All eyes fixed on NFP
GBP suffers setback from lower PMI services
Weekend risk: Chinese rate hike, Portugal election, Greek package
As markets await NFP numbers, investors’ remain reluctant to take large positions this side of US payrolls. While the post-ADP Bloomberg consensus for payrolls looks high at 165k (BNPP is at 75k), it should be noted that less than half the analysts have revised down 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 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 1.7trn cannot buy sustainable job growth then the global economy is in even greater trouble than feared. Also of importance 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, a modest rebound may provide significant comfort to those insistent that the economy is not double-dipping here and USD negative as a result. We like long NOKSEK as cheap insurance against full blown risk capitulation — see today’s Market Focus.
In Europe, the UK Services PMI came in lower than expectations (53.8 v. consensus of 54.2) slowing on softer household spending and the impact of an additional public holiday at the end of April. The decline in the PMI provides further proof that the recovery in the UK is struggling even before the full effects of fiscal tightening are yet to be felt, adding to our bearish GBP view in place since May when such indicators began rolling over. EURGBP continues to track EURUSD higher with consummate ease and with 0.8845 gone on Thursday next stop may not be before 0.8900. In other European data, Eurozone PMI services slipped in May to 56.0 from 56.7 in April, but was well above expectations. Despite the slippage, Eurozone services growth remains robust. Also on the positive side, Spanish consumer confidence, Spanish PMI services as well as German PMI services came in much stronger than the previous month.
Potential event risk over the weekend lurk ahead of Monday’s Chinese holiday with the familiar speculation of a Chinese rate hike, although this has been well flagged and so the impact should be limited if announced. Portugal heads to long-awaited elections, and polls suggest a comfortable win for the Social Democrats: a strong majority will be 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 isprobably 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 approaches, putting further pressure on the USD.
BNP Paribas
Corporate & Investment Banking