Mixed Messages Ahead of the ECB and US Jobs

The US dollar is narrowly mixed ahead of two events today that are usually separated by a day, due to the US holiday tomorrow: ECB meeting and US monthly employment report. There have session has already had several developments.

Sweden's Riksbank was the most surprising. It delivered a rate cut twice the size that the market expected. It cut its key repo rate 50 bp. It now stands at 25 bp. The central bank's decision came over the objections of Governor Ingves and First Deputy Governor Jochnick in a 4-2 decision. While it is unusual for a central bank head to be outvoted, we are reminded that several times the BOE Governor King was outvoted.

The surprise hit the Swedish krona hard, taking it down about 1.75%. The euro finished the North American session just below SEK9.16 yesterday and short up to almost SEK9.39 today. This is the highest the euro has been against the krona since late 2010. The stock market liked the rate cut and has outperformed other bourses today, rising about 1.0%.

Although no other development today can compete with Sweden’s surprise, there are few noteworthy developments.

First, China’s service PMI readings are consistent with stabilization of the world’s second largest economy that we have been identifying. The slippage in the official reading to 55.0 from 55.5 is still consistent with this of course, but more telling is that the HSBC measure rose to 53.1 from 50.7, seeming to confirm what the official data has been suggesting.

Second, after reporting poor foreign demand in the way of the trade deficit blow out yesterday, Australia reported a larger than expected drop in domestic consumption. May retail sales fell 0.5% (vs. flat consensus) and the April series was revised to -0.1% form +0.2%. In addition, RBA Governor Stevens provided the jawboning that had been expected to have been contained in the central bank’s statement earlier this week.

Stevens argued the currency was too strong and not by just a couple of cents. While the verbal intervention has not had much impact in recent months, the market seemed more vulnerable as it had not backed off far from the multi-year high set on Tuesday above $0.9500. It has now broken below the 20-day moving average (~$0.9400) for the first time in nearly a month. The next target is near $0.9320 and the lower end of the 3-month trading range is near $0.9200, which is the key for the medium term outlook.

Third, the euro area service PMI confirmed the flash reading of 52.8, but the details were a bit mixed. Germany reading was shaved from the flash 54.8 to 54.6. This confirms the loss of momentum as it stood at 56.0 in May. The French flash of 48.2 was confirmed. It warns that the French economy may be contracting. The PMI stood at 49.1 in May. It is the third consecutive decline. Italy surprised on the upside with a 53.3 reading. The consensus expected 51.8 after 51.6 in May. It is difficult to call Spain a disappointment, but its June services PMI came in at 54.8 down from 55.7 in May and below the 55.8 consensus. Still, of the four largest economies in the euro area, Spain’s service PMI is the highest.

Separately, following the disappointing German retail sales earlier this week, the aggregate figures for the euro area were also weaker than expected. The flat reading compares with expectations for a 0.2% increase. The year-over-year pace of 0.7% is less than half of April’s 1.8% rate, which itself had been revised down from 2.4% as the monthly gain of 0.4% was revised to -0.2%.

Fourth, after reporting stronger than expected manufacturing and construction PMI earlier this week, the UK service PMI was disappointing. It slipped to 57.7 from 58.6 in May. The market was anticipating more modest slippage to 58.3. The report is unlikely to change anyone’s economic assessment. Of note, the employment sub-index rose to what appears to be a record high of 58.8, up from 56.2.

That brings us to the US jobs report and the ECB meeting. We suspect both will be anticlimactic. The ADP report likely stole the thunder from the BLS report today. It likely removed the risk of a disappointing report. The key to the dollar may be how the US Treasuries respond. Not that there is always a one-for-one correspondence, but we suspect in the current context, a rise in the 10-year yield through the 2.65%-2.67% area, would lift the dollar across the board. We have argued that another 200k+ increase in non-farm payrolls following the strong auto sales should ease concern that the dismal Q1 GDP says anything about Q2 GDP.

The ECB meeting may elicit a muted response from the market. Investors know that with the TLTROs still couple months away, the ECB is in a monitoring and preparation mode. Some more details about the TLTROs may be forthcoming, but the more Draghi discusses the additional reporting requirements to ensure that the funds are not simply recycled into sovereign bond markets, the more it will seem that the full 400 bln euro capacity of the new facility will not be used. Lastly, there is modest risk that Draghi is asked about the progress with the minutes, which could be forthcoming toward the end of the year.

The euro seems “comfortable” on a $1.36 handle and the dollar has neared JPY102. While this latter is a psychological level, additional resistance is seen near JPY102.20. Sterling support is pegged between $1.7090-$1.7115.