Holiday Pre-Jobs Data Note

Asia: Asian equities rallied on improving global growth prospects, with the MSCI Asia-Pacific Index advancing for its 6th consecutive session. The 0.3% rise puts the index at its highest level since mid-Jan. Of note, the Nikkei closed almost 0.4% higher, for a 2.7% rise on the week to new six month highs. Leading sectors including oil & gas, technology and financials, while telecom, utilities and health care were drags.

There were three main developments to note:

1. There is speculation that the BOJ will upgrade its assessment of the economy at next week's meeting, with export strength noted. Nevertheless, the underlying problem of deflation persists and that is the main source of policy angst. Japanese policy makers cannot be upset by recent market developments of yen weakness and Nikkei strength.

2. I noted yesterday that the risk of the US citing China as a "currency manipulator" eased this week, with China's seemingly more supportive position vis a vis Iran and the US Trade Representative Office focus on sources of trade friction rather than the yuan (suggesting perhaps a desire to keep the issue on the multilateral level, especially the IMF. Now comments by both Obama and Geithner also point in that direction. Both indicated that they thought China was moving toward a more market determined foreign exchange policy. A couple of weeks ago, it appears both sides were itching toward a confrontation and now it seems that both have pulled back.

3. Rubber prices rallied 1.6% to a new 19 month high (15% year-to-date). Part of the rise may reflect the pullback in the Japanese yen, which the rubber futures contracts are denominated in; but the signs of stronger world growth in general, and the improved auto sales in the US and China helped as well.

North America: The US employment report is the only focus today. While the ADP survey was disappointing, other surveys and anecdotal reports give the market little reason to second guess expectations for a relatively strong report. Most forecasts are just below 200k increase in non-farm payrolls.

In this notoriously difficult to forecast report, there are two additional sources of potential volatility: weather and census workers. Given the level of weekly initial jobless claims and the likely pace of expansion of the US economy, we suspect that the underlying trend is toward modest job growth of something on the magnitude of 50-100k a month. The Fed report was skewed to the downside and the risk is that today's report is skewed to the upside.

Within the report, in addition to the headline and unemployment rate, (it is expected to remain steady at 9.7%), hourly earnings (expect ~ 0.2%) and hours worked (33.9 vs 33.8) will be important inputs into income and therefore consumption, as well as output estimates.

Manufacturing employment is expected to have risen for the third consecutive month. In terms of government employment, note that the layoffs from state and local governments has more than offset the increased employment from the federal government. Employment in the construction sector is often a useful input into construction spending, were nonresidential construction remains a drag.

Markets Full liquidity will not return until next Tuesday. Ranges thus far: Euro--$1.3544-$1.3591, JPY--93.68-94.07 GBP--$1.5239-$1.5299.

Outlook: The risk is that the dollar's downside correction that began last week may have more room to run, barring a significant upside surprise to the US jobs data. For the euro a move above $1.36 now could spur a move toward $1.38 period ahead. The Tories in the UK seem to be creeping up in some polls. The $1.5300 area is the immediate cap, but should it be taken out, there is potential toward $1.5380 and then $1.5450. The dollar continues to flirt with the JPY94 area. If this can be surmounted, there is scope toward JPY95.

What levels would raise confidence that the short-covering rally in the euro and sterling may be over? A break of $1.35 might help neutralize the euro's new found positive tone. However, until $1.34 goes, bottom pickers may maintain the upper hand. Sterling's bounce has been so strong that its pivot might not be seen until $1.5100. Meanwhile, dollar-yen support is seen in the JPY93.60 area.

A word about the SNB. There has not been official confirmation, but there seems to be little doubt that the SNB intervened yesterday on euro-Swiss and maybe dollar-Swiss. There has been no follow through official action or market action. Euro-Swiss has been in a narrow consolidative range--1.4316-1.4344. Yesterday's operation pushed the euro briefly and marginally through 1.4400. The market may want to test the SNB's resolve before it becomes convinced.