US weekly jobless claims rose by 4,000 to 307,000, but the four-week moving average drops to 308,500 from 312,500.
The dollar is mixed in Thursday’s trading with the unwinding of carry trades stabilizing as European stocks push higher following a late rally in yesterday’s U.S. session. The Bank of England (BoE) left kept rates unchanged at 5.75% as expected, and so did the European Central Bank (ECB) at 4.00%. Considering a cooling in UK home price growth and the ensuing credit squeeze in global markets, the future for further BoE rate hikes remains uncertain, which poses a threat for sterling’s high yielding luster.
Will the US employment Shoe Drop? Despite a rare sliver of good news from the U.S. housing market yesterday – pending home sales showed the first increase in four months – the 48,000 increase seen in ADP forecast for July private payrolls was well below expectations of 100,000 and followed 150,000 in June and 98,000 in May. Considering the ADP's 66% track record in predicting the direction of in private payrolls reported by the U.S. Department of Labor, yesterday’s disappointing figure causes us to downgrade our forecast for non farm payrolls to 80,000 from June's 132,000 Although the initial consensus of forecasts was at 124,000, several economists have downgraded their forecasts to 90,000 to 110,000.
Despite a rise in the employment index of the Chicago PMI to the highest level in nearly a year, the manufacturing ISM’s employment index for July fell to 50.2, its lowest level since the 48.7 reached in March.
Monster’s online employment recruitment index fell by three points to 183 in July, reaching its lowest level since February. While the decline was part of a seasonal summer slowdown in online hiring, Monster said, “Recruitment of construction-related occupations eases further, reflecting softer demand in the residential sector,” adding, “Employer demand in California continues sharp downturn, as softness spreads from housing to finance and wider service sector.” Indeed, the 0.3% decline in June construction spending was the first in five months, which may translated into further softness in hiring the following month. Construction payrolls were in the red in seven of the past 2 months ending in June.
U.S. employment gauges such as the unemployment rate and weekly jobless claims have continued to point to a tight labor market partially reflecting the breadth of part time jobs and shadowing a slowdown in personal incomes. The low unemployment rate may act as a deterrent to a Federal Reserve Bank easing interest rates, despite the broad signs of weakness in the rest of the U.S. economy and rising risks of restrictive access to credit. But the sectoral developments in manufacturing, retail and construction continue to be unequivocally weak.
While a decline in payrolls below 100,000 may not be a surprise to the markets, a rise in the unemployment rate to 4.6% or 4.7% should further drive up the probability of 2007 Fed easing.
USDJPY unable to regain 200-day moving averageUSD/JPY’s failure to cross above the 200-day moving average of 119.50 underlines the control of the bear and supports our call for 115.60 by month end. The recovery above 119 proved short-lived as the overall dynamics remain predominantly negative with players seeking opportunities to sell on the highs.
The yen’s prolonged strength remains a corollary of tightening credit conditions and rising risk of contagion in global markets in the midst of periodic negative news of hedge fund losses and limiting access to credit. The latest is Paul Tudor Jones’ hedge fund, reporting losses of more than 9% in July and 3% down year to date
The current push higher in USD/JPY above 119 is expected to encounter resistance at 119.30, followed by 119.50. It is unlikely for the pair to extend gains ahead of Friday’s payrolls. Support stands at 118.60, followed by118.30.
EUR/USD to maintain consolidation ahead of payrolls We expect EUR/USD to remain at the lower end of the 1.36-1.37 range as ECB President Jean Claude Trichet is expected to maintain the door open for a third quarter rate hike, without signaling a tightening for next month. This may weigh on the pair, calling up the support at 1.3630 and 1.36. Today’s release of Euro zone June PPI (+0.1%) was the lowest in six months due to weak intermediate and energy items, pushing the annual PPI to a 38-month low of 2.3%. Upside capped at 1.3680 .
Sterling seen stabilizing near 2.0275 Strong construction PMI and renewed home price strength from the UK neither prompted the Bank of England to make a surprise rate hike nor are boosting the pound. We expect the pair to weaken from a slight downdraft from a falling EUR/USD following the ECB press conference, which is likely to call up 2.0270. Upside seen capped at 2.0340, a break of which stalling at 2.0360.
Ashraf LaidiChief FX AnalystCMC Markets US140 Broadway, 30th FloorNew York, NY(212) 644-4220a.laidi@cmcmarkets.com
