There was light relief for both British and Eurozone service sectors ascoinciding Markit Purchasing Managers Index data showed rebounds for thosesectors in both nations. These diffusion indices draw a line in the sand at 50to indicate expansion and contraction with a reading above 50 representinggrowth while lower levels represent contraction. The U.K. services PMI improved from43.2 to 45.5 in February, while the Eurozone reading rallied from a record lowto 40.9. Although welcome data, one has to point out that these economiescontinue to contract but at a slightly lesser pace.
The Eurozone PMI was accompanied by more optimism over future activitywhere respondents looked forward to a resumption of activity ahead. For nowthough work and order backlogs continue to decline in a sign that currentconditions continue to deteriorate allowing companies to work on overdueprojects.
While the broad picture appears to be improving, it is still extremelyimportant to point out that the likelihood of a sustained near-term recovery isslim. Two pieces of evidence this morning augur worse to come. First, the Swissgovernment released the weakest consumer price reading in 50 years, in whichprices declined 0.4% from one year ago. Blaming declining oil and energyprices, rent and transport costs fell delivering an anemic annual rate ofconsumer inflation of 0.2%. The Swiss National Bank has predicted that for 2009prices will range between -0.55 and zero against the backdrop of a 2.2%contraction in gross domestic product.
In Spain,where unemployment is the Eurozone’s highest, the Bank of Spain predictedthat unemployment this year would reach 17.9% and that the employment picturewould weaken to 19.4% by 2010. For the longest time the Spaniards have breachedEU deficit limits, which are set to 3% of GDP, while today the Bank predicted aworsening picture with the 2009 rising to 8.3% and growing to 8.7% next year.For this year the Bank predicts economic contraction of 3%, which improves to acontraction of 1.1% for 2010.
This remains a very ugly picture despite today’s PMI data, whichis one reason that the euro was a little weaker at $1.3440 ahead oftoday’s U.S.non-farm payroll report. In the event job losses came in at 663,000, bang inline with consensus driving the unemployment rate to 8.5%. In this climate,investors are accordingly treating in-line as a cue to buy euros in the hopethat the ECB won’t need to react with quantitative easing.
However, investors appear to be taking a more somber view of the U.S.labor data. While investors have been accustomed to bad news, today’sin-line report still masks a nasty domestic situation. Some 43,000 financialsector workers lost their jobs in March despite the easing of creditconditions. Some 47,800 retail employees were terminated from positions asconsumers remained cautious. 17,500 auto-related workers lost their jobs asdemand for new cars and trucks remains in purgatory awaiting the potential forbankruptcy proceedings at General Motors. Analysts predict that in this eventsome 1 million job losses would be recorded sending the rate of unemployment to11% and above. And despite apparent glimmers of hope within the housing sectorlast month, including a rise in new home sales, some 126,000 constructionworkers lost their jobs at a time when better weather traditionally sparkshiring. Given that we know unemployment and foreclosures are prolonging openseason on housing inventories, it remains difficult for us to say that today’sin-line report should produce greater risk appetite.
The Japanese yen continues to lose focus and overnight the dollarbreached the ¥100 mark and indeed, post-unemployment, the dollar continues toadvance to ¥100.20. The blind acceptance that the economy is on the mendcontinues to detract from the traditional safe haven status of the Japaneseunit.
Within one-hour of the release of payroll data Friday, the dollar hasstrengthened to $1.3375 against the euro, while against the yen it’strading at ¥99.90 and against the pound it’s trading at $1.4786.
