EUR wants to go higher, and will – unless payrolls are so weak as to prompt another 200pt Dow drop.
UK services PMI important for GBP.
Weekend risk: Chinese rate hike, Portugal election, Greek package
Market jitters about the broader outlook for growth eased as market economists downplayed the significance of poor ADP and ISM data. Investors’ reluctance to take large positions this side of US payrolls and some ‘good news’ stories on Greece ensured a less volatile NY than Wednesday?s; the poor initial claims (422k) and chain store sales (-2.6%) were largely discounted.
While the post-ADP Bloomberg consensus for payrolls looks high at 165k (BNPP is at 75k), it should be noted that less than half of analysts have updated their forecasts since Wednesday. Prior to the ADP release consensus was at 200k; and so we suspect that the trading community will view anything north of about 100k as something of a relief, especially in the context of the 244k April gain. On the strong side only an unlikely print materially above 200k would provide support for the USD. In this case long USDJPY is the trade. A much weaker number — say 50k or below — would call into question not only US growth but also the whole point of QE: if USD 1.7tr cannot buy sustainable job growth then the global economy is in even greater trouble than feared. We like long NOKSEK as cheap insurance against full blown risk capitulation — see today?s Market Focus.
The UK Services PMI will be the most important data point in front of payrolls (the Eurozone equivalents are final numbers and seen unchanged on the preliminaries). The euro peripheral data (and also including Spanish consumer confidence) may actually be more interesting here as we head towards ECB week. For the UK services PMI consensus is for little change on April?s 54.3 (54.1 or 54.2) but we suspect after the very weak manufacturing survey it will take a number nearer 52.0 to get GBP back on the skids (BNP Paribas is 52.8, which might just do it). EURGBP continues to track EURUSD higher with consummate ease and with 0.8845 gone on Thursday next stop may not be before 0.8900.
Also of importance – but not till after payrolls – will be the non-manufacturing ISM, which we expect to rebound to 54.0 in May after declining sharply the prior two months. The decline in the index has been broad based and somewhat at odds with the more gradual slowing reflected in many other economic indicators. Accordingly, we think the index is set for a modest rebound. This could provide significant comfort to those insistent the economy is not double-dipping here and USD negative as a result.
Weekend risk abounds: ahead of Monday?s Chinese holiday there is the familiar speculation of a Chinese rate hike, although this has been well flagged and so should not have too much impact if announced. Portugal heads to long-awaited elections, and polls suggest a comfortable win for the Social Democrats: a strong majority will be a EUR positive as it eases the introduction of the necessary austerity measures. Watch also for developments on the Greek package: the Greek PM is due to discuss the troika report with Juncker this afternoon; while it is not clear when the report will be released, a long gap between a negative report and a solution is probably best avoided and so there may be some scope for early agreement on the outlines of a package.
Lastly we note Moody’s threat to review the US credit rating if no progress is made on the debt ceiling in the coming few weeks. The debt ceiling/fiscal reform topic is set to become a major focus as European concerns subside and as the August 2 deadline looms closer, putting further pressure on the USD.
BNP Paribas
Corporate & Investment Banking