Mid-Day Report: Sentiments Recovered as US Jobless Claims Dropped to 4 Years Low

Markets sentiments recovered in early US session as initial jobless claims unexpectedly dropped to 4 years low of 348k in the week ended February 11, lower than expectation of 364k. Continuing claims dropped another 100k in the week ended February 4 to 3.43m, lowest since August 2008. Housing starts improved to 699k in January even though building permits was relatively steady at 676k Headline PPI moderated sharply from 4.8% yoy to 4.1% yoy in January while core PPI was unexpectedly unchanged at 3.0% yoy. Some strength is seen in commodity currencies while yen extends its selloff. However, Euro remains broadly pressured on Greece uncertainties as well as concerns on bank rating downgrades even though bond auctions in France and Spain were relatively solid.

Other data released today saw Canadian international securities transactions dropped to CAD 7.38b in December. Manufacturing shipments rose 0.6% mom in December. New Zealand business manufacturing index dropped to 50.5 in January. Australian job market expanded more than expected 46.3k in January, largest number in 14 months. Unemployment rate unexpectedly dropped to 5.1%.

France sold EUR 8.45b in in 2-, 3- and 5-year bonds today, close to maximum target of EUR 8.5b. That include EUR 2.09b in July 2014 bonds, with demand at 2.3 times and yield down to 0.89% comparing to prior auction's 1.05%. France also managed to sell EUR 1.34b in 2015 bonds and EUR 5.03b of 2017 bonds. On the other hand, Spain sold 2.27b of July 2015 bonds with yield at 3.32%, sharply up from 2.861% in last auction earlier this month. Nonetheless, demand was at 2.19 times, up from prior 1.63 times. Spain also sold January 2015 and 2019 bond at yield of 2.966% and 4.832% respectively. Demand was at 4.37 times and 3.27 times. Overall, the bond auction was successful with little impact from Moody's recent downgrade.

Moody's placed over 100 financial institutions in 16 European countries on review for possible downgrade. Those institutions include familiar names like Barclays, BNP Paribas, Commerzbank, Credit Agricole, Deutsche Bank, HSBC, ING Group, Royal Bank of Scotland, Santander, Societe Generale and Unicredit. Moody's noted that government's support towards the banking systems and accommodative policies are "overshadowed by the prolonged adverse impact of Eurozone debt crisis.

ECB's monthly bulletin showed that economists slashed Eurozone GDP outlook for 2012 and 2013 on "additional fiscal consolidation measures in many euro-area countries, a further tightening of credit conditions, lower confidence and a generally higher level of uncertainty". Forecasters expect Eurozone economy to contract -0.1% in 2012, comparing November's projection of 0.8% growth. 2013 projected was lowered to 1.1%, down from prior forecast of 1.6%. Meanwhile, inflation is expected to slow sharply below ECB's target of 2% in medium term.

Regarding situation in Greece, Finance Minister Venizelos believed Greece has met all conditions for the EUR 130b second bailout from EU/IMF already. And Luxembourg Prime Minister Juncker hailed that Greece has made "substantial further progress" and detailed the EUR 325m additional spending cuts. However, "further considerations are necessary regarding the specific mechanisms to strengthen the surveillance of program implementation". Juncker also noted that "further considerations are necessary regarding the specific mechanisms to strengthen the surveillance of program implementation". Juncker is still confident that "Eurogroup will be able to take all necessary decisions on Monday February 20". But that is far from being certain. It's reported that Finland and the Netherlands had appealed for the postponement of a new program until elections as early as April before the conference call.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 78.18; (P) 78.42; (R1) 78.66; More...

USD/JPY's rally resumed after brief consolidations and reaches as high as 78.94 so far in early US session. Intraday bias is back on the upside for further rally. As noted before, the pull back from 79.52 should have finished with three waves down to 76.02 and rebound from 75.56 is likely resuming. Current rise should target 79.52 resistance and then 100% projection of 75.56 to 79.52 from 76.02 at 79.98. On the downside, below 78.18 minor support is needed to signal short term topping. Otherwise, near term outlook will remain bullish even in case of retreat.

In the bigger picture, the case of long term reversal is starting to build up as USD/JPY is trading above the long term falling channel that started at 2007 high of 124.13. As noted before, bullish convergence condition is present in weekly MACD for some time already. A strong break above 79.52 resistance will at least confirm that 75.56 is a medium term bottom and should bring stronger rally back to 85.51 resistance next. We'll continue to assess the odds of trend reversal as the rise from 75.56 extends.

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