Big big data day today, with employment data in the United States. As we’ve blogged over recent months this information is – outside of the machinations of the ECB governing council – the most critical for the world’s macro-economic future as it will be highly influential in determining when the Federal Reserve pushes ahead with interest rate hikes. But before we expand on this, there has been some significant activity in the last few days that merits discussion.
On Wednesday afternoon we saw ADP Nonfarm Employment data published in the U.S, it’s always a precursor to the Federal data that gets disseminated today, and it’s fair to say that it isn’t always in line. Wednesday’s number disappointed both in terms of comparisons to the previous month and also economist forecasts. We will see how this correlates with the more important data today. Also on the same day we got ISM non-manufacturing data which showed a slight improvement in aggregate but some key sub-components disappointed, notably business activity and new orders, while the employment sub-component was very very strong. This is further evidence of the strength in the pickup of employment in the United States, but the less positive activity and orders data is also consistent with the recent Goldman Sachs Global Leading Indicator which is pointing towards contraction later on in the year. It’s going to be interesting to see how less conducive business conditions later on in the year, square with very robust employment growth. Is it possible that a more confident US consumer will ride to the rescue and power the US towards a new consumption cycle? I confess, I really don’t know what to think at the moment.
Yesterday saw interest rate decisions by both the Bank of England and the European Central Bank. Both kept rates unchanged, but the headline numbers were always likely to be that way. The key is always the narrative that underlies the headlines. In the case of the Bank of England there was nothing new to report, at least where policy is concerned. Indeed, the newspapers were more interested in a Serious Fraud Office investigation into the central bank’s conduct at the height of the financial crisis. This probably bears watching as reputational capital is a critical component of the power of a central bank, and it is arguably at risk because of this probe. But as I’m sure you guessed, the ECB, and more specifically Mr Draghi’s post-rate announcement speech was always going to be the big show. And the news from the Eurozone’s premier central banker was extremely positive. He declared the end of the Eurozone crisis, with growth forecasts of 1.5% in 2015; 1.9% in 2016; and 2.1% in 2017 for the Eurozone. Much better numbers compared to ECB forecasts just 3 months ago. Not surprisingly he attributes the recent improvement in financial conditions to the announcement of QE at the beginning of the year. I confess to some discomfort at this chest thumping from such a remarkably accomplished figure, and an image flashed in my mind as I watched this. Do you recall President George W Bush on the USS Abraham Lincoln declaring mission accomplished during the war in Iraq? We all know what happened after. I couldn’t help wonder if I was witnessing something similar. Time will tell, and I know people in Greece who would strongly disagree with the rosy outlook!
And then we come to today. It’s not just the non-farm payroll number itself that will merit attention, but we also need to pay close attention to the revisions to prior months. Historically as employment conditions improve, previous months’ data tends to have a bias towards significant upward improvement, i.e., the employment conditions in previously reported months turns out to be even stronger than initially reported, which therefore means that the labour market is even tighter than suspected. In addition to data revisions, we should pay close attention to the Average Hourly Earnings data because the Federal Reserve will be looking at this. Any sign that wage growth is picking up strongly will force the hand of the central bank more quickly than anything else could. Be warned!
Yesterday, for the first time since 2003, over a decade ago, even longer ago than President Bush’s fateful ‘mission accomplished speech’ on the battleship, EUR/USD traded below the 1.10 level. It’s back above again today, at least in the European morning, but strong data in the United States could see a sharp fall. I am seldom trusting of market reactions to big data, and today is no exception. When I look at the price action in EUR/USD I see us at new lows relative to January on considerably weaker price momentum, I don’t like positive divergence, but this is what I see. I am unwilling to discard my view that we will see parity in this currency pair at some point this year, but the signs are that we may be close to a significant bottom that may take time to re-test. If my concerns were specific to EUR/USD alone I might ignore it, but EUR/GBP also looks to be close to a bottom, albeit a less significant one. Let me be clear, I’m not saying that we could be seeing the end of a major trend, I just think that we may be close to a low in EUR/USD that will only be re-tested again after many months. We will have a clearer picture for you after the big show this afternoon..
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