Payrolls will have a less catalytic effect this time

Outlook:

Payrolls should come in at 230,000-235,000 but as noted above, the forecast range is 200,000 on the low side and 265,000 on the high end (Market News). As usual, and depending on details like the participation rate, we could see the dollar slump on disappointment or rally like crazy on a high number. Payrolls have less catalytic effect this time because tapering is done and the “considerable period” for lower for longer could be about to be changed to something else. We see no reason to change the timing of the First Rate Hike from “mid-year,” which is probably June. Earlier talk of postponement to the fall has simmered down. So far we are not hearing about acceleration to a date before June, though.

That’s the background but the market’s reaction to the data release is as much knee-jerk as driven by thoughtful consideration of the institutional implications of the data. With any luck, payrolls’ power will be diminished this time after a quick and rapidly fading spike or two.

As for Draghi and the ECB, we can imagine that Draghi wants to proceed with due caution and not jumping off the cliff reflects a mature and reasoned approach. Yeah, and I’ve got a bridge in Brooklyn to sell. The press is being polite, but the likelihood is high that Draghi is indeed running into opposition on the ECB board. Draghi has said taking action against deflation is urgent, so to postpose not only in De-cember but also in January is to bely the urgency. Forecasters and traders are going to price in something at the Jan 22 meeting, anyway. After that, we have to wait for the March 5 meeting (in Cyprus). Urgency? What urgency?

We are also disturbed by the semantic games surrounding the plans to expand the ECB balance sheet. The older statements said the bank “expects” to expand it, while yesterday’s statement says it “intends” to expand it. So what? Maybe it’s a message to the BBK that resolve to do QE is unwavering. It’s hard to imagine the language change means nothing. Some analysts go overboard and assert that wordplay reveals conflict on the board. We have seen this thesis before, and indeed opponents of QE have not been shy. This time it’s not just the Germans and Luzembourg’s Mersch, but also France’s Benoit Coeure. Like the semantic square-dance, expression of doubt about QE from a minority of board members doesn’t pass the “So What?” test. This is why, probably, Draghi brushed off not having unanimity.

We like the deduction made by an ING economist in the FT: “The divisions [on the executive board] don’t change the probability of whether or not the ECB does QE. Mr Draghi is the man and as long as there’s a majority in favour, then he’ll do it.” And this is why European bourses are higher this morning. We are inclined to see the dollar rally continue after today’s messy response to payrolls.