BMO Capital Markets - Busch Update

Good morning,

After worse than expected (wte) US nonfarm payroll numbers (-467 ve -367) and dwindling average hourly earnings, equities are getting pummeled and the greenback¥ are strengthening on risk off demand. Who knew ADP would be accurate for a change? The US dollar index is up .51 at 80.13. As predicted/expected yday, North Korea test-fired two short-range missiles today and may fire mid-range missiles soon. How the world would change if they fired them missiles and the US shot them down....The Overnight Libor: US is at .26813%, EU is at .2725%, and UK .55%. The 3mth Libor to 3mth OIS spreads: US is at 38, EU is at 47, UK is 77. The 1yr OIS are US at .43, EU .81%, and UK at .67%.

Global equities are declining after the weak US employment data with the US S&P 500 is down 12 pts. US 10 yr note yield is at 3.50% and the 2yr note at 1.01% with the spread at 249. The TED spread fear factor is at 42 and the VIX is at 25.30, CVIX which closed at 13.939. Crude is up $1.75 at $71.63, nat. gas is at $3.87, and home heating oil is at $1.82 and the CRB is at 252.32. Wheat is at 5.16 and corn at 3.71.

Not So EZ Jobs: The Eurozone announced that almost 1 out of every 10 workers is out of a job as the unemployment rate jumped to 9.5%. More disturbing, the unemployment rate for workers under 25 was 19.6% and certainly conjures up images of cars burning in France from disaffected youth. Today, the ECB left their overnight interest rates unchanged at 1% while they try to decide how much enhanced credit support (QE) they will supply to the markets. The recent one year liquidity injection helped lower rates, but banks appear to be holding most of the new money instead of lending it. Already two ECB policymakers have raised this issue, but Trichet gives no indication of additional "enhanced credit support".

US Jobs: Our Sal Guateri writes, "U.S. nonfarm payrolls fell a much larger than expected 467,000 in June, stalling the recent trend towards moderating job losses. This is up from a downwardly-revised 322,000 in May, though down from an average -607,000 from October-April. The job losses were widespread, cutting across the services-producing, construction and manufacturing sectors. Even excluding a rare large drop in government jobs (-52k), the decline in private employment (-415k) was sizeable. Temporary help employment, often a leading indicator of labour market trends, fell 38,000 following a modest decline the previous month. The June swoon takes total job losses in the current recession to 6.46 million, or 4.7%, the worst percentage decline since the 1949 recession. The unemployment rate rose one-tenth to 9.5%, a new 26-year high. It is expected to peak at 10%, below the postwar high of 10.8% set in 1982. The average duration of unemployment hit a record-high 24.5 weeks, suggesting companies remain very reluctant to hire. Wage growth continues to grind lower amid rising unemployment, with average hourly earnings flat in the month and the yearly rate dropping to a near four-year low of 2.7% compared with over 4% in 2007. The aggregate weekly hours index slid 0.8 in the month, and is down a hefty 7.9% a.r. in Q2. Even with a beefy build in productivity, this suggests a downside risk to our -2.9% estimate for Q2 GDP. Bottom Line: Though moderating somewhat from earlier in the year, job losses remain sizeable, a source of downside risk to the economic outlook."

My Spin: This is why trading in the summer is so difficult.....The action in EurSek over the last two days is a great example of reading too much into a number (PMI) and then have something the next day (surprise rate cut) take right back over the path you just came down. When the S&P 500 gets near 930, the market receives either a mixed signal or a negative signal that makes short term players dump and we drop quickly. As I said yesterday during Power Lunch, I was surprised the equities remained as high as they have. Today, we see what happens when get new information that isn't supportive of green shots. As we get into Q2 earnings season next week, this will act as a reminder that incomes and jobs are not supportive of a strong recovery. Initial jobless claims are not showing the classical sharp drop to indicate a major inflection point in the recession.

For those of you leaving shortly for vacation, we have a G8 meeting and an Obama/Putin/Medvedev party as well to keep us on our toes......Let's see if NK sends the US a birthday present....

Andy

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