The US employment report was distinctly uninspiring despite the drop in the unemployment rate and the market continues to plow full steam ahead with bets on the imminent arrival of QE.
From the day’s action, it appeared that this market knew what it wanted to do regardless of the US employment outcome, as the USD had broken significantly lower almost across the board ahead of the employment report. With a weak payrolls number and an unemployment rate that only dropped because of various adjustments in the participation rate, the market is placing a firm bet that QE3 is coming, of course, with some undoubtedly also believing that it will come at the September meeting. Interestingly, QE3 bets were stronger in the currency and bond market than they were in risk appetite – at least a slight nod to the fundamentals for companies from a weak economy. Gold shot sharply higher and the USD cratered further before stabilizing a bit. The JPY sat up and took strong notice of the bond rally as well, as USDJPY notched back lower.
US Employment report
After lulling market observers into believing that the ADP payroll report was beginning to predict the NFP report, the latter came out at less than half (96k) of the formers level (+201k), severely disappointing market expectations. The unemployment rate managed a drop of -0.2% to 8.1%, but this was due to huge adjustments in the size of the workforce, likely from increasing ranks of retirees and discouraged workers. The survey from August of 2011 showed over 2.7 million more Americans were considered “in the labour force” vs. this month and the participation rate dropped to a new low since the late 1970’s.
Canada, meanwhile, had its “mean reversion month” in August as the data bounced as much as it fell the previous month, suggesting little change in job market prospects.
Looking ahead
There is no change in view on whether the market will ultimately find the effects of further QE disappointing, once the cat finally emerges from the bag. But with yesterday’s massive break higher in the S&P500 and today’s very high momentum follow-up move lower in the USD, I have notched my level of caution somewhat higher until the move is either reversed or runs out of momentum. We also have to consider that next week’s events could/should be more important than today’s data anyway, so we need to see where the market stands on the other side of these before drawing conclusions. As for the levels of interest, the 1.2750-1.2850 zone is key in that period, as is the 1.0400/1.0450 area in AUDUSD and the 1.6000 area in GBPUSD. If we move and stay above these levels, we’ll have to at least partially rewrite the script again on how much longer this market regime can continue.
Stay careful out there.
Economic Data Highlights
Australia Aug. Performance of Construction Index out at 32.2 vs. 32.6 in Jul.
Australia Jul. Trade Balance out at -556M vs. -300M expected and -227M in Jun.
Switzerland Aug. Unemployment Rate out unchanged at 2.9% as expected
Germany Jul. Trade Balance out at +16.9B vs. +15.3B expected and +18.0B in Jun.
Switzerland Aug. Foreign Currency Reserves out at 418.4B vs. 406.5B in Jul.
Norway Jul. Industrial Product Manufacturing out at +0.3% MoM and +7.6% YoY vs. -0.3% MoM expected
UK Jul. Manufacturing Production rose +3.2% MoM and fell -0.5% YoY vs. +1.8%/-2.4% expected, respectively and vs. -3.9% YoY in Jun.
UK Aug. PPI Input out at +2.0% MoM and +1.4% YoY vs. +1.7%/+1.4% expected, respectively and vs. -2.4% YoY in Jul.
UK Aug. PPI Core out at +0.1% MoM and +1.2% YoY vs. 0.0%/+1.2% expected, respectively and vs. +1.2% YoY in Jul.
Germany Jul. Industrial Production out at +1.3% MoM and -1.4% YoY vs. 0.0%/-3.0% expected, respectively and vs. +0.3% YoY in Jun.
Canada Aug. Unemployment Rate out unchanged at 7.3% as expected
Canada Aug. Net Change in Employment out at +34.3k vs. +10k expected and vs. -30.4k in Jul.
US Aug. Change in Nonfarm Payrolls out at +96k vs. +130k expected and +141k in Jul.
US Aug. Change in Private Payrolls out at +103k vs. +142k expected and vs. +162k in Jul.
US Aug. Unemployment Rate out at 8.1% vs. 8.3% expected and 8.3% in Jul.
US Aug. Average Hourly Earnings out at 0.0% MoM and +1.7% YoY vs. +0.2%/+1.9% expected, respectively, and vs. +1.7% YoY in Jul.
Canada Jul. Building Permits out at -2.3% MoM vs. -1.0% expected
Upcoming Economic Calendar Highlights (all times GMT)
Canada Aug. Ivey PMI (1400)
China Aug. CPI (Sun 0130)
China Aug. PPI (Sun 0130)
China Aug. Industrial Production (Sun 0530)
China Aug. Retail Sales (Sun 0530)
New Zealand Q2 Manufacturing Activity (Sun 2245)
Japan Jul. Current Account (Sun 2350)
Australia Jul. Home Loans (Mon 0130)
Japan Aug. Consumer Confidence (Mon 0500)
John J Hardy,
SAXO BANK