Today’s jobs report shows the weakest net payrolls increase in nearly three years (88,000 reported, the lowest since November 2004) just one week after first quarter gross domestic product (GDP) growth slowed to its lowest rate in four years and should open the door further for a third quarter rate cut. The report also comes five days after the latest inflation figures showed market decline in price pressures (see below), weakening the Fed’s argument of inflation vigilance .
The breadth of the weakness in today’s jobs report must not be ignored. The services sector, known for its strength, has seen net job creation slow to 116,000, the lowest level since June 2006. Its three-month moving average dropped to its lowest since July 2006.
Manufacturing jobs fell by 19,000 in April, extending losses for the tenth consecutive monthly decline. This was the longest monthly decline since 2003-2004.
Construction lost 11,000 jobs, falling into the red after a 50,000 increase in March and 77,000 decrease in February.
Average hourly earnings slowed to 0.2%, while the number of hours worked also moved lower, reflecting the slowdown in personal incomes.
With the manufacturing sector in a recession and the housing slowdown not yet reaching bottom, the case for a Fed funds rate cut this year is further strengthened. Monday’s release of the core PCE price index showing a slowdown to 2.1% from 2.4% also reduces the case for the Fed’s inflation vigilance. Slowing inflation as measured by Monday’s core PCE release is consistent with the March CPI data released in April 17 showing core CPI growing 0.06% m/m in March, its lowest rate since April 2005 and 2.5% y/y from 2.8%--lowest since May 2006. The data places the Fed’s inflation rhetoric in doubt and leaves the market to worry about slowing growth. The year on year core CPI dipped to 2.5% from 2.8%, its lowest rate since May 2006.
Next week’s FOMC statement: A bitter recipe for the U.S. dollar
Considering the softening in inflation data (core PCE and core CPI), the prolonged weakness in employment, continued erosion in housing and recession in manufacturing, the Federal Reserve will have no choice but to maintain its downgraded growth outlook while softening its inflation preoccupation. This should be a recipe for further dollar declines, as it opens the door for a 25-basis point rate cut as early as August. Although there is a possibility of a rate cut as early as June, Fed funds futures are pricing in a rate cut as early as October.
In contrast, Thursday’s Bank of England (BoE) decision is widely expected to produce a 25-basis point rate hike to 5.50%, while the European Central Bank (ECB) is expected to open the door for a June rate hike. These developments are expected to prolong the euro’s bullish run. The euro’s sustainability has rested on periodic retreats—an effective means of avoiding rumblings from European politicians.
Euro risks further selling in case of “neutral” payrolls Euro zone retail sales rose 0.5% in March from 0.3%, matching expectations, while rising 2.6% y/y, beating expectations of a 2.3% rise. Euro zone services PMI slipped to 57 from 57.4, undershooting forecast of 57.5.
Considering the record-breaking net euro longs versus the dollar for an unprecedented three-consecutive weeks (111,282 contracts), futures traders may use today’s jobs report as a vital catalyst for unwinding some of these excess longs, especially ahead of next week’s FOMC decision. Thus, even if payrolls slow to between 100,000 and 130,000, it would not prevent speculators from starting to unwind, in which case we would see continued declines in the euro reaching the $1.35 figure, paving the way for $1.3470. Key We would deem a payroll figure of less than 80,000 as instrumental in driving the euro back towards the 1.36, facing resistance at 1.3620.
Aussie risks to the downside as RBA downgrades inflation forecast We expect further downside for the AUD/USD to as low as 81.50 in the event of a payrolls figure of at least 95-100,000. We warned in yesterday evening’s note “Still Bearish on Aussie” that the Australian dollar faced downside risks across the board ahead of the Reserve Bank of Australia’s quarterly statement on monetary policy. Indeed, the RBA reduced its forecast for underlying inflation to 2.4% from 2.7%, falling further within the central bank’s preferred inflation band of 2-3%. Considering the 5-8% strengthening in the Aussie versus the USD and CAD between Q4 and Q1, Aussie strength should further prevent the RBA from any more tightening. U.S. payrolls weakness is seen helping to stabilize the pair towards 82.20 and 82.45.
Sterling vulnerable to $1.9770 in the event of neutral payrolls Cable remains at our projected support of $1.9860, but is apt to extend declines towards $1.98 in the event that U.S. payrolls come in no less than 95,000. Further declines are seen stabilizing at 1.9765—the 38% retracement of the 1.9184-2.0131 rise. Upside capped at the preliminary resistance of 1.9890. Key resistance stands at 1.9920. A payrolls figure of less than 80,000 could potentially drive the pair towards 1.9940-45.
USD/JPY nears top Activity in USD/JPY has been subdued due to the prolonged holiday in Japan. But this has not prevented the pair from preserving its bullish tone as U.S. equities remain at record and multi-year highs. USD/JPY technicals are starting to show signs of a top at the 4-hour but the fundamental story from the U.S. payrolls could well trigger further gains in the event of a reading at or above 100,000.
Preliminary resistance stands at 120.50, followed by 120.75. Support starts at 120.20, followed by 119.80. A drop below 119.30 sees the 100-day moving average of 119.15.
Ashraf Laidi
Chief FX Analyst
CMC Markets US
140 Broadway, 30th Floor
New York, NY
(212) 644-4220
a.laidi@cmcmarkets.com
