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For the week ending Friday, July 6th

It was a choppy trading week this week given the 4th of July holiday and mixed bag of economic news in the lead-up to today's jobs report in the U.S. Base metal prices in London opened weaker on Monday as disappointing manufacturing data, including a surprise drop in the Institute for Supply Management's PMI figure below 50, weighed on market sentiment. While expectations for more accommodative monetary policy reportedly helped push LME 3-month copper as high as $7,815/mt on Tuesday, markets remained jittery even after announcements by the People's Bank of China and European Central Bank to lower interest rates and the Bank of England's announced expansion of its bond buying program.

In New York, COMEX September copper traded as high as $3.5565/lb. before the holiday, but gave up those gains in the second half of the week. A bigger than expected drop in U.S. oil inventories briefly boosted NYMEX crude oil futures above $88/bbl., but by week's end oil prices came under pressure as well. On Wall Street, the Dow Industrials see-sawed throughout the week but closed lower at 12,896.67 on Thursday.

On Friday, all eyes were on the latest jobs report from the Labor Department and, while far from catastrophic, the growth in June nonfarm payrolls came in below expectations at 80,000. The markets reacted as you might expect, though, with the major U.S. stock indexes all off more than 1% today while the DJ-UBS Commodity Futures Index dropped 2.3%.

As the Euro weakened below $1.23, LME 3-month copper reportedly fell from as high as $7,715/mt this morning to around $7,530/mt in the afternoon, while LME 3-month aluminum dipped to $1,900/mt. Precious metals were also under pressure as COMEX gold plunged by $30/to to less than $1,580/to while silver prices fell 2.5% to $27/to.

Crude oil prices also took a hit, with NYMEX crude for August delivery down nearly $3 to below $85/bbl today. On Wall Street, the Dow Industrials were down over 160 points in late afternoon trading and looked set to finish the week in negative territory.

Macro news...

In the lead up to this week's big jobs report, there were some surprises on the economic news front, not all of them pleasant. As indicated, the Institute for Supply Management's overall Purchasing Managers' Index unexpectedly fell to 49.7 in June, signaling the first contraction in the manufacturing sector since July 2009 as new orders dropped by 12.3% points to the lowest point since April 2009.

Other reports surprised to the upside, including a 0.9% uptick in U.S. construction spending in May and a boost in domestic vehicle sales from 10.6 million SAAR in May to 11.1 million SAAR in June. June vehicle sales were reportedly up 22% year-on-year while sales during Jan-Jun 2012 were up 15% over last year.

And in nearly simultaneous moves designed to restore confidence on Thursday, the European Central Bank reduced short-term lending rates to 0.75%, the People's Bank of China cut its one-year lending rate by 0.31 percentage point to 6% and the Bank of England expanded its bond-buying program to 375 billion pounds, according to Reuters reports. But the central bank actions apparently had little lasting impact on investor sentiment as markets headed south on Thursday. Today's jobs report didn't help much either.

The Bureau of Labor Statistics reported this morning that nonfarm payrolls edged up by 80,000 in June, up from the 77,000 gain in May, but not enough to make a dent in unemployment rate, which remains stubbornly high at 8.2%. Confirming the recent slowdown in hiring, the BLS report indicates that average job growth decelerated from +226,000 in the first quarter to +75,000 in the second quarter of 2012. Hiring in the manufacturing sector slowed down too, as job growth in the first quarter averaged 41,000 per month while second quarter average manufacturing job growth was just 10,000 a month.

Ferrous...

As June drew to a close a number a market reports indicated that further ferrous scrap price drops could be in store for July as the typical summer lull set in. While Scrap Price Bulletin kept it prices on hold early this week, The Steel Index reported a $23/ton drop in its shredded reference price this week to $343/lt delivered Midwest. Given the 4th of July holiday this week, next week should provide a more complete picture of where scrap prices are headed this month. Regarding steel sheet prices, AMM reports this week that U.S. Steel and ArcelorMittal raised their base prices for flat-rolled products by $40 a ton, following similar prices hikes by Severstal North America and NLMK USA announced earlier in the week.

Despite the recent drop-off in domestic HRC prices – TSI shows a 5.3% monthly fall in their average HRC price in June to $615.25/st as spot coil prices hit 12-month lows, import prices reportedly remain competitive. Steel Market Intelligence reports that not only are more ISM Steel Survey respondents seeing lower foreign prices, but also more aggressive selling by foreign mills.

For the month of June, preliminary figures from the American Iron and Steel Institute indicate that the import market share was unchanged at 24%, although steel import permit applications decreased 5% from May preliminary imports to 2.796 million net tons.

AISI also reported this week that domestic raw steel production for the week ending June 30 decreased 1.5% week-on-week but increased 0.9% y-o-y to 1.881 million net tons as capacity utilization reached 76.1%. While it remains to be seen whether the steel mills price hike will stick, Platts raised its midpoint HRC assessment by $5/ton to $595/st ex-works late this week.

Nonferrous...

Global economic jitters have taken a toll on nonferrous prices this year and this week was no exception as LME 3-month copper dipped below $7,530/mt on Friday, down from as high as $7,815/mt earlier in the week. For the year to date, LME nickel, lead and aluminum prices have fared the worst among the nonferrous metals, with prices down from 4% - 10%, and the 2nd quarter was in most cases worst that the first.

