New Zealand and Australia spring surprises after the US ADP report yesterday


MAJOR HEADLINES – PREVIOUS SESSION

  • US Apr. ADP Employment Change out at -491k vs. -645k expected and -708k prior

  • CA Mar. Building Permits out at +23.5% m/m vs. +2.3% expected and -18.5% prior

  • CA Apr. Ivey PMI out at 53.7 vs. 40.8 expected and 43.2 prior

  • NZ Q1 Unemployment Rate out at 5.0% vs. 5.3% expected and 4.7% prior

  • NZ Q1 Employment Change out at -1.1% q/q vs. -1.0% expected and revised +0.6% prior

  • AU Apr. AiG Construction Performance Index out at 36.5 vs. revised 30.3 prior

  • AU Apr. Employment Change out at +27.3k vs. -25k expected and revised -37.2k prior

  • AU Apr Unemployment rate out at 5.4% vs. 5.9% expected and 5.7% prior


THEMES TO WATCH – UPCOMING SESSION

  • GE Factory Orders (1000)

  • UK BOE Rate Announcement (1100)

  • EU ECB Rate Announcement (1145)

  • US Non-farm Productivity (1230)

  • US Unit Labour Costs (1230)

  • US Initial Jobless Claims (1230)

Market Comment:

The surprises in recent employment reports continued overnight. Hot on the heels of the dramatic “improvement” in the US ADP employment report (only(!) 491k jobs were lost in April versus an expected 645k), both New Zealand and Australia came in with above-forecast numbers. First off, New Zealand unemployment rose to 5.0% in Q1, up from the 4.7% in the previous quarter, but below the 5.3% forecast. Secondly, the Australian employment report produced a dramatic turnaround with the employment change showing 27,300 jobs were added in April, a wide discrepancy from the market’s prediction of a loss of 25,000 jobs and as a result the unemployment rate slid to 5.4% from 5.7% last and 5.9% expected. The staggering shift was met with a great deal of skepticism, and it was noted that the sample size for the report was only 22,800 households and hence had a large chance of error. In addition, there could be further distortion from the timing of Easter this year and it may be worth noting that the revision to the March data was also worse, at -37,200 versus -34,700 originally.

The expectations for the ECB meeting later today have shifted to the more hawkish side with the tremendous rally in equity markets, easing credit conditions and the much-touted "green shoots" evident in some of the surveys, if not so much in the most recent real economic data in the Euro-zone. The most recent batch of ECB comments show too wide a range of viewpoints to indicate that the council will come up with strong new non-traditional monetary measures. We should look with 95% certainty for another 25 bps of easing to 1.00% with an indication that the council hopes to pause at this level for some time. As for other measures, we might expect some tweaking of existing facilities and the definite possibility that the ECB shies away from new QE-style asset purchases for now. Guidance on asset purchases will be the touchstone issue at this meeting, in any case. Any EUR- positive effect of a more hawkish outcome may be fleeting if risk aversion heads south again as we feel it must soon, as the market may judge the ECB's efforts to be behind the curve and a simple delay of the inevitable.

The BoE may be in a similar dilemma - will it want to announce an extension of its gilt-buying scheme at this point in time while risk appetite is virtually frothing at the mouth? The BoE is likely to tap very lightly on the brakes relative to its recent meetings, though it will also leave all paths explicitly open. The rate is unlikely to be changed from its current 0.50% at this time. The market already seems to be positioned for this outcome, with risk aversion likely to be the largest risk to the pound at this time, though less so than, for example, the commodity currencies. The market is likely to react very negatively in the short term if the bank surprises with immediate plans to buy up another GBP 75 billion worth of Gilts.

Later in the session will see the release of the weekly US jobless claims and these may garner a bit more attention this week given the surprise in the ADP report yesterday. Expectations are for the shedding of another 635,000 jobs in the week to May 3 compared with 631,000 the previous week. The additional focus may prompt a more forceful reaction from the markets than the norm.