Activity in the global capital markets is subdued. Yesterday's moves are being consolidated, and the dollar has been confined to narrow ranges. The euro
is in a quarter cent range, while sterling
is in a 50 cent range and the dollar has
been confined to about two-thirds of a
yen.
The US
employment data is the main focus ahead
of the weekend. Nonfarm payrolls are expected to
have added around 160k jobs. That would be the second consecutive month
below 200k. In both 2014 and 2015,
there were one such back-to-back sub-200k readings (Jan-Feb 2014 and Aug-Sept
2015). Moreover, the 40k strike at Verizon likely depressed the report.
At the same
time, economists and policymakers general expect job growth to slow as full employment is
reached. Weekly jobs claims are elevated, and the four-week moving average is
about 20k above the cyclical low set in April.
Jobs growth has
ratcheted down. The three-month moving average of
nonfarm payrolls is near 200k down from a six-month average of 220k. The
details of the report, including hours, worked, and average hourly earnings are
expected to show little change. Due
to rounding, there is a chance that the unemployment rate ticks down to 4.9%
from 5.0%.
We suspect
there is some downside risks with today's US employment report. It appears that the economy enjoyed a
strong rebound in March-April and may has moderated in May. That said, as
of June 1, the Atlanta Fed GDPNow is tracking 2.5% growth in Q2. To offset the risks associated the UK
referendum eight days after the FOMC meeting, we think among the necessary
developments is an unambiguously strong employment report, with more upside
pressure on wages evident. We do not expect such a threshold will be met.
If this
assessment is correct, there is some downside risk to the dollar as the market shifts
the modest expectations from June to July. As we have noted, the main problem with a July hike is that there is
no press conference scheduled afterwards. This
is an operational challenge and one that is surmountable. A move
in July would also secure the Fed more degrees of freedom as it would
underscore the claim that all meetings can be live, not just the quarterly ones
followed by a scheduled press conference.
The Asian
session featured three economic reports. China's Caixin services PMI slipped
to 51.2 from 51.8, and the composite eased to 50.5 from 50.8. Despite the
disappointing PMI readings this week, the Shanghai Composite snapped a
five-week losing streak to close more than 4% higher. Reports indicate
that as of the middle of July, the PBOC will begin calculating reserve
requirements based on period averages rather than the end of the period levels.
Australia's May
services PMI rose to 51.5 from 49.7. It is the first reading above the 50
boom/bust level in three months. The RBA meets next week. Some
observers look for a follow-up rate cut, but we are less convinced that the
conditions warrant back-to-back rate reductions.
Japan reported
a 0.6% rise in April real labor cash earnings (year-over-year). It is the third positive reading but
well off the 1.6% rise seen in March.
Unadjusted for inflation, cash earnings rose
0.3% (year-over-year) in April. The median forecast was for a 0.9%
increase after 1.4% in March. The BOJ meets in the middle of June, but
the focus, especially after Prime Minister Abe confirmed the postponement of
the retail sales tax hike, is back on
fiscal policy.
In Europe, the
services and composite PMI was the main attraction. The eurozone
services PMI ticked up to 53.3 from the 53.1 flash reading It still is
the first increase since last November. The German reading was unchanged
from the 53.1 flash report, while France slipped to 51.6 from the 51.8 advanced
reading. Spain surprised to the upside at 55.4. The market had anticipated
a decline from 55.1. Italy was the outright disappointment. The
services PMI fell to 49.8 from 52.1. It is the first sub-50 reading since the
end of 2014.
The composite
reading rose to 53.1 from the 52.9 flash estimate and 53.0 in April. The composite as alternated between
53.0 and 53.1 for the last four-months.
However, this seems to suggest some slight loss of economic momentum. The
three-month average (53.1) is slightly lower than the six-month average (53.3)
and lower than the 12-month average (53.7). At the ECB's press
conference, Draghi acknowledged the likelihood that Q2 growth is unlikely to
match Q1's 0.5%.
The UK reported
better than expected services PMI and composite, but sterling continues to trading heavily as the focus is on the
referendum. The services PMI rose to 53.5 from 52.3. The median
forecast was for a 52.5 reading. The composite PMI rose to 53.0 from
51.9. Expectations were for a smaller uptick. The improved data
underscores our skepticism of the BOE's claim that referendum was responsible
for slower economic activity. It could be, but it is hard to tease it out
of the high frequency economic data.
In addition to the US
employment data, factory orders and trade balance, Fed Governor Brainard speaks
shortly after the end of the European session. Although we do not
put Brainard in with the Fed’s Troika of Yellen, Fischer, and Dudley, we recognize
her insight regarding advocating a more
cautious path when some regional presidents were talking about an April move and her emphasis on global
conditions. Yellen speaks on Monday.
Currency Market Becalmed Ahead of US Jobs Data
Reviewed by Marc Chandler
on
June 03, 2016
Rating:
Reviewed by Marc Chandler
on
June 03, 2016
Rating:
