Everyone will try and keep all their necessary trading very close to home and pare questionable positions ahead of tomorrow’s highly anticipated US non-farm payroll report. Already the below consensus US ADP and relatively soft reading on the ISM non-manufacturing employment index may have begun to temper some investors expectations for tomorrow’s final payrolls print. Both the equities and FI class are expected to remain range-bound today in anticipation of tomorrow’s expected release of +165k new jobs.
The mighty ‘buck’ has been pulling back somewhat after yesterday’s ADP report and from here on in, unless completely necessary, there is a strong likelihood that the market will tread water until tomorrow’s North American payrolls are known. NFP is the broadest gauge of job creation and a strong reading will put many doubts to rest about the US growth traction. However, a below-consensus non-farm print (+150k), in combination with the buildup in Fed tapering expectations could cause this USD correction to continue to gain traction.
Many investors, and rightly so, have been trying to downplay the link between yesterday’s ADP print and tomorrow’s payrolls headline – over the past 10-months ADP has come under NFP eight-times, averaging a miss of -37k jobs. In truth, there is no strong correlational in the independent reports.
As long as signals in the US labor market remain questionable, both the bond dealer and investors will take comfort in the fact that the Fed will likely keep buying bonds for longer. However, on the flip side, despite yesterday’s ADP number coming in well short of consensus, it’s most likely “not weak enough” to shift any of the Fed’s sentiment about potential QE tapering. It also worth noting, that recent ADP reports have understated NFP growth in two of the prior three-months.
Within the EU, the blaming and ‘bloating’ games are about to begin. It seems that a summer of discontent is not reserved wholly for the populous. An impending IMF review of the Greek bailout supposedly highlights a series of errors. Believed reports suggests that the IMF has admitted to major missteps over the past three-years in its handling of the bailout of Greece and said it badly underestimated the damage that its “prescriptions of austerity would do to the Greek economy, which has been mired in recession for the last six-years.” Aside from the pending blame game, Greek Prime Minister Samaras is expected to ask/demand his country’s international creditors to further extend its deadline for the “public sector layoff scheme as his government is concerned that a summer of protests resulting from the cuts could have significant ramifications for the tourism industry” -it’s estimated that the size of Greece’s “shadow” economy has reached +24% of the country’s GDP last year or +€46.4-billion (Institute of Economic Affairs).
For the remainder members, Euro equities have wavered, German Bunds trade steady and all while the 17-member single currency remains supported ahead of two central bank announcements this June Thursday– the ECB and Bank of England. Even Sterling and Gilts are little changed before out going BoE governor, Mervyn King presides over his final meeting later this morning. Neither Central Bank is set to make any changes. But, both may still consider further easing under a new Governor, Mark Carney, from July in the BoE’s case or if the Euro-zone sentiment worsens again over the summer in Draghi’s case.
For the ECB’s rate decision, it will be the accompanying Q&A that to likely be the most interesting of events. Some analysts are suggesting that if Draghi uses the opportunity to “strongly re-emphasize that the door remains open to negative deposit rates” – then the market should expect the Eonia strip to rally. The Eonia Rate is short for the ‘Euro Over-Night Index Average – computerized as a weighted average of all overnight unsecured lending transactions. The majority does not expect any change in the refi or depo rates. Markets will be watching for any progress on SME lending, but in line with what recent press reports have said, we do not see anything happening. The market also expects both growth and inflation forecasts to remain largely unchanged.
Even if does become a ‘dovish’ press conference – promoted by perhaps disappoint SME rhetoric – should put some deserved pressure on the EUR, however, ahead of NFP there should not be a material EUR sell-off. Ever since the ECB has be open regarding negative rates, the EUR’s TWI has done nothing but appreciate – why? Most likely on the back of “the ongoing improvement in the Euro area current account surplus.” As highlighted early confinement is probably the game winner ahead of NFP.
There are always reasons to sell the 17-member single currency, however, the bids currently hold. It seems that Asian Central Banks have been adding their weight to speculators wanting to sell around 1.3130-50. Foe now, the dips remain very shallow which suggests that the current market “squeeze has legs.” Aiding the EUR’s cause was the Spanish auction going well, as usual. However, the Spanish/Bund market would imply that the secondary market might have a few concerns. The UST/Bund widening spread could be suggesting that there may be some merit in fading a EUR rally?
With King out and Carney coming in, it seems that everyone expect no change to the policy rate or QE from the “Old Lady” or Bank of England today. Tomorrow’s market focus lies squarely on new Governor Mark Carney who officially takes the helm on Canada day. The current thought process has many thinking that despite reduced risk of further near-term debt monetization in the UK, the scope for dovish policy innovation under Carney should be leaving the market more bearish GBP. It’s probably a tad too early to presume what Carney’s next move – a maverick certainly by not one to pre-guess, just asks the Canadians. Some analysts already believe that shorting Cable close to current levels offer the “best risk/reward” to position for the possible range of policy scenarios under the new Governor Stewardship.
A somber note was posted on Fed’s website last Friday from the Federal Advisory Council (12-executive level bankers who consult with and advises the Board of Fed Governors) from their 17th May meeting. To many it can be described as a bit of an eye opener. To some who have questioned Central Banks QE exit strategy or of lack of it, it should be nothing new.
In addition to the Council’s concern about “an unsustainable bubble in equities and fixed-income markets, it also mentioned that Fed policies have helped increase the prices of equity securities (among other things), that current Fed policy has created systemic financial risks and potential structural problems for banks, and that “uncertainty exists about how markets will reestablish normal valuations when the Fed withdraws from the market [emphasis added].” Moreover, the FAC noted, “It will likely be difficult to unwind policy accommodation, and the end of monetary easing may be painful for consumers and businesses.”
EURO Data Dulls Major Pairs Ahead Of Jobs
Dean Popplewell, Director of Currency Analysis and Research @ OANDA MarketPulseFX
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