There was something for everyone in today’s US employment report, which was still weaker than the undercurrent of expectations. The response was a slightly “risk-off” one in the immediate aftermath of the report, with the USD trying to mount a comeback. Will it succeed and how are we set up for next week?
ECB Rate hike frenzy leads Euro higher
The market changed drastically coming into today’s US employment report, as suddenly, the fear and loathing induced by the situation in the Middle East was brushed away according to the most common risk-related markets like equities and . Whitle the USD was week, it was interesting to note that the pro-cyclical currencies failed to see any follow through on developments, as AUDUSD settled lower and USDCAD remains off the lows established ahead of yesterday’s blowout rally in risk. That’s because, as we argued in our key article earlier this week showing how interest rate spreads (particularly those surrounding CB expectations) seem to be the key driver in this environment. So yesterday’s spike higher in the US . Of course, European rate expectations jumped even higher on Trichet’s sabre rattling, so the EURUSD break higher appears justified through the lens of rate expectations, while the spreads vs. the UK and Australia in particular suggest that the USD is too weakly priced at the moment. Let’s see how the US employment report does or does not shift the view on the Fed today before we suggest how compelling the arbitrage opportunity might be.
The market changed drastically coming into today’s US employment report, as suddenly, the fear and loathing induced by the situation in the Middle East was brushed away according to the most common risk-related markets like equities and . Whitle the USD was week, it was interesting to note that the pro-cyclical currencies failed to see any follow through on developments, as AUDUSD settled lower and USDCAD remains off the lows established ahead of yesterday’s blowout rally in risk. That’s because, as we argued in our key article earlier this week showing how interest rate spreads (particularly those surrounding CB expectations) seem to be the key driver in this environment. So yesterday’s spike higher in the US . Of course, European rate expectations jumped even higher on Trichet’s sabre rattling, so the EURUSD break higher appears justified through the lens of rate expectations, while the spreads vs. the UK and Australia in particular suggest that the USD is too weakly priced at the moment. Let’s see how the US employment report does or does not shift the view on the Fed today before we suggest how compelling the arbitrage opportunity might be.
EURUSD and ECB expectations
EURUSD broke higher as the Euro was generally the out-performer across markets yesterday after Trichet’s press conference showed the ECB president hot and bothered on the need to raise rates. As a counterweight to the excitable talk of CB inflation hikes, consider the FT’s Stephen King take on all of the hubbub surrounding the hike expectations from his article yesterday: Central banks risk wrecking recovery ( ). It really appears the Trichet is doing his utmost to re-enact July 2008, when he hiked rates just as chaos was unfolding around the world. This time around, he risks launching a series of rate hikes as it is becoming clear that the EuroZone project as a whole is on the verge of a lurch towards sovereign debt defaults. Wouldn’t at least a head nod to the upcoming EU summit and the risks it might involve be in order? But as Mr. King states in his article, many central bankers are too hasty and impatient and Mr. Trichet, to his credit, has at least been very consistently “vigilant”, to use his own favorite word, on his inflation focus.
EURUSD broke higher as the Euro was generally the out-performer across markets yesterday after Trichet’s press conference showed the ECB president hot and bothered on the need to raise rates. As a counterweight to the excitable talk of CB inflation hikes, consider the FT’s Stephen King take on all of the hubbub surrounding the hike expectations from his article yesterday: Central banks risk wrecking recovery ( ). It really appears the Trichet is doing his utmost to re-enact July 2008, when he hiked rates just as chaos was unfolding around the world. This time around, he risks launching a series of rate hikes as it is becoming clear that the EuroZone project as a whole is on the verge of a lurch towards sovereign debt defaults. Wouldn’t at least a head nod to the upcoming EU summit and the risks it might involve be in order? But as Mr. King states in his article, many central bankers are too hasty and impatient and Mr. Trichet, to his credit, has at least been very consistently “vigilant”, to use his own favorite word, on his inflation focus.
