US Jobs and More

The US dollar continues to trade quietly in narrow trading ranges. Although the most important economic report of the month for the world's biggest economy will be reported, it is unlikely to breathe fresh life into the foreign exchange market.

Outside of the disappointing Q1 GDP report and what appears to be a seasonal quirk in the weekly initial jobless claims, having to do with Easter, US data has generally been firm, and expectations for 3% GDP in the current quarter remain intact. Yet, US 10-year yields have fallen more than 7 bp this week, and that includes today's small increase.

US monetary policy is seen to be on near automatic pilot, and this means that the tapering will continue until it is completed in early Q4, and the first rate hike is more than a year away. Despite the wobble in March, the Fed's forward guidance has been successful, and the low volatility in the foreign exchange market seems to be partly a function of this.

In addition, we argue that with the FOMC dropping its unemployment threshold for a more nuanced approach to the labor market, the US employment report appears to be losing some ability to shake the market. Moreover, private sector job growth has been extremely steady, and this too may serve to diminish its impact. Over the past three months, the average private sector job gain is 182k. This is the same as the 24-month average and slightly below the 189k 12-month average.

That said the three month average is about to improve as December's 86k increase drops out. The six month average will also improve and is likely to poke through the 200k threshold, which is where it was for most of H1 13. While some may argue that there has been a new acceleration, we would not want to overstate the case. Last October and November, private sector payrolls rose 272k and 247k respectively. These are going to drop out of the short-term averages in the May and June reports.

There seems to be a reasonable chance that the unemployment rate ticks back down to 6.6% from 6.7%, but the other details of the report, like hourly earnings and the work week, are unlikely to be very inspiring. A 0.2% increase in earnings is needed to keep the year-over-year pace at 2.1%, while the work week is expected to be flat 34.5 hours.

Foreign exchange participants may be best served by keeping an eye on the US 10-year yield. A move below 2.6%, may weigh on the dollar against the yen. Note that Japanese markets are closed Monday and Tuesday next week. The euro remains firm but steady. It has been confined to $1.3775-$1.3905 since April 9. While most observers do not expect the ECB to either cut the deposit rate below zero or launch an asset purchase program next week, and contrary to much rhetoric may observers, the ECB's jawboning appears to have helped check the euro's rise.

That said there does still seem to be scope for the ECB to surprise next week with a possibility of a token move on the 25 bp repo rate or to narrow the rate corridor by cutting the 75 bp lending rate. Some suggest a decision not to sterilize the SMP purchases, which Draghi previously played down, is also possible. The ECB liquidity injection this week and the large miss on sterilizing the SMP have seen excess liquidity in the Eurosystem essentially double to 160 bln. This is the highest in three months, and this will help ensure EONIA falls quickly in the coming days, which has been above the refi rate for five sessions through yesterday.

The euro area manufacturing PMI edged to 53.4 from 53.3 flash reading. Germany slipped slightly from the flash to 54.1 from 54.2, but France ticked up to 51.2 from 50.9 (still off from 52.1 in March). Spain slipped slightly from March, but Italy was the notable surprise rising to 54.0 from 52.4, which represents a new multi-year high. Ironically, and under-appreciated by many observers, when the ECB staff presents new forecasts next week, it may revise higher its GDP forecasts.

We do not read much into the modestly disappointing UK construction PMI. At 60.8, it is off from 62.5 in March and lower than the consensus forecast of 62.0. There are two mitigating factors. First, of the three PMIs, it covers the smallest part of the UK economy. Second, and more importantly, it remains above the 60 level, not just the 50 boom/bust threshold and has done so for six months.

While the service PMI is out next week, the main takeaway from investors is that the UK economic expansion continues and its growth likely leads the G7 this year. Macro-prudential policies are more likely to be used to curb excess in the housing market than a rate hike in the coming months. Sterling itself still seems poised to challenge the $1.70 level and beyond (next target beyond that is around $1.72).