NFP: is “slightly bad” worse than “really bad”?

UK (dis) inflation
UK core PPI Output inflation matched its lowest month-on-month reading for the last 12 years or more in June, underlining the deflation threat as promoted by the BoE as it decided to increase its asset purchase target this week and no doubt aided somewhat by a stronger sterling vs. the euro over the last couple of months.

Swiss reserves
The latest swiss currency reserve data released today suggests that the SNB is really having its mettle tested with the 1.20 EURCHF peg – as another 10% or more of Swiss GDP in new currency reserves accumulated in June, about the same as in May. The peg can’t hold for much longer (i.e., EURCHF downside break risk rising every day as the pain of maintaining the peg will only be tolerated for so long) if the EU debt strain continues at current levels. Will the peg be “saved” with capital controls or allowed to break, or do we get a real miracle – a solution to the EU situation that lasts more than a week? Time is short – be careful on this front.

US employment report
The ADP this week proved a red herring, as the nonfarm payrolls change came out at a more anaemic than expected +80k, about half of the ADP number. And this despite both ISM surveys suggesting stable to improved hiring conditions. To be fair, the private payrolls number did see a +23k revision for the May numbers – almost precisely matching the 22k shortfall vs. expectations, so the net surprise was theoretically close to nil there. It looks like the weekly jobless claims win again as an indicator. In that light, continue to watch those weekly numbers closely. The household survey came in at +128k vs. a robust 422k last month, though this number jumps all over the place from month to month. The underemployment measure moved higher to 14.9% from 14.8% – that number has only come off about 2% from its 2009 highs.

In a way, the US employment report is the “worst of both worlds” for risk, as it isn’t bad enough to encourage immediate Fed liquidity injection, and isn’t good enough to confirm or deny whether the US is merely been going through a bit of a soft patch. Maximum uncertainty, in other words.

Chart: EURGBP
The EURGBP chart says it all today – pushing to a new post-global financial crisis low as peripheral yields are backing up already here just a week after the EU summit concluded with supposed breakthrough and after the ECB moved to ease rates.

 

 

 

 

 

 

 

 

 

Looking ahead
So far, the reaction to the US employment data is according to script, with the negative data pulling bonds higher, the JPY outperforming across the board, and the risk currencies and European currencies headed south versus the USD. Still, the magnitude of the surprise is rather modest and will quickly leave the market to look for the next round of event risks. Those are coming next week as the Q2 corporate earnings reports begin rolling in in earnest.

As well, today saw the Spanish 10-year yield backing up to almost 7.0% again, already putting the screws to the EU political leadership again and its approach to the sovereign debt situation again – the yields in Spain are precisely where they were the day before last week’s summit. Many questions, few answers. One of the next key potential stumbling blocks is next Tuesday’s German Constitutional Court hearings regarding the ESM and whether it may proceed.

Economic Data Highlights
Spain May Industrial Output out at -5.4% YoY vs. -8.2% in Apr.
Switzerland Jun. Foreign Currency Reserves rose to CHF 364.9 billion from CHF 305.9 billion in May
Switzerland Jun. CPI out at -0.3% MoM and -1.1% YoY vs. -0.2%/-1.0% expected, respectively and vs. -1.0% YoY in May.
Norway May Industrial Product Manufacturing out at +0.5% MoM and +1.7% YoY vs. +1.9% YoY in Apr.
UK Jun. PPI Input out at -2.% MoM and -2.3% YoY vs. -2.1%/-2.2% expected, respectively and vs. 0.0% YoY in May
UK Jun. PPI Output out at -0.4% MoM and +2.3% YoY vs. -0.2%/+2.4% expected, respectively and vs. +2.9% YoY in May
UK Jun. PPI Output Core out at -0.2% MoM and +2.0% YoY vs. 0.0%/+2.0% expected, respectively and vs. +2.3% YoY in May
Germany May Industrial Production out at +1.6% MoM and 0.0% YoY vs. +0.2%/-1.2% expected, respectively and vs. -0.6% YoY in Apr.
Canada May Building Permit out at +7.4% MoM vs. -1.0% expected
Canada Jun. Net Change in Employment out at +7.3k vs. +5.0k expected
Canada Jun. Unemployment Rate out at 7.2% vs. 7.3% expected and 7.3% in May
US Jun. Change Nonfarm Payrolls out at +80k vs. +100k expected and vs. +77k in May
US Jun. Unemployment Rate out unchanged at 8.2% as expected
US Jun. Average Hourly Earnings out at +0.3% MoM vs. +0.2% expected
US Jun. Average Weekly Hours out at 34.5 vs. 34.4 expected and 34.4 in May
Canada Jun. Ivey PMI out at 49.0 vs. 57.5 expected and 60.5 in May.

Upcoming Economic Calendar Highlights (all times GMT)
Japan May Machine Orders (Sun 2350)
Japan May Current Account Total (Sun 2350)
China Jun. CPI (Mon 0130)

 

John J Hardy,
SAXO BANK