US Jobs, European Devleopments, Australia's Tax Compromise

The release of the US employment data is the main event of the day. Investors are well aware of the unwinding of the census build, which will produce a headline decline of jobs.

The market will look past this and focus on private sector jobs. The softer than expected ADP and ISM data yesterday have probably led to downward adjustment to expectations that had been around 100k at the start of the week. The private sector has added jobs in the past five months and in 6 of the past seven. To judge whether the labor market is losing momentum (which appears to be the case based on the weekly initial jobless claims), one needs to place today’s report in the context of the recent trend. Over the past five months the average private sector jobs growth was 99k and over the past 7 months its has been just below 70k. The most recent three month period has seen an average of 139k. Also note that over the past five months that the manufacturing sector has grown jobs, the average monthly pace has been a little more than 25k, which is where the consensus stands.

Hours worked is also an important if under-appreciated aspect of the report. It is not expected to change from 34.2 hours, but the market’s reaction is likely to be stronger on a unexpected decline than an unexpected increase. Some have asked about the fishermen in the Gulf of who have lost their jobs. Our understanding is that fishing falls under farm workers and hence is excluded from the non-farm payroll figures.

It would seem to take a significant upside surprise to arrest the market concerns that have grown in recent weeks about the US economy. Most investors seem to take it for granted that European growth would be weak this year. The shift in market views has been directed at the US and to a lesser extent China.

This comes at the same time that Europe appears to have successfully navigated some treacherous waters—Spain selling 5-year bonds a day after Moody’s puts it on credit watch for a possible (?) downgrade and the ECB engineered a fairly smooth expiry of the large 12-month LTRO. And these evens took place in a context in which the European currencies had begun benefiting for position adjusting, perhaps partly inspired by the approaching quarter end. The move has taken on a life of its own and yesterday appears to have been one of the top 7 largest single day advances of the euro since 2000.

This does not mean that the European debt crisis is necessarily over. The recent positive news stream aside, the strains are still evident. Easily available metric investors will want to monitor are the overnight deposits at the ECB. These deposits earn less than they would in the market and high levels of such deposits are similar in some respects to the excess reserves at the Federal Reserve. It reflects a transmission mechanism still in disrepair.

Another metric to monitor is 3-month euro LIBOR. It remains elevated. In fact, some are linking the recent recovery in the euro to the higher short-term rates. The stress tests and capital that may need to be raised may become a more important focus in the coming weeks. A report in the Financial Times today cites some expectations that 20 European banks may have to raise a total of 30 bln euros.

Australia’s new government appears to have worked out a compromise on the controversial resource profits tax. This may have lent the Australian dollar some support and some mining shares did better as a result of the compromise. The compromise is a lower headline rate and a narrower application. The headline rate is reduced from 40% to 30% and this applies to iron ore and coal. It will still be at 40% for oil and gas projects. While the initial conception of the tax would have included minerals too, the compromise focuses only on the profits of iron ore, coal, and on shore oil and gas. The Australian dollar, like the other dollar bloc currencies do better in a more confident global growth environment. The Australian dollar needs to rise above $0.8550 to begin healing some of the technical damage inflicted in recent days.

The Canadian dollar and Mexican peso would seem even more sensitive to disappointing US employment data. US dollar support is seen initially near CAD1.0540. Weaker than expected US auto sales, growth concerns in general and the escalation of violence in Mexico has helped lift the dollar. With yesterday’s gains the dollar has gained almost 5.5% since 21 June against the peso. The MXN13.20 is the next target.