Update 1:10 p.m.:

There were no fireworks in the last hour of trading, but traders managed to push the Dow into the black in the last ten minutes before the bell.  The Dow closed higher by 6 points.  The euro never fully recovered, but traders put that on the backburner. 

The 2-year ended at .82%, the 5-year 2.15%, and the 10-year closed off 9/32s to yield 3.38%.

I usually look forward to big economic releases, but I have to admit I'm dreading the payroll release in the morning.  Even more than usual this one will have headlines, sub-headlines, and text that will all tell conflicting stories.  The number will be full of "yes, buts."  The markets will likely react violently in one direction or the other to any headlines, but by Monday the number will be a distant memory.  Then it will be back to euro watch. 
 
Update 11:25 a.m.:

The euro has recovered a bit.  The euro moved from a low of 1.215 to 1.218, and that has allowed the Dow to recover to -13 points.  Trading remains extremely light as traders buckle up for tomorrow's number. 

The 2-year is .82%, the 5-year 2.15%, and the 10-year is now down again by 8/32s to yield 3.37%.

Bernanke was speaking today and repeated his warnings of a sluggish recovery due to high unemployment, but several other Fed officials are talking of tightening.  Atlanta's Fed President said the Fed might need to tighten before the unemployment rate drops in order to curb inflation.  But he did not indicate any urgency in taking action.  Kansas City Fed President spoke out strongly to move the fed funds rate to 1% by the end of the summer.  He makes the point that 0-.25% is an emergency rate and should be corrected.  As many of you know, I agree with that.  The current rate does nothing but encourage leveraged speculation.  But Koenig goes on to say that after a pause at 1%, the Fed might need to push the rate ultimately to 3.50-4.50%.  I can't see that happening any time soon.

Update 9:35 a.m.:

Currency traders are reminding the markets who's the boss.  The euro has dropped to 1.216 vs the dollar, well off the 1.226 earlier today.  The Dow is now trading -70 points, despite the fact that traders want to focus on tomorrow's number and set up for an expected rally.  If the euro rallies today, stocks will be quick to follow.  But it's the euro's ball game still.   

Early losses in bond prices have now been completely recovered.  The 2-year is .80%, the 5-year 2.13%, and the 10-year is now unchanged to yield 3.35%.

Update 7:30 a.m.:

As indicated by pre-opening futures trading, the Dow did open higher this morning.  The index hit +65 very soon after the opening.  One assumption about today was that the euro was higher and wouldn't be a factor in trading. But our friend, the euro, had other plans.  The euro was 1.226 vs. the dollar, but the currency has fallen to just below 1.22.  That's not a huge move, but it was enough to at least temporarily short-circuit the rally.  The Dow is now up only 4 points.  

Bond prices have recovered a good portion of the morning's losses.  The 2-year is .81%, the 5-year 2.15%, and the 10-year is now down only 7/32s to yield 3.37%. 

Volume is light in both markets.  
 
Morning Comment:

Global stock markets followed up the U.S. rally with big rallies of their own last night.  This is leading to indications of a higher opening again here.  Dow futures are higher by 35 points.  As mentioned in yesterday’s closing comment, the rally was mostly about traders getting positioned ahead of tomorrow’s Nonfarm Payroll report.  At the start of the day yesterday, the risk/reward favored buying stocks and selling bonds heading into the Friday number.  Looks like we’re seeing more of that mentality to start the day. 

The euro is also helping by being somewhat stronger vs. the dollar and considerably stronger vs. the yen.  This alleviates a lot of that risk as well, as those big leveraged trades of borrowed yen and dollar are less threatened.  If we have another big day in stocks today, that favorable risk/reward ratio for stocks heading into tomorrow will disappear. 

The ADP payroll report came in somewhat below expectations, but this wasn’t a number that will change expectations that tomorrow’s number will be over 500k.  The key for tomorrow is the payroll number minus census workers.  Economists are looking for a gain of 100k-150k.  The Bureau of Labor Statistics seemed to really pump up the figures last month with some big seasonal and birth/death adjustments.  We’ll see if they do the same tomorrow. 

Weekly Jobless Claims fell by about what was expected, but the number is still somewhat elevated.  Claims are still too high to feel comfortable that the job market has really made a serious turn. 

The bond market selloff has accelerated today.  The 2-year is .85%, the 5-year 2.20%, and the 10-year is now down 18/32s to yield 3.41%.  Atlanta Fed President Lacker spoke last night and said that the Fed might need to raise rates while the Unemployment Rate is high.  He said the Fed would not embark on this course until they were assured the rate would eventually fall, but he indicated that the Fed wants to head off any inflation pressures.  This was typical Fedspeak, but the reminder that the Fed would tighten with a high Unemployment Rate seemed to add to selling pressure on bonds.   

From yesterday's news, one final comment.  The headlines on auto sales touted big gains by GM and Ford.  As the numbers were released, it looked like the overall number would be much higher than forecast.  But by the end of all reporting, auto sales came in at 11.6 million annualized, which was not far from the expected pace of 11.5.  The headline comparisons were against sales of a year ago when the pace was 9.5 million.  But, as mentioned yesterday, 11.5 million is probably the "new normal" vs. the "old normal" of 15 million.  This isn't bad news.  This pace seems to enough for scaled-down auto makers to turn profits, and perhaps means consumers are buying at a pace they can afford.  There was one small negative in the auto sales report than went mostly unnoticed.  Fleet sales to rental companies made up a much larger than usual portion of the sales.  Without those, the annualized rate would have been under 11 million. 
   

I’ll be back with updates.

Dwight Johnston