Markets face up to the US jobs data today in tentative mood, Asian stocks having softened by the greatest degree in nearly two weeks overnight and the past two days having seen high-beta currencies, such as the Aussie and Korean won the weakest performers of the majors.
The recent trend in jobless claims, together with the ADP data earlier in the week, have tempered expectations of a strong set of numbers, with the market looking for a 160k gain in headline payrolls following the softer 120k increase seen in March. Video:
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Nevertheless, in the wider picture, expectations of further QE from the Fed have also been cut back, so it would take a pretty weak payrolls number to shift this expectation and knock the dollar from its relatively steady tone of the past month.
Commentary
The shifting ECB. Even though on the face of it, the market was positioned for no change from the European Central Bank meeting yesterday, there were some residual hopes of a surprise cut given the recent run of disappointing real sector data. There were some subtle changes to the opening statement which suggest that the ECB’s stance could well be softening. It still fears that inflation will remain above 2% this year but removed the reference to near-term upside risks to prices’ stability that was present in last month’s opening statement. There was also an acknowledgement of the recent weaker survey data and that at next month’s meeting (which also includes latest staff forecasts) more data would be available. Could this be laying the ground for a further easing? From one angle, the influx of liquidity from the two 3Y refi operations means that short-term interest rates are already significantly below the 1% refinancing rate, currently around 0.35%. This means that the impact on market rates of a further easing may be limited. That said, the interest on the 3Y loans is tied to the prevailing refinancing rate, so a cut here would further ease the interest rate-cost of those banks that took out loans. Thus it certainly remains the case that the chance of a cut has increased and, reading between the lines, the ECB acknowledged this at the press conference. A cut in rates next month remains a distinct possibility, not least because the two cuts seen from Draghi so far have merely reversed the mistaken rate increases delivered by Trichet last year.
Aussie insecurity. Sentiment towards the Aussie has taken a turn for the worse over the past week, in a manner which suggests that further weakness may be in store. Tuesday’s surprise 50bp rate cut from the RBA has certainly unsettled the currency, but other forces have contributed to the recent softness. It is also increasingly clear that the economy is suffering. Established house prices fell by another 1.1% in the first quarter, the fifth consecutive decline. Therefore it’s not a great surprise to see the RBA cutting forecasts overnight for both growth and inflation, now looking for growth of 3% this year and inflation at 2.5% by year end (both projections cut by 0.5% vs. Feb forecasts). Both household and business demand is weak, residential and non-residential construction has fallen markedly and the expensive currency represents a significant impediment to competitiveness. Ex-leader of the Liberal Party, John Hewson, claimed in the Australian Financial Review yesterday that the cash rate should fall to 2% to bring it into line with other developed economies.
A warning for euro bears. Of the 27 members of the EU, ten are officially now in recession. Particularly in the south, much-needed structural reform and fiscal austerity are generating a great deal of painful financial adjustment, which in the short to medium term reinforces the downward pressure on those economies. Deep recession in southern Europe is also amplifying the acute strains being experienced by most of the banks in these countries. These extremely challenging financial conditions are understandably manifesting themselves in increased political tensions and instability. Notwithstanding the economic logic supporting a weaker currency, it is surprising that the euro is not much lower. Perhaps the explanation for the euro’s failure to head lower over these past few months is that the sellers have done as much as they feel they need to for now (in terms of euro-selling) and, as such, are already positioned for further weakness. For their part, traders have been covering some of their record short euro positions over the past three months but remain significantly net short. The problem for the euro bears is two-fold. Firstly, just where is any substantive selling pressure likely to come from? Secondly, it probably requires a new crisis-catalyst to trigger a fresh wave of selling, for instance Spain requiring a bailout or France ripping up the new fiscal compact. Logic dictates that the euro should fall in this environment. However, what should trouble the euro bears is that the single currency should already be a lot lower. As such, those with a negative disposition towards the euro need to be very wary, because the price action for has some time now not really supported their view.
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