTU in Globex electronic platform. As per US energy department, natural gas storage is likely to increase in a slower pace than prior week, may support gas to trade on higher side.

An active hurricane season with presence of tropical storm Leslie which is becoming stronger but not moving much may keep threat of supply disturbances. This may support the trend in gas prices.

Natural gas futures rose nearly 2%, yesterday up for the fourth straight session along with stronger cash gas as industrial demand returned after the long US Labor Day holiday weekend.

The use of natural gas in U.S. trucks and fleet vehicles could skyrocket over the next two decades as low prices and new infrastructure provide incentive to switch to the cheap fuel was recently cited in an article in Reuters which is helping to support prices

The number of rigs drilling for natural gas in the United States slid by 13 last week to a 13-year low of 473, as per data from Houston-based oil services firm Baker Hughes showed.

Dreams About Central Banks and Gold

Again this morning base metals are trading sluggishly with aluminum and zinc slightly down while other metals are marginally up by 0.17 percent at London Metal Exchange. The continued slowdown in China is weighing heavily on the metals family. This morning Chinese services PMI reported below the previous adding to the ongoing economic problems in China.

The Asian equities are also trading weak after negative US releases yesterday coupled with looming uncertainty in the Euro-zone. Further, the Chinese demand has remained weak and has largely been mitigated by South Korea as the heartland has procured huge metal stockpiles recently limiting downside in metals. Even the US vehicles sales have rebounded and improved consecutively for the second month and may support gains in aluminum prices ahead in the session.

Markets are eying the ECB rate decision scheduled tomorrow, while the ECB President has commented that “We cannot pursue price stability now with a fragmented euro area because changes in interest rates affect only one country, or two countries at most, They have no importance whatsoever in the rest of the euro area.” Expect the ECB to refrain interest rate cut and may propose plan for short term bond buying. Hence, tomorrow’s meet would provide further clues regarding the ECB’s plan and the shared currency is likely to remain sluggish and may disappoint gains during the day.

From the economic data front, the Euro-zone PMI numbers are likely to remain weak while the retail numbers may also decline and may continue to support downside in base metals. From US, the non-farm productivity and unit labor cost are likely to improve slightly and may help in recovering base metals.

As long as the US macroeconomic releases continues to disappoint, hopes of easing amplifies, on the back of which gold remains solid. After marking off the $1700, a level that was seen last in March 2012, gold holds nerve ahead of the mostly eyed ECB meet on Thursday. At present it has seen hardly any change at the Globex while the Asian stocks were hit on the back of slowing US economy.

Keeping the ECB reference rate intact with resumption in bond buying and an indication of higher inflation would be a supportive factor for euro and gold as well. However, the Euro area PMI numbers may stay more or less at the prior level later today while the Euro zone GDP may continue to shrink. The US releases however are expected to be slight positive for dollar in terms of increasing productivity and unit labor cost.

Gold holdings  of SPDR gold trust, the largest ETF backed by the precious metal, increased to 1,293.14 tons, as on Sept 4. Silver holdings of iShares silver trust, the largest ETF backed by the metal, declined to 9,642.97 tons, as on Sept 4. Gold producers’ average total cash costs jumped 19% to a record $727 per ounce in the first half as output was little changed, as per Thomson Reuters GFMS.

Gold output rose slightly to 1,366 tons in the first half from a year earlier and second-half supply is expected rise 1.7% percent year-on-year to 1,482 tons, as per GFMS. Holdings of gold-backed exchange-traded funds rose to a record high of 71.889mn ounces (2,038 tons) by Sept. 4 while Silver ETF holdings stood at 501.503mn ounces, easing from 504.431mn hit in late August, the highest level since May 2011.

The Federal Reserve could act soon to shore up the frail economy. As the weak data reinforced expectations for another round of quantitative easing by the Fed, the ECB is under increasing pressure to cut excess borrowing costs ahead of a policy setting meeting on Thursday. Investors may adopt a cautious approach before the meeting, and the all-important U.S. non-farm payrolls data due on Friday. 

U.S. Dollar Strengthens on Weak Manufacturing News

News that U.S.manufacturing shrank the fastest in more than three years in August is helping to drive traders into the safety of the dollar as trader sentiment shifted into “risk off” mode. 

Last month’s weakness was the third in a row of contraction in manufacturing according to the Institute for Supply Management survey. The ISM’s index of national factory activity fell to 49.6 in August from 49.8 in July. 

Early in the trading session, the Euro rose as Spanish and Italian yield curves steepened sharply on reports that ECB President Mario Draghi told a European Parliament committee that the central bank could buy bonds. This was considered a positive event because of prior concerns that the ECB was violating a mandate that prevented the purchase of bonds with maturities as long as three years. 

The Euro turned positive against the Dollar later in the session when the weak U.S.economic data was released. Expectations are that Draghi is going to provide more details of his bond purchasing plan on Thursday after the ECB meets to decide monetary policy. 

The U.S. Dollar is trading higher against the British Pound. A flight to safety rally is helping to boost the Greenback. There are also concerns that the Bank of England is going to implement another round of quantitative easing in the form of additional bond purchases. Printing more currency tends to have a negative effect on the currency. 

The news that U.S.manufacturing shrank last month is not good for the crude oil market. With supply relatively high, a drop in demand could encourage more selling. Additionally, the U.S. Dollar is being driven higher which is making commodities priced in dollars more expensive. This is likely to also pressure demand. 

Despite the stronger dollar, December Gold is trading higher. This means that investors are driving the market. Upside momentum is picking up as the market penetrates key retracement zones. Following several months of accumulation, it now looks as if speculators are willing to chase this market higher.

This Week is all about US Jobs Data

After Mr. Bernanke’s speech last week markets are all focused on the ECB meet on the 6th, but will immediately turn back to the US nonfarm payroll report. Based on Mr. Bernanke’s statements, his main concern and reason for offering up monetary stimulus would be to create jobs.

The data will be released on Friday, and even more attention will go out to the labor market data with the ADP and unemployment reports scheduled for release prior to the Nonfarm.

After months of disappointing reports, the payrolls finally brought some good news last month. Employment growth picked up from a very slow pace of around 75 000 on average in the second quarter to 163 000 in August, beating the consensus which was looking for an increase in nonfarm payrolls by 100 000.

Also the breakdown showed some signs of improvement, but the question is whether the positive development can be confirmed. There are indications that the weather-related strength late 2011 and early this year boosted the payrolls, which was followed by payback later on. The weather related distortions might have faded now and the payrolls should hover again towards more normal levels in the coming months.

For August, the consensus is looking for a gain in private employment by 125 000 down from 163 000 in July. The difference will mainly be based in the manufacturing sector, where employment growth is expected to have slowed from 25 000 to 10 000.

The consensus looks quite fair to us, but we believe that the risks, if there are any, might be on the downside of expectations.

The ADP report, on Thursday, might give us further indications about what to expect from the payrolls, although lately it has not been a good leading indicator.

Also on Thursday, US initial jobless claims are forecast to continue to hover sideways, around the 370 000 level. In the week ending the 1st of September, initial jobless claims are expected to have dropped by 4 000, from 374 000 to 370 000.

Thursday’s data will follow on the heels of the ECB meeting and statements by Mr. Draghi, so it promises to be an interesting end of the week.