US Employment Report
There were details for both optimists and pessimists in today’s US employment report. The good news is that, in the Household Survey, the drop in the headline Unemployment Rate to 8.9% this time around wasn’t aided “artificially” by a drop in the Participation Rate, but the bad news is that, unadjusted for the participation rate, we are still at very high unemployment levels close to the record for the cycle. Also good was the rise in Private Payrolls numbers to the second highest monthly level since the crisis.
There were details for both optimists and pessimists in today’s US employment report. The good news is that, in the Household Survey, the drop in the headline Unemployment Rate to 8.9% this time around wasn’t aided “artificially” by a drop in the Participation Rate, but the bad news is that, unadjusted for the participation rate, we are still at very high unemployment levels close to the record for the cycle. Also good was the rise in Private Payrolls numbers to the second highest monthly level since the crisis.
On the more negative side, we can suggest that some of the strength in payrolls is just a mean reversion factor from a negatively weather-affected January data point, and that if we average the last two months together, there is no suggestion of an improvement in trend. Also negative for the US economy was a 0.0% month-on-month in earnings, especially depressing considering the cost-push inflation from gasoline and elsewhere, and the lack of an expected rise in the Average Weekly Hours indicator suggests less pipeline pressure for new hires (this indicator has stagnated for four months now).
Looking ahead
The reaction so far to the US employment report is rather interesting, with bonds a bit stronger and risk slightly off, while the USD has recovered quite sharply in places. It appears the market was gunning for a better number. (and in that light, the STIRS are at war with risk appetite as the former pull on the USD negatively while the latter has generally been USD supportive. Recently, the STIRS have won out) It would be interesting for the reversal back to the strong side to deepen for the greenback today as it makes the outlook far more neutral on the greenback (rather than bearish) than was the case earlier this week. We will run through all of the key charts and discussion points in our Video update later today. Stay tuned.
The reaction so far to the US employment report is rather interesting, with bonds a bit stronger and risk slightly off, while the USD has recovered quite sharply in places. It appears the market was gunning for a better number. (and in that light, the STIRS are at war with risk appetite as the former pull on the USD negatively while the latter has generally been USD supportive. Recently, the STIRS have won out) It would be interesting for the reversal back to the strong side to deepen for the greenback today as it makes the outlook far more neutral on the greenback (rather than bearish) than was the case earlier this week. We will run through all of the key charts and discussion points in our Video update later today. Stay tuned.
Next week’s calendar is fairly light. We have the RBNZ and BoE out announcing rates. For the RBNZ, it would make some sense to see a 50-bp rate cut if the RBNZ really wants to front-load the stimulating effect of its policy, which it may want to. After all, the Christchurch earthquake was a devastating development. For the BoE, the consensus is that the doves may be able to hold sway until May.
Check back with us later for the video update – in the meantime, have a wonderful weekend!
Economic Data Highlights
- UK Feb. Halifax House Price fell -0.9% MoM vs. -0.5% expected
- Sweden Jan. Service Production rose +0.4% MoM and +4.8% YoY vs. +5.1% YoY in Dec.
- US Feb. Change in Nonfarm Payrolls out at 192k vs. 196k expected and 63k in Jan.
- US Feb. Change in Private Payrolls out at 222k vs. 200k expected and 68k in Jan.
- US Feb. Unemployment Rate out at 8.9% vs. 9.1% expected and 9.0% in Jan.
- US Feb. Average Hourly Earnings out at 0.0% MoM and +1.7% YoY vs. +0.2%/+1.9% expected, respectively and vs. +1.9% YoY in Jan.
- US Feb. Average Weekly Hours out at 34.2 vs. 34.3 expected and 34.2 in Jan.
Upcoming Economic Data Highlights (all times GMT)
- US Fed’s Yellen to Speak in Paris (1500)
- US Fed’s Nelson to Testify on TALF (1500)
- Canada Feb. Ivey PMI (1500)
- US Jan. Factory Orders (1500)
- New Zealand Jan. Building Permits (Sun 2145)
- Australia Feb. AiG Performance of Construction Index (Sun 2330)
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