What Happened Before the Jobs Data and More

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All was quiet on the currency front before the jobs data.


Activity in the global capital markets is subdued. Yesterday's moves are being consolidated, and the dollar has been confined to narrow ranges.  The euro is in a quarter cent range, while sterling is in a 50 cent range and the dollar has been confined to about two-thirds of a yen. 

The US employment data is the focus ahead of the weekend.  Nonfarm payrolls are expected to have added around 160k jobs.  That would be the second consecutive month below 200k.  In both 2014 and 2015, there were one such back-to-back sub-200k readings (Jan-Feb 2014 and Aug-Sept 2015). Moreover, the 40k strike at Verizon likely depressed the report. 

At the same time, economists and policymakers general expect job growth to slow as full employment is reached.  Weekly jobs claims are elevated, and the four-week moving average is about 20k above the cyclical low set in April. 

Jobs growth has ratcheted down.  The three-month moving average of nonfarm payrolls is near 200k down from a six-month average of 220k.  The details of the report, including hours, worked, and average hourly earnings are expected to show little change.  Due to rounding, there is a chance that the unemployment rate ticks down to 4.9% from 5.0%. 

We suspect there are some downside risks with today's US employment report. It appears that the economy enjoyed a strong rebound in March-April and may have moderated in May.  That said, as of June 1, the Atlanta Fed GDPNow is tracking 2.5% growth in Q2.  To offset the risks associated the UK referendum eight days after the FOMC meeting, we think among the necessary developments is an unambiguously strong employment report, with more upside pressure on wages evident.   We do not expect such a threshold will be met.

If this assessment is correct, there is some downside risk to the dollar as the market shifts the modest expectations from June to July.  As we have noted, the main problem with a July hike is that there is no press conference scheduled afterwards.  This is an operational challenge and one that is surmountable.   A move in July would also secure the Fed more degrees of freedom as it would underscore the claim that all meetings can be live, not just the quarterly ones followed by a scheduled press conference.

The Asian session featured three economic reports.  China's Caixin services PMI slipped to 51.2 from 51.8, and the composite eased to 50.5 from 50.8.  Despite the disappointing PMI readings this week, the Shanghai Composite snapped a five-week losing streak to close more than 4% higher.  Reports indicate that as of the middle of July, the PBOC will begin calculating reserve requirements based on period averages rather than the end of the period levels. 

Australia's May services PMI rose to 51.5 from 49.7.  It is the first reading above the 50 boom/bust level in three months.  The RBA meets next week.  Some observers look for a follow-up rate cut, but we are less convinced that the conditions warrant back-to-back rate reductions. 

Japan reported a 0.6% rise in April real labor cash earnings (year-over-year).  It is the third positive reading but well off the 1.6% rise seen in March.  Unadjusted for inflation, cash earnings rose 0.3% (year-over-year) in April.  The median forecast was for a 0.9% increase after 1.4% in March.  The BOJ meets in the middle of June, but the focus, especially after Prime Minister Abe confirmed the postponement of the retail sales tax hike, is back on fiscal policy.  

In Europe, the services and composite PMI was the main attraction.  The Eurozone services PMI ticked up to 53.3 from the 53.1 flash reading.  It still is the first increase since last November.  The German reading was unchanged from the 53.1 flash report, while France slipped to 51.6 from the 51.8 advanced reading.  Spain surprised to the upside at 55.4.  The market had anticipated a decline from 55.1.  Italy was the outright disappointment.  The services PMI fell to 49.8 from 52.1. It is the first sub-50 reading since the end of 2014. 

The composite reading rose to 53.1 from the 52.9 flash estimate and 53.0 in April.  The composite as alternated between 53.0 and 53.1 for the last four-months. However, this seems to suggest some slight loss of economic momentum.  The three-month average (53.1) is slightly lower than the six-month average (53.3) and lower than the 12-month average (53.7).  At the ECB's press conference, Draghi acknowledged the likelihood that Q2 growth is unlikely to match Q1's 0.5%.

The UK reported better than expected services PMI and composite, but sterling continues to trading heavily as the focus is on the referendum.  The services PMI rose to 53.5 from 52.3.  The median forecast was for a 52.5 reading.  The composite PMI rose to 53.0 from 51.9.  Expectations were for a smaller uptick.  The improved data underscores our skepticism of the BOE's claim that referendum was responsible for slower economic activity.  It could be, but it is hard to tease it out of the high frequency economic data.  

In addition to the US employment data, factory orders and trade balance, Fed Governor Brainard speaks shortly after the end of the European session.  Although we do not put Brainard in with the Fed’s Troika of Yellen, Fischer, and Dudley, we recognize her insight regarding advocating a more cautious path when some regional presidents were talking about an April move and her emphasis on global conditions. Yellen speaks on Monday.

Currency Market Becalmed Ahead of US Jobs Data is republished with permission from Marc to Market

See also: ADP and ECB Preview