Four Developments Before the US Jobs Data

The US dollar is mixed as the market braces for the last main event of the week, namely the Us employment report.  The greenback is consolidating yesterday's outsized gains against the major currencies and is finding a better bid tone against the dollar-bloc.  

It may be more difficult than usual to anticipate the market's reaction to the US employment data.  Some observers see a weak report increasing the risk of QE as early as August.  Yet given the recently announced Operation Twist extension, it seems to early to anticipate another policy response.  Some houses did increase their forecasts for the non-farm payrolls report after the ADP data yesterday.  Almost half the ADP gain was due to hiring by small businesses, which the national report attempts to estimate.  Other estimates of small business hiring, like SurePayroll reported a decline.   

Given the markets' heightened concern about the global growth outlook, a disappointing report could see the dollar advance in a risk-off type activity.   In addition, on top of this concern, pressure remains in the euro zone as illustrated by Spain's 10-year knocking at the 7% yield threshold.   The rancor in Europe may be on display at Monday's European finance ministers meeting.   In this light, note that the UK Telegraph (yes, take with a grain of salt), that Finland would rather exit the euro zone than continue to bailout others. 

There are four developments to note ahead of the US data.   First, Italy's cabinet agreed to make another 26 bln euro in spending cuts (over three years) to replace the VAT hike (from 21% to 23%).   Spain is expected to announce another 30 bln euros in savings soon.  The austerity regime remains intact. 

Second, UK producer price inflation fell more than expected (-2.2% input prices and -0.4% output prices in June). This is important because as price pressures fall, the BOE is understood to have even more scope to expand its gilt purchases.  Many observers do not think the GBP50 bln announced yesterday will be the last.  A further extension is seen as early as Sept-Oct. 

Third, although the German economy is unlikely to have matched the Q1 0.5% advance, the economy's resiliency is impressive.  Yesterday's stronger than expected manufacturing orders was followed by today's news that industrial production rose 1.6% in May, recouping a good chunk of the 2.1% decline in April.  Construction jumped 3.1% and manufacturing rose 1.8%; both helping to offset the 1.6% decline in energy output.  Separately, following a dismal PMI, Norway report a strong 1.5% rise in industrial output (May), which included a 0.5% rise in manufacturing output (the consensus was for a 0.1% decline).  

Fourth, Swiss reserves jumped to CHF364.9 bln in June from CHF305.9 bln in May.  The SNB confirms that the rise in reserves reflects large purchases of foreign currencies as the franc's cap is defended.   The intervention likely has continued.    Part of the reason the SNB feels compelled to cap the franc is the domestic deflation.  Today Switzerland reported a 0.3% decline in June CPI to bring the year-over-year rate to -1.1%, which is a new low since the -1.2% rate seen in July 2009..