As compared to the first quarter, LME 3-month copper asking prices dropped 5% to average $7,994/mt in the second quarter of 2012. But looking forward, Goldman Sachs analysts expect copper prices to rebound. According to a recent report, GS has a 3-month copper price target of $8,000 per mt and a 12- month target of $9,000/mt.

Despite recent falling prices and Chinese power tariff subsidies, the bank is reportedly bullish on aluminum prices as well. GS has a 3-month aluminum target price of $2,220 per ton and a 12-month target of $2,400/mt as slower expected output and increasing consumption is expected to lead to tighter aluminum market conditions.

However, CRU estimates that that Chinese aluminum production increased 1.2% in May to reach an annualized rate of 21.3 m tpy and the consultancy expects Chinese production to increase in the coming months.

As for this week, the LME official 3-month aluminum asking price was up to $1,966/mt as of Wednesday morning but by Friday afternoon 3-month aluminum was down to around $1,900/mt. Secondary aluminum in the U.S. prices were said to be slightly firmer this week, with old sheet mostly indicated around 65-67 cents per pound, old cast in the upper 60's, siding around 67-69 cents, and MLC in the low 70's.

Copper scrap spreads in the U.S. were reportedly little changed this week with Platts listing Bare Bright at 5 cents under COMEX, burnt No. 1 at 17 cents under and No. 2 at 36 cents under amid lackluster market conditions. In afternoon trading today, COMEX September copper was down around 8 cents to $3.41/lb.

Guest contributer: Jason Schenker, ChFC, ERP, CFP
President Prestige Economics, LLC

June Employment Report: Unimpressive Job Growth Unlikely to Inspire the Fed to Implement QE3

Unimpressive Job Gains

Today's U.S. Employment Report for June was unimpressive. The number of jobs added was a modest 80,000, the unemployment and participation rates remained unchanged, while revisions to the monthly numbers in April and May had almost no net impact.

This was a modestly positive report, but weaker than the Consensus had come to expect. Markets are likely to have a mixed reaction today, as market participants see a modestly positive report, but still remain concerned about the slow pace of job creation, as well as the fact that additional quantitative easing may not be imminent.

Critical Numbers in the Jobs Report

1. June total net change in jobs was +80,000 jobs.

2. June Unemployment Rate was unchanged at 8.2 percent.

3. May change in jobs was revised higher to +77,000 from +69,000 jobs.

4. April change in jobs was revised lower to +68,000 from +77,000 jobs.

5. June Participation Rate was unchanged at 63.8 percent.

6. Lost government jobs in June numbered 4,000 jobs.

Market Implications: Likely to be Mixed.

In a report I sent to readers last night, I cautioned that "a Non-Farm Payroll number between 50,000 and 100,000 would likely have a mixed market impact." This report was weaker than Consensus expectations for the number of jobs created, but was on target for the unemployment rate. This report is not likely to relieve market participant concerns about the slow pace U.S. job growth that were raised over the past few months.

Fed Implications of Today's Report: Not Bad Enough for QE3

So, was the employment number on Friday be bad enough to push the Fed toward QE3? We say no. If the Federal Funds Target Rate were not at zero, the current economic situation would completely justify a rate cut, or a series of rate cuts.

The problem is, however, that QE3 is not just a 25, 50, or 75 basis point rate cut; QE3 is a much more significant than a rate cut, because it requires the expansion of the Fed's balance sheet. As such, the barrier to QE3 is higher, and the economic data will need to be dire before the FOMC is likely to act.

Additionally, even though the June ISM Manufacturing Index released on Monday was indicative of contraction in manufacturing, this is not government data and is just one significant data point. The U.S. Employment Report today is critical for the next Fed decision. Our assessment is that the Employment Report today was not good enough to show significant improvements in the labor market, but it was not bad enough to warrant QE3.

Looking at the Week Ahead

The mixed sentiment of today's report is likely to carry into next week. The economic data out of the United States next week is not light, but the docket is dominated by economic indicators that are from May or are of secondary importance: wholesale inventories (May), PPI (June), the Trade Balance (May) and the Monthly Budget Statement (June). One other key event to watch next week is the European deadline (July 9th) to begin implementing the points outlined in the recent E.U. Summit decision statement.

This Week's Quote: "An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today." -- Laurence J. Peter

This Week's Thought: Youth is a quality, not a matter of circumstances.

This Week's Story: One day, an elderly man on a bicycle rides to the Canadian border. From each of the handlebars hangs a bucket of sand. The guards wave him through the border.

The next day, the same elderly man rides to the Canadian border. From each of the handlebars hangs a bucket of sand. The guards look at him skeptically, but wave him through again.

On the third day, the same man rides again to the border. From each of the handlebars hangs a bucket of sand. The guards stop the old man and make him dump out the buckets of sand. They diligently search the sand but find nothing. The old man puts the sand back in the buckets and continues on his way.

On the fourth day, the same man again rides to the border with the buckets of sand hanging from his bicycle. They pull him aside. One of the guards says, "Look, we promise nothing will happen to you, but what are you smuggling here?" The old man replies: "Bicycles."