Payrolls Soft, Euro Slumps
US nonfarm payrolls rose just 80k in June, undercutting the 100k consensus. Private payrolls were slightly stronger, up 84k but still below the 110k expected in the market. The details, however, were less disappointing, with average hourly earnings up 0.3% m/m and average weekly hours increasing to 34.5 in June from 34.4. Our economists note that payroll earnings – a product of private payrolls, weekly hours and average earnings – rose 0.7% m/m in June, faster than the 0.3% m/m average in the first five months. We continue to expect job growth to pick up in H2 2012, keeping the Fed away from the QE trigger. Risk assets sold off following the report, and not surprisingly, the yen was the biggest beneficiary. While our Japan economics team still expects the BoJ to expand its Asset Purchase Programme at its upcoming meeting, we believe a JPY5 trn ‘top up’ would have little lasting impact on USDJPY in the absence of a material widening of the 2yr UST-JGB yield spread. – unlikely in the wake of the soft US payrolls data and lingering QE risks. Our 1-month USDJPY target remains 78. There was no respite for the euro, which is still going through a harsh post-Summit reality check. ECB members Noyer and Coeure served reminder that the central bank cannot finance the ESM to buy government bonds “in an unlimited manner”. The ESM, which had been due to take effect on July 9, now awaits the ruling of the German constitutional court on July 10. Approval is also pending from Italy’s Chamber of Deputies, which is not scheduled to vote until July 30, further delaying the activation of the permanent bailout fund. The German Finance Minister said that there has not been a troika report on Spanish bank aid yet and that a final agreement may not be sorted until July 20. Spanish bonds remained unsettled amid the uncertainty, with the 10-year yields testing the 7% level. Also, the Greek Prime Minister’s admission that his country’s fiscal reform programme has gone off track and press reports (citing unnamed EU sources) suggesting that a decision on Greece’s bailout will not be taken this month will keep the markets focused on headlines coming out of the Eurozone – starting with the Finance Ministers meeting today.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank