Hungary makes waves
Risk appetite headed south ahead of the US employment report on new developments in Hungary, that were at least hinted at yesterday by a spike higher in EURHUF on an "informal" visit from the IMF to Hungary. Now suddenly it has come to light that Hungary's finances are a shambles after the new center-right PM Orban took power on May 29 and now is out suggesting that the country is in a "grave situation" because the previous government lied about the state of the economy and cooked the public books. More news on specifics is expected this weekend, and the news is not likely to be pretty, as the previous administration was obviously up to no good, and as the PM will likely try to firmly pin as much of the situation on his predecessors as possible. The situation is reminiscent of Greece, with important differences - Hungary can devalue its currency and can more easily default than Greece - the question is how it handles its mortgage debt - much of it denominated in Swiss francs - and whether the country gets another IMF bailout or ends up in some kind of default. EURCHF broke below 1.4000 in today's trade - but are CEE defaults a CHF positive? More on this in the future. In any case, the situation puts a damper on the entire EM complex as it reminds how fragile these economies are when a crisis hits.
Risk appetite headed south ahead of the US employment report on new developments in Hungary, that were at least hinted at yesterday by a spike higher in EURHUF on an "informal" visit from the IMF to Hungary. Now suddenly it has come to light that Hungary's finances are a shambles after the new center-right PM Orban took power on May 29 and now is out suggesting that the country is in a "grave situation" because the previous government lied about the state of the economy and cooked the public books. More news on specifics is expected this weekend, and the news is not likely to be pretty, as the previous administration was obviously up to no good, and as the PM will likely try to firmly pin as much of the situation on his predecessors as possible. The situation is reminiscent of Greece, with important differences - Hungary can devalue its currency and can more easily default than Greece - the question is how it handles its mortgage debt - much of it denominated in Swiss francs - and whether the country gets another IMF bailout or ends up in some kind of default. EURCHF broke below 1.4000 in today's trade - but are CEE defaults a CHF positive? More on this in the future. In any case, the situation puts a damper on the entire EM complex as it reminds how fragile these economies are when a crisis hits.
Chart: CHFHUF
During the go-go days of the great global credit bubble, when risky assets of all stripes were appreciating almost regardless of fundamentals, it seemed a no-brainer for Hungarian citizens to finance their home purchases in Swiss francs, where interest rates were very low and the currency was weakening, while Hungarian rates were far higher and HUF was strengthening. During the middle years of the decade, up to 80% of mortgages were financed in foreign currencies. The chart below shows how much more expensive those mortgages have now become from currency appreciation - some 33% or more from 2007 lows in CHFHUF.
During the go-go days of the great global credit bubble, when risky assets of all stripes were appreciating almost regardless of fundamentals, it seemed a no-brainer for Hungarian citizens to finance their home purchases in Swiss francs, where interest rates were very low and the currency was weakening, while Hungarian rates were far higher and HUF was strengthening. During the middle years of the decade, up to 80% of mortgages were financed in foreign currencies. The chart below shows how much more expensive those mortgages have now become from currency appreciation - some 33% or more from 2007 lows in CHFHUF.
New PM for Japan
As many expected, FinMin Naoto Kan became the new prime minister of Japan after Hatoyama's resignation. The consensus is that Mr. Kan will want to more aggressively resist any further JPY strength, a pressing matter in a country experiencing seeming perma-deflation, but also paradoxically, the country with the world's heaviest public debt load. USDJPY was able to stay a bit elevated at the top of the recent range through the first round of Hungary-triggered turmoil this morning, but the US employment report surprise was too much for the pair to bear just after the release, at least, and the sell-0ff shows us that the JPY has a hard time selling off when risk appetite is on the wane and bonds rally. Still, let's see what kind of rhetoric emerges. For now, it appears that as long as "risk off" remains the theme and government bonds are on the bid, Japan bears may find better levels to sell the JPY.
