Labor market – weak, but to what extent?
The US macro didn’t deliver many upside surprises in the past 3-4 months so anxiousness among investors at the beginning of the week (and ahead of the key monthly figures) really wasn’t that awkward. Meanwhile, the data didn’t turn out to be as bad and with a noticeable exception of the ADP report was not only above the consensus but also July’s readings. Consequently, ahead of the payrolls report investors are full of hope rather than fear.
The market consensus for the headline is at -100k, however the figure is still under Census influence (it will fade since October). The key part is a change in private employment. The consensus is for a mere +30k (lowest since Jan) against a rise of 71k in July but looking at the pieces it still looks optimistic. Most importantly, average initial claims climbed in August to 486k (highest since Nov 09) from 459k in July. ADP also pointed at the decline in private employment. On the other hand the ISM employment subindex continued to improve (it wasn’t higher since Nov 73!) but manufacturing represents a mere 10,9% of total private employment (36% in 1939). The challenger report also pointed at the lowest layoffs in 10 years but one needs to keep in mind that the private sector already lost a massive 8 millions of jobs during the recession and low layoffs do not need to translate into fresh hiring immediately.
From the short-term perspective, any reading of 30k or higher will be welcomed by the markets, especially given the current sentiment. However, such reading would be pretty meaningless from the more distant point of view. Here the change would be brought by a rise (or better few consecutive increases) by 100-150k or a drop by 50k or more.
EURUSD – ECB turning hawkish
The ECB meeting yesterday didn’t deliver any changes on its own but the conference turned out to be euro positive. Higher growth (1,4-1,8% for 2010 and 0,5-2,3% for 2011) and inflation (1,5-1,7% in 2010 and 1,2-2,2% for 2011) didn’t surprise after the latest figures but the comment of “inflation risks to the upside” clearly indicates the ECB does not intend to enter the “easing competition” already involving the Fed and the BoJ and with the BoE as a likely contestant. That should be the euro positive in the mid-term, especially if the eurozone data continue surprising to the upside.
Despite the boost from the ECB and equity markets the EURUSD failed to break through a resistance of 1,2854 and remain in a consolidation, which may also take a form of a horizontal wedge. Chances are, the horizontal scenario will be over in few hours and three weeks of a relative stability on the pair promises a large movement. However, one needs to keep in mind that the reaction of the EURUSD to the payrolls is often far from straightforward. For instance, imagine a bullish reading of +80k in private employment. It would certainly buoy the global sentiment and thus support the euro. On the other hand it might as well cause a rise in the USD short term market rates and thus provide a reason to buy the dollars.
Events to watch – payrolls, ISM services
The payrolls report (8.30 ET, 14.30 CET, -100k expected) is by far the most important figure today but should it be inconclusive, the ISM services (10.00 ET, 16.00 CET, exp 53,6 pts.) may help shape the sentiment ahead of the weekend. A similar index is due in UK (4.30 ET, 10.30 CET, exp 53 pts.)
