- US NFP disappoints; asset market reactions suggest global growth under fresh scrutiny
Friday’s disappointing 120k payrolls report confirms the Fed’s fears that the strength in employment over the past few months was partly due to seasonal factors. The number itself is not weak; but it is barely enough to hold the unemployment rate constant with an unchanged participation rate and keep the economy growing around its trend pace of 2-2.5%. This is unlikely to be enough for the Fed. While this is only one month of data, the April FOMC will have to weigh the possibility that the economy is not accelerating and as ‘Operation Twist’ draws to an end. Our economists place the likelihood of some form of further monetary policy accommodation being announced at the June meeting at 65-70%. But while the jobs report would seem to suggest a return to USD weakness – US 10yr yields fell nearly 12bps on the day – FX Markets reacted to the disappointment by selling AUD and CAD, suggesting renewed concerns of a much broader global slowdown. The coming week is inundated with Fed speakers across the hawk-dove spectrum – beginning with Chairman Bernanke today – and markets will be watching for their reactions to the payrolls report. Any signs of further easing will likely trigger a risk rally and a lower USD – if global growth concerns can be assuaged. While employment data is critical, Fed hawks will also be watching core CPI on Friday, which we expect to edge higher due to the tight rental market. Also this week, we anticipate a further build-up in Eurozone concerns in the run-up to the French elections and as pessimism on Spain persists. We continue to see EURUSD sub-1.30 in the coming weeks.
- AUD, global growth outlook hostage to China data
The usual slew of monthly China data this week will be instrumental in shaping investors’ outlook for global growth; and first up this morning was a higher-than-expected 3.6% CPI print. While higher inflation may constrain the authorities’ ability to offset economic weakness with fiscal stimulus, it is important to note that most of the higher CPI was food-related: nonfood inflation remained relatively stable at 1.8%. At least as important will be tomorrow’s trade numbers that will provide some clarity on the level of activity in the Chinese economy after a couple of months of holiday-distorted numbers. Weaker exports may reconfirm market expectations that CNY appreciation will be minimal (if at all) in 2012; conversely a rebound in trade will prolong the theme of Asian outperformance, particularly against a faltering USD. In addition, Australian employment numbers on Thursday will be another contributing factor in setting the monetary policy stage for the RBA following the strong hints that a rate cut is likely in May, provided Q1 CPI data (due April 23) is benign.
- BoJ unlikely to ease on Tuesday, downside back in play
The Bank of Japan meets tomorrow, but our economists expect that at this stage any further easing is likely dependent upon the Fed. The suggestion therefore is that any potential easing this month is more likely at the April 26-27 meeting, just after the FOMC. In the meantime, 2yr US Treasury yields suggest a USDJPY below 81; and while some of the recent
overshooting is likely due to positioning, this raises the issue of at what level the yen shorts might capitulate. While Friday’s IMM data showed only a minor change in JPY speculative positioning (still net short), some of the shorts were likely trimmed ahead of payrolls. But we think that Japanese retail positioning remains sizeable, with the TFX now
significantly under-reporting positioning. There are likely large stops in the 80-80.50 region, coinciding with a number of technical and psychological levels. Indeed, given that a reversion to the previous 76-80 trading range would seem to undermine all the political effort made over the past few months, we would not rule out verbal intervention from the
authorities on a break of 81.
BNP Paribas