As many expected, FinMin Naoto Kan became the new prime minister of Japan after Hatoyama's resignation. The consensus is that Mr. Kan will want to more aggressively resist any further JPY strength, a pressing matter in a country experiencing seeming perma-deflation, but also paradoxically, the country with the world's heaviest public debt load. USDJPY was able to stay a bit elevated at the top of the recent range through the first round of Hungary-triggered turmoil this morning, but the US employment report surprise was too much for the pair to bear just after the release, at least, and the sell-0ff shows us that the JPY has a hard time selling off when risk appetite is on the wane and bonds rally. Still, let's see what kind of rhetoric emerges. For now, it appears that as long as "risk off" remains the theme and government bonds are on the bid, Japan bears may find better levels to sell the JPY.
Meanwhile, in Euro news
In Europe, sovereign debt spreads were wider again and provided the fuel for taking EUR/USD within reach of the psychologically significant 1.2000 level. It's hard to see what will stop the Euro's downside risk save for the "no new seller" risk, as market positioning eventually gets overcooked, no matter how alarming the fundamentals. The French PM was out saying that only EUR/USD parity would be good news, but such pronouncements mean little as the French are always seen as ready to talk down the Euro. But the basic spirit of his rhetoric is likely felt by many, though we all have to remember that the weak Euro is a result of a fear of a meltdown in the European banking system. On that latter note, our bank stress indicators (simple measures we assume reflect counterparty risk perception) have also stretched to new wide levels today.
In Europe, sovereign debt spreads were wider again and provided the fuel for taking EUR/USD within reach of the psychologically significant 1.2000 level. It's hard to see what will stop the Euro's downside risk save for the "no new seller" risk, as market positioning eventually gets overcooked, no matter how alarming the fundamentals. The French PM was out saying that only EUR/USD parity would be good news, but such pronouncements mean little as the French are always seen as ready to talk down the Euro. But the basic spirit of his rhetoric is likely felt by many, though we all have to remember that the weak Euro is a result of a fear of a meltdown in the European banking system. On that latter note, our bank stress indicators (simple measures we assume reflect counterparty risk perception) have also stretched to new wide levels today.
Nonfarm circus upon us
After revisions and predictions that just couldn't seem to go high enough (700k and more in some cases leading into this morning), the final US Nonfarm payrolls release for May was a huge disappointment, coming in at a "mere" 431k as compared with the 536k Bloomberg consensus. Worse still, the Change in Private Payrolls number was a mere 41k (compared to last three months of 62k, 158k and 218k last month), which probably isn't even sufficient to track the growth in the US population. Past history tells us that May is the peak of census hiring, so the coming few months' numbers will be very important for overall payrolls. On a slightly more positive note, the actual unemployment rate did drop a bit more than expected to 9.7% and earnings and hours worked were a bit higher than expected. It's still a bit worrying how slow the US has been to turn around the job market. The two other great peaks in unemployment (1975 and 1982-3) saw the unemployment rate some -0.8% and -1.4% lower seven months after the peak. This time around, we are only -0.4% lower. Even the lower peak in unemployment in the early 1990's saw the rate falling -0.5% by seven months after the peak. What are the implications of this sticky high unemployment?
After revisions and predictions that just couldn't seem to go high enough (700k and more in some cases leading into this morning), the final US Nonfarm payrolls release for May was a huge disappointment, coming in at a "mere" 431k as compared with the 536k Bloomberg consensus. Worse still, the Change in Private Payrolls number was a mere 41k (compared to last three months of 62k, 158k and 218k last month), which probably isn't even sufficient to track the growth in the US population. Past history tells us that May is the peak of census hiring, so the coming few months' numbers will be very important for overall payrolls. On a slightly more positive note, the actual unemployment rate did drop a bit more than expected to 9.7% and earnings and hours worked were a bit higher than expected. It's still a bit worrying how slow the US has been to turn around the job market. The two other great peaks in unemployment (1975 and 1982-3) saw the unemployment rate some -0.8% and -1.4% lower seven months after the peak. This time around, we are only -0.4% lower. Even the lower peak in unemployment in the early 1990's saw the rate falling -0.5% by seven months after the peak. What are the implications of this sticky high unemployment?
