Jobs Data and the Week in Perspective

Currency in Crisis

The pending holidays have drained activity in the global capital markets. The US jobs report may spark some short-lived interest, though the thinness of the market may exaggerate the impact of real orders.

There are 132.7 mln employees in the US. An increase of 0.1 hours of the work week is tantamount to 330k full time equivalents. Earnings growth remains subdued. Feb's 1.9% year-over-year pace is expected to have been sustained, but despite a better labor market in Q1, earnings growth has slowed from 2.1% year-over-yea last March.

We have expressed concern about that the consensus estimate for NFP does not seem to fully reflect the risk that seasonal considerations work against a strong report and the fact that the 4-week moving average of weekly initial jobless claims showed little improvement from the February. However, the shift in sentiment sparked by the less dovish FOMC minutes may limit disappointment.

Yet to appreciate the developments this week, one needs to recognize that going into the jobs report, the benchmark 10-year US Treasury yields is down 2 bp this week. The dollar supportive widening of interest rate differentials against Germany took place this week more because of the tensions in the euro zone and less because of the shift in perceptions of the risks of QE3. Indeed core bonds, like German bunds and UK gilt yields are also lower on the week (6 and 5 basis points respectively).

The most compelling explanation is not economic data, where in fact the UK reported stronger than expected manufacturing, service and construction PMI reports. Rather the European debt crisis is flaring up

Italy is faring a bit better, but pressure is evident as well. The benchmark 10-year yield has risen 34 bp this week and about 60 bp since mid-March. The CDS is up about 20% , bringing it to levels last seen in late January. The premiums over Germany are widening as rates rise just as they narrowed as yields fell. The premium France pays over Germany widened 16 bp this week to 124 bp, which is also the largest since late January.

A series of poor economic reports from Japan coupled with the political machinations that led to the rejection of the government's nominee to the BOJ are seen as increasing pressure for new actions by the BOJ when it meets next week.

Although many Asian markets were closed today, it is noteworthy that the Shanghai Composite rose 0.2%. There is some speculation that the PBOC will cut required reserves this weekend that may have helped support the market. However, we suspect that officials will be cautious ahead of next week's data dump which is expected to see a pickup in new yuan loans and a tick up in CPI.

The lack of participation has kept the US dollar largely within the ranges seen yesterday. The underlying technical tone of the dollar improved this week, as reflected by the 5-day moving averages crossing the 20-day in the euro and Swiss franc. Sterling';s moving averages look set to cross next week. However, the broader trading range, such as $1.2970-$.13500 in the euro remain intact. Similarly sterling is holding above $1.5770-$1.5800. The failure of the RBA to move this week and the poor economic data stream has market participants as convinced as they ever are of such things, that the RBA will deliver a rate cut next month. Wednesday's range of $1.0245-$1.3040 may mark the near-term range.

The disappointing Tankan report was followed by news that Japan's monetary base contracted in March for the first time in two years. As the yen outperformed this week (except against the Canadian dollar), the Nikkei dropped almost 4%, including 0.8% earlier today. The euro saw its largest drop against the yen this week in more than 6 months. . Spain's 10-year benchmark yield rose 42 bp this week bring the increase since the beginning of March to nearly 100 bp. The price of insurance via the CDS market has risen 30% in the same period to stand at levels not seen since before the LTROs.

The consensus is for a 205k headline rise in nonfarm payrolls and 215k jobs in the private sector. The unemployment rate is expected to remain unchanged at 8.3%. While the net job creation and the unemployment rate will dominate interest, hours worked and earnings contain important information.