NFP more of a market mover than ECB on top-line macro news thursday

Market Review

The EURUSD saw a very active session yesterday as the ADP Employment number was posted much higher than expected at 281k and saw initial widespread USD strength. As the session went on the move in Cable was retraced, while the EURUSD continued on its path in waves and posted the low of the session making a new low of the week by one tick. Bonds were the asset class that had the most notable reaction to the data with a significant drive lower for T-Notes that dragged German Bunds with it. The economic and monetary policy arguments behind strong US data are both negative for the bond market. Strong data leads to risk-on as well as arguably bringing forward the Fed’s rate hiking schedule. However, Yellen stressed in her speech yesterday that the Fed’s primary focus is to promote full employment and to engineer price stability. She made an interesting comment which was that it is not the Fed’s job to ‘prevent’ asset bubbles but to ensure that the banking system is strong enough to withstand them. 

Today's Fundamental View

This morning has seen services sector PMIs delivered from China and Europe. China posted their best number for two years offering a hint that the second half of 2014 will see an economic improvement on the lacklustre first half. The Euorzone’s data as a whole was in-line at 52.8 with Germany and Spain slightly disappointing but Italy delivering strong numbers. The UK continues to substantially outperform the continent with a reading of 57.7 although this was marginally lower than expected. EZ retails sales were also announce at flat and lower than the +0.3% expected. However, despite a busy morning for data, markets have been quiet as the main event comes at 13.30. Here we will be bombarded with top line macro news with the Non-Farm Payrolls (exp 215k) and the full US employment report, including Jobless Claims. This all comes to the market at the same time as Mario Draghi sits down to deliver the ECB’s monthly monetary policy press conference one month after the avalanche of policy action they enacted last time out. We feel that the Non-Farm Payrolls should be the more significant market mover. The ECB are not going to add to their policy action this month and it is too early to measure the effectiveness of a negative deposit rate or a TLTRO. He will be asked about how the ECB feel that the Euro is still reluctant to weaken and what this means for their ambitions to avoid deflation. This line of questioning will inevitably lead to probing on the likelihood and timing of a full ECB QE programme. Draghi will deliver the reassurance that the are ready and willing to deliver QE should it be required. But behind closed doors we feel they are crossing their fingers and hoping they will not have to act on this promise. The ADP data yesterday points towards a strong NFP today and we feel equities can push higher given Yellen’s reassurances on rates yesterday. The US dollar should continue to strengthen and T-Notes should continue to drive lower. In the event of bad data then equities would perhaps suffer the most with there realistically being limited upside potential for the EURUSD given the ECB stimulative policy stance. In this event T-Notes will also look to recover yesterday’s large sell off. As a final note of caution – please be aware that this event will generate a lot of volatility given the NFP and Draghi combination and so disciplined risk management is paramount. 

Alternative View

Bad NFP numbers and/or a hawkish Draghi will lead to significant upside for the EURUSD with the S&P selling off