Canada jobs and construction
Meanwhile, north of the US border, the Canadian job report was mixed, with better payroll numbers but with an unemployment rate that refused to drop as expected. Building permits registered a fat increase rather than a small decrease in April. As we suggested yesterday, the status of the risk trade is far more important for CAD levels than the fundamentals. And on a side note, looking at a pair like EURCAD, we wonder if it's time to put in a longer term bid on that pair - it has simply gone too far as the recent, very sharp rally suggested. Recall that the EURCAD rally before the recent sell-off took place as the market action got very nervous and this kind of situation could repeat itself, as the Euro is at least nominally rewarded for its deep liquidity.
Meanwhile, north of the US border, the Canadian job report was mixed, with better payroll numbers but with an unemployment rate that refused to drop as expected. Building permits registered a fat increase rather than a small decrease in April. As we suggested yesterday, the status of the risk trade is far more important for CAD levels than the fundamentals. And on a side note, looking at a pair like EURCAD, we wonder if it's time to put in a longer term bid on that pair - it has simply gone too far as the recent, very sharp rally suggested. Recall that the EURCAD rally before the recent sell-off took place as the market action got very nervous and this kind of situation could repeat itself, as the Euro is at least nominally rewarded for its deep liquidity.
Looking down the road for CAD, a struggling China and a potential double dip in the US will mean lower demand for Canadian resources and the Canadian housing market (an inflating bubble worse than the infamous US housing bubble, if somewhat less hazardous due to less "financial innovation" and less leveraging by Canadian banks) could roll over any day/week/month now. Canada's apparent strength has been far too reliant on the construction industry and housing gains and the strong loonie will likely prove to have given the country some degree of the Dutch disease, a development that will be more evident once house prices begin to tank. A close above 1.0500 again today could set the tone for a higher USDCAD next week. Watch out for Canada's Ivey PMI out shortly.
Looking ahead
Let's see how we close the day here for better end-of-the-day and end-of-the-week signals. For now, it certainly appears that risk is off, but markets have been chopping bulls and bears to bits lately with frequent direction changes, so it behooves all of us to stay very careful out there. Watch the bond markets particularly closely, so far we have seen an enormous snap-back rally that has refused to retrace in the least almost a full hour after the US employment report release.
Let's see how we close the day here for better end-of-the-day and end-of-the-week signals. For now, it certainly appears that risk is off, but markets have been chopping bulls and bears to bits lately with frequent direction changes, so it behooves all of us to stay very careful out there. Watch the bond markets particularly closely, so far we have seen an enormous snap-back rally that has refused to retrace in the least almost a full hour after the US employment report release.
Stay tuned for our closing note later today for a summing up of the day's action and a glimpse at next week's key event risk highlights.
Economic Data Highlights
- UK May Halifax House Prices fell -0.4% MoM vs. +0.3% expected
- EuroZone GDP rose +0.2% QoQ and +0.6% YoY vs. +0.2%/0.5% expected, respectively
- Canada May Unemployment Rate out at 8.1% vs. 8.0% expected and 8.1% in Apr.
- Canada May Net Change in Employment out at 24.7k vs. 15k expected
- Canada Apr. Building Permits rose 5.4% MoM vs. -2.0% expected
- US May Change in Nonfarm Payrolls out at 431k vs. 536k expected
- US May Change in Private Payrolls out at 41k vs. 180k expected
- US May Unemployment Rate out at 9.7% vs. 9.8% expected and 9.9% in Apr.
- US May Average Hourly Earnings rose 1.9% YoY vs. 1.6% expected
- US May Average Weekly hours rose to 34.2 vs. 34.1 expected and 34.1 in Apr.
Upcoming Economic Calendar Highlights
- Canada May Ivey PMI (1400)
- New Zealand May QV House Prices (Sun 1200)
- Australia May AiG Performance of Construction Index (Sun 2330)
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