Need To Know News

Enbridge is moving ahead with a multibillion-dollar plan to ship Crude to Asia from the Alberta oil sands. Having secured C$100mln in funding from oil sands producers and Asian refiners for the Gateway pipeline, the company will file its regulatory application for the pipeline in Q1 2009.

The pipeline had been suggested some time ago but was shelved as Enbridge focused on its US expansion projects. The proposal was dusted off early this year as interest from refiners in Japan and Singapore ignited, according to a company statement.

The combination of soft Canadian GDP– down 0.1% — and falling oil prices has left the loonie exactly where it’s been stuck for the past week — on the losing side. CAD has recouped some of today’s losses as the afternoon wears on, though, with USD/CAD now up only 1 pip to 1.0235, EUR/CAD up 8 pips to 1.5949, and CAD/JPY down 25 pips to 105.40.

A highly volatile day for equities and poor GDP numbers have encouraged safe-haven buying in both the US and Canada. The Canadian 10yr yield is down 11bps to 3.71% and the 2yr is down 12bps to 2.95%.

Meanwhile, the energy heavy S&P/TSX is on a rollercoaster ride yet again, currently down 46 points to 13,634 after y/day’s 350-point leap. Suncor Energy is off 3.1% and Canadian Natural Resources is down 2%.

The Toronto index plunged 100 points earlier in the day, but RIM drove the rebound with a 3.7% gain. Financials have also held on firmly with RBC up 1% and CIBC up 1.5%.

Dealers have noted leveraged account USD/JPY bids in place under 107.80, which so far, have put a floor under the pairing into mid-afternoon dealings. The pairing has been relatively resilient despite weak equities, and overall, it appears most see upside risk to Friday’s employment data, and look to Wednesday’s better ADP report for guidance, rather than the perhaps distorted initial claims data released this morning.

The July ISM Manufacturing Index is expected to fall to 49.0 from 50.2 in May. The June New Orders Index dropped to 49.6 from 49.7, the Shipments Index grew to 51.5 from 51.2 and the Employees Index declined to 43.7 from 45.5 in May.

The Prices Paid Index grew to 91.5 in June from 87 in May, the Inventories Index rose to 51.2 from 48, and the Backlogs Index increased to 47.5 from 46.

After posting a reading over 50 in May for the first time in June, ISM looks set to come in below that level again in July. However, the index still is above normal recessionary levels.

In Regional FED data, New York and Chicago indices beat expectations, but the Philadelphia index was lower than consensus.

July Empire State FED Index: -4.9 vs. -8.7 prior

New Orders: 8.3 vs. -5.5 prior

Prices Paid: 77.9 vs. 66.3 prior

Employment: -6.3 vs. 1.2 prior

July Philly FED Index: -16.3 vs. -17.1 prior

New Orders: -12.1 vs. -12.4 prior

Prices Paid: 75.6 vs. 69.3 prior

Employment: -7.3 vs. -6.9 prior

July Chicago PMI: 50.8 vs 49.6 prior

New Orders: 53.5 vs. 52 prior

Prices Paid: 90.7 vs. 85.5 prior

Employment: 45.9 vs. 46.7 prior

Metals traded higher across the board, with Gold and Silver well bid off of USD weakness and lower bond yields. Gold surged to an intraday high at 925.60 shortly after this morning’s data before consolidating with a narrow range between 915 and 917 in the middle of today’s range. Gold, up 1.2% to 913.90, has unable to break through its 9-Day moving average and closed below the coincident range (920-925) from the end of last week.

Silver, up 1.8% to 17.77, mirrored movements in gold for most of the day and closed in the middle of today’s range with support above its 9-Day moving average at 17.62.

Platinum, up 1.5% to 1764, closed in the mid to upper portion of today’s range but below its 9-Day moving average and within narrow range since July 24th.

Copper, up 0.5% to 366.45 closed in the mid to lower portion of today’s range which was bound by the 200-Day moving average at 371.25 and the 9-Day moving average at 363.57.

The USD has taken back most of this morning’s losses and is now flat to lower across the board relative to the major currencies with the USD Index marginally lower at 73.264.

The USD rebound appears to be guided by extended selling in energies, and perhaps the surge in the Chicago PMI Prices Paid Index published earlier this morning.

Lower bond yields and weakness in equities combined with this morning’s lower than expected data will continue to complicate interest in greenback this afternoon and should yield range bound trade into the close ahead of tomorrow’s employment report.

Fed fund futures have given back some of their gains but are still higher on the day, and now reflect a 31% chance of a rate hike in September from 36% yesterday.

Estimates for July Non-Farm Payrolls show a very wide range (unchanged to -150k), with a median view of -75k following -62k in June. Many surveyed analysts have yet to adjust their estimates following the July ADP report.

The unemployment rate is expected at 5.6% from 5.5% prior. Manufacturers’ payrolls are expected to drop 40k in July after declining 33k in June. Average hourly earnings are expected to increase 0.3% and average workweek hours are expected to be unchanged at 33.7.

Government employment jobs should help whittle down the headline number in the July report, but further job losses in manufacturing and construction are expected in July as businesses continue to scale back production in response to rising energy costs and declining demand. Better overseas demand as a result of the weak USD represents one of the few bright spots in US manufacturing, though it is unlikely to have a significant impact in the July employment report.

The July ADP report revealed a worse than expected 65k drops in goods employment. The employment indices in the Empire Fed Index and Chicago PMI each declined further in July.

Service-sector employment is widely expected to be muted over the period, which may make goods based sector job declines that much more painful. Private sector jobs fell 22k in June following a 37 decline in April and would have been worse, save for increases in Education and Health employment.

The July ADP report revealed a surprising 74k increase in service sector jobs, which could yield a higher than expected print the July employment report; however, service sector jobs published in the ADP report have tended to overshoot those published in the government report over the past 8 months.

Initial Jobless Claims over the period were volatile and were impacted by seasonal factors and retooling in certain regions. Removing some of the noise from the claims data reveals a consistently upward trend over the period.

UofM Confidence data remained weak over the period which does not bode well for the July employment report. The typically volatile Household Survey for employment revealed a 155k decline in jobs following a 285k decline in May. The Monster Employment Index fell 3 points in June and is in negative territory on a y-o-y basis for the first time since the index’s inception in ’93.

A Department of Labor Official noted that “less than 50% of people eligble for fiiing an Initial Jobless Claims do so”.  The reasons for not filing for an Initial Jobless Claim is thought to be an eligibility issue; people don’t file because they don’t think they are eligible.   A Department of Labor spokesperson notes that current special factors, the implementation if EUC and state generated letters to previous claimants, mean Initial Claims could be higher for 4 to 6 weeks.  The Labor spokesperson notes that the Tier 3 Emergency Unemployment Compensation program was signed by the President on 30 June and states started sending letters to possible claimants on 6 July.  Labor notes that the 4 to 6 week of higher claims is based on the 4 to 6 week period in 2002 when Initial Claims rose due to the enactment of the Temporary Extended Unemployment Compensation act.  The TEUC was enacted in 2002 and lasted until 2004.  In short, we should look for higher Initial Claims for at least the next 4 to 6 weeks.