Jobs Data in Focus

Highlights

The US dollar trading higher just as the North American session is about to start.  However, position squaring in Asia and Europe had pushed short-term technical indicators into an over-extended condition and near-midday in Europe, the dollar began recovering.   The euro has been sliding across the board.  One trigger may have been the collapse in the euro against the Swiss franc when the CHF1.40 level gave way.  Yet there is some risk of ‘buy the rumor, sell the fact’ activity after the jobs data.    New Japanese Prime Minister Kan is talking a tougher fiscal line but has not distanced himself from previous soft yen comments.  The dollar has made a new marginal high against the yen for the week and reached its best level since May 18, but resistance in the JPY93.00-30 area remains intact.   The Canadian jobs data were better than expected with 24.7k jobs created compared with 15.0k expected, but the key is a whopping 67.3k full time jobs.

Global equities are mixed today after yesterday’s recovery in the US.  The MSCI Asia-Pacific Index was fractionally, nearly fully recovering earlier losses.  In fact those bourses that are open the latest, like India, Thailand and Singapore did best—gaining around 0.5%.    After gapping lower, the Shanghai Index fully recovered to eke out a marginal gain by closing near its highs.   European bourses are mostly higher, with Spain and Greece the main exceptions.  Financials are easily the weakest sector in Spain, but in Greece consumer goods, telecom and utilities are doing worse than the financials.   In the Dow Jones Stoxx 600, financials are higher, but is the sector with the smallest gain.

Despite the relative calm in the other parts of the capital markets, the bond markets suggest strains below the surface.  It is not simply in the periphery of Europe, where 10-year bond, where premiums over Germany are widening, but also in core countries.  For example, the 10-year spread between Belgium and Germany is the widest in a little more than a year.  Dutch-German spread is the widest in 4 months.   Consider that the French-German spread has widened 14 bp this year, 8 of which has taken place this week.   It is true that there has been some reduction in funds parked overnight at the ECB to 299.47 euros from the record 320.37 bln previously, but this is still running some thing like ten times greater than normal. 

Currency Markets

Today’s US employment data is important.  Market participants are now well aware that the Census workers will flatter the headline number of non-farm payrolls.  The key will be the private sector.  Recall that in recent months, the US state and local governments have been laying off people sometimes faster than the census department hired.  This was also picked up in Q1 GDP where the state and local government cuts offset in full the new spending by the Federal government.  This means that the government’s total contribution to today’s data may be a little less than what the Census contributed.  The Bloomberg consensus is for a 180k rise in private sector jobs.  This is a little above April’s 3-month average of 155.6k, which itself compares to an 84k 3-month average in March and a -90k 3-month average in Dec. 09.  When thinking about the economic impact of the report, keep in mind the work week has risen from 33.8 hours in Dec. to 34.1 hours in April.  Given the number of existing workers, each tenth of an hour increase is equivalent to a bit more than 300k jobs (in terms of output, not income or the unemployment rate).  The general picture of gradual improvement in the labor market, with more private sector workers, working a slightly longer work week, earning a little bit more an hour is likely to remain intact despite the month-to-month volatility of the report. 

The G20 meet today and tomorrow in South Korea to prepare for the heads of state summit in Canada later this month.  It seems that this meeting will be dominated by the European agenda.  Officials in Germany are pushing for a financial transaction tax that is opposed by countries most vocally by countries that did not have a banking crisis, like Canada and Australia (but also Mexico and Brazil).  The German Finance Minister, which has already shown his willingness to act unilaterally, has warned that if Germany does not get satisfaction from the G20 it is prepared to push its case in Europe, where coincidentally there is a Eurogroup meeting of euro zone finance ministers Monday.  UK’s new Chancellor of the Exchequer Osborne is pressing for an agreement on bank capital rules (capital levels and liquidity).  The US position seems to be to preserve its freedom to act—especially given the financial reform bill still making its way there the legislative process.  The Obama Administration appears more sympathetic to strengthening the capital requirements providing incentives and disincentives for various risk taking activities rather than banning them outright.  Look for a SpecialFX report shortly after the employment report that looks at the divergence between the US and European general macro-economic approaches.

Another important talking point today is the news wire report quoting Boutros-Ghali of the IMF warning that the multilateral lender has not secured the funding for its Greek aid commitment.  This could prove to be troublesome as it refers only to the Greece.  Recall that a couple weeks after this commitment was made, the IMF apparently agreed to go ahead with the euro zone efforts to ‘shock and awe” the market that claimed an IMF commitment of about $250 bln.  We, alongside others, expressed skepticism over that figure, noting that the IMF does not make blanket commitments to regions.  Instead it works on a country-by-country basis.  While it may be impolitic to suggest that number was pulled out of the air, but the kind of funds the IMF would need would seem to pose some operational issues.  There has been some talk that maybe there could be another SDR issuance, but it is not clear how that would solve the IMF’s funding challenge.  That said, recall that the SDR’s composition is reviewed every five years and the next review is due later this year.  Currently, the dollar accounts for 44% of it and the euro 34%.  Sterling and the yen accounted for 11% each.   Neither China nor the other BRICs seem ready to make a compelling case that their currencies ought to be included.

Chinese money market rates declined the most in two years today.  The completion of the Bank of China’s convertible bond sale (raised about CNY40 bln) and an injection of liquidity by the PBOC (CNY14 bln) sent the key 7-day repo rates down 73 bp to 2.22%.  The three-year bond rates slipped to 2.68% from 2.70% at yesterday’s auction.  It is the fourth decline since the three-year sales was resumed in April.  Given the fact that Europe is China’s largest export destination and that the yuan has appreciated more than 17% against the euro this year, the decibel of the calls for yuan appreciation may be somewhat lower at the G20 meeting.