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US Employment Report a slightly disappointing mixed bag

Thu, Jul 2 2009, 13:41 GMT
by John Hardy

Saxo Bank

Volatility may be high ahead of long US weekend. Riksbank surprises with further 25 bp chop to rates - whither EURSEK?

MAJOR HEADLINES – PREVIOUS SESSION

• Australia May Trade Balance fell to -556M vs. -125M expected and -282M expected

• Norway Jun. PMI out at 48.7 vs. 43.0 expected and 40.8 in May

• Sweden's Riksbank cuts Interest rate 25 bps to 0.25% vs. no change expected 

• Norway Jun. Unemployment Rate rose to 2.7% as expected, vs. 2.6% in May 

• UK Jun. Construction PMI fell to 44.5 vs. 46.0 expected and 45.9 in May

• EuroZone May Unemployment Rate rose to 9.5% vs. 9.4% expected and 9.3% in Apr. 

• EuroZone May PPI fell -0.2% MoM and -5.8% YoY vs. +0.1%/-5.6% expected, respectively

• EuroZone ECB leaves rates unchanged at 1.00% as expected 

• US Jun. Change in Nonfarm Payrolls out at -467k vs. -365k expected and -345k in May

• US Jun. Unemployment Rate out at 9.5% vs. 9.6% expected and 9.4% in May 

• US Jun. Average Hourly Earning rose 0.0% vs. 0.1% expected and 0.1% in May

• US Weekly Initial Jobless Claims out at k vs. 615k expected and 627k last week 

  
  

THEMES TO WATCH – UPCOMING SESSION

• US May Factory Orders (1400) 

• Australia Jun. AiG Performance of Service Index (2330) 

Market Comments:

The US employment report showed a negative surprise approximately in-line with the negative surprise in the ADP number yesterday. Some positive spin can be induced from the unemployment rate, which only rose 0.1% to 9.5%, which should get plenty of attention from the "second derivative crowd". This is the smallest incremental increase since September of last year and a bit of relief from the galloping increases in the unemployment rate of the previous six months, which saw the rate increase from 6.8% to 9.4%. Average Earnings were flat for month-on-month comparisons, a low that has only been matched about five times since the early 1990's. Average weekly hours declined to a new record low of 33.0 hours. The weekly claims number provided no cause for cheer, with yet another 600+ reading, even as Continuing Claims fell rather sharply.

All in all, this is a neutral report and perhaps slightly to the disappointing side considering the relatively robust risk appetite of late. We could see a large "reaction" in the market today, perhaps mostly because participants were simply waiting for the event risks to be out of the way before trading and also because we are headed into a three-day weekend in the US. We remain constructive on the USD and the JPY in the immediate wake of the US numbers and as Trichet's press conference gets underway as risk appetite seems to be fading and as interest rates fade. The very well-marked line in the sand of late is 1.4000 in EURUSD, which must be punctured with conviction to get any further broad USD rally started.

Trichet's initial comments were not particularly shocking, with statements indicating the ECB believes there are few problems with inflation in the near term, which is only low due to temporary effects. The economic outlook is clearly weak, but the bank hopes and believes that the weakness will moderate for the rest of the year and that growth could resume in mid 2010. Risks to the economy and inflation look broadly balanced, according to the bank. All in all a rather dovish to neutral performance from Mr. Trichet ahead of the Q&A session, which will likely address the usual questions of whether rates can be cut further, etc... The market certainly seems to be taking this as a dovish signal from the bank as bunds are spiking higher and EURJPY has been pummeled from its recent highs.

This morning, Sweden's Riksbank surprised the market with a further 25-bp chop to rates that brings the rate to a mere 0.25%. The Riksbank has long ago set itself on a more dovish path than the ECB and today's move continues the trend. A deputy governor for the Riksbank said that rates can't "in practice" be cut any further, as this looks like the end of the cutting cycle for the bank. The cut saw a knee-jerk move sharply higher in EURSEK. With the Riksbank now having hit bottom and questions remaining on whether the ECB will eventually be forced to cut rates further, it will be interesting to watch EURSEK to see whether the technical indications of a new potential downtrend are confirmed. The key for SEK will be an ability to power through vs. the Euro even if risk aversion hits the CEE region again. The 11.00 area will be an important resistance area in the short term if this uptick in the pair continues.

The ugly Australian Trade Balance number (on weaker coal exports - one of those key China-sensitive indicators for Australia) has AUD on the defensive, as does the USD and JPY strength as of this writing. The Aussie vs. USD and JPY will continue to be one of the high beta trades among the majors. The technicals are turning increasingly sour for these crosses, though we have yet to break out of the range in AUDUSD, for example - see chart below.

Charts: AUDUSD and EURJPY

AUDUSD is still rangebound, though the sharp reversal from the new attempt at two-week highs recently opens up a bit more downside potential. Further downside potential comes with a break of the rising trend line coming around 0.7900 at present, though the bigger range break is down closer to 0.7800.

EURJPY is finally waking up and smelling the yield differentials, which have diverged sharply from the action in spot of lately. The strong reversal after yesterday's strong rally provides an interesting pivot point here that could be setting the pair up for further declines. This trade (as with AUDUSD) will likely largely track the moves in risk appetite. The rising trend line and the 55-day moving average are obvious technical points of interest if the descent continues.

Published on  Thu, Jul 2 2009, 13:46 GMT