Today's jobs report is an unequivocal step closer towards recession, but risk appetite is alleviated by Microsoft's takeover bid for Yahoo!, which carries an artificial boost for equity indexes, which would otherwise be selling off sharply under today's labor report.
The plunge in U.S. payrolls to a loss of 17,000 jobs in January should overshadow the decline in the unemployment rate to 4.9% from 5.0% and the upward revision in the December payrolls to 80,000 from 18,000. This is the first net decline in U.S. payrolls since August 2003, bolstering the notion that recession is already here. Recall that economists and pundits usually refer to the beginning of recessions in the past tense due to the lagging nature of economic data. Thus, if we were to adhere by the textual definition of two consecutive quarterly gross domestic product (GDP) contractions, and given the fact that GDP figures have a three-month lag, we would have to wait until April to obtain the preliminary estimates for Q1 GDP. Rather than waiting for the passage of time to make rear-view mirror calls based on lagging indicators, we focus on the coincident indicators such as ISM, industrial production, moving averages of payrolls and unemployment rate and retail sales.
The BLS’ report deals a severe blow to the ADP’s estimate for private payrolls, anticipating a 140,000 increase in private payrolls. Even government jobs showed a decline of 18,000, the first since July. Construction jobs tumbled by 27,000, while manufacturing jobs lost 28,000.
The silver lining of the report is 11,000 increase in retail jobs, and 47,000 increase in education and health services as teachers return to work.
The yield curve (as measured by the 10-/two-year spread) steepens to 155 basis points (bp) from 143 bps and is expected to widen further to as high as 170 bps before end of Feb.
We mentioned earlier this morning EUR/USD may revisit its all time high of $1.4966. The pair spiked to 1.4951 before retreating to 1.4920. Stronger than expected manufacturing PMI figures from the Euro zone and Germany will underpin the euro and improve likelihood of 1.4990 today.
Considering rising chances of an interest rate hike from the Reserve Bank of Australia next week following a jump in the RBA’s inflation index, we favor further rallies in the Aussie against USD, JPY, GBP at 0.9060, 97.00 and 0.4600 respectively.
USD/JPY relatively supported by U.S. stock futures following Microsoft’s $45 billion takeover bid for Yahoo! In what maybe the biggest takeover in the technology industry, stocks indices are rallying, and spared from a key sell off that would have otherwise taken place as result of the “recessionary” jobs report. Recall that yesterday’s sell off towards 107.75 was staved off due to comforting remarks from MBIA that it will obtain sufficient capital injections. But S&P’s decision to place MBIA on credit watch for a possible downgrade may alter the dynamics. We continue to expect USD/JPY to test the 105.75 support en route to 105.50.
Sterling’s woes are underlined by cable’s prolonged sell off below $1.98 despite the U.S. jobs report following Jan manufacturing PMI’s decline to 50.6 from 52.4, undershooting expectations of 52.5. With the UK PMI failing to follow its Euro zone counterpart, the figure bolsters chances of a 25 bp rate cut from the Bank of England (BoE) next week. Cable drops to our projected target of 1.9820, and will eye support at 1.9740.
EUR/GBP overshot our 0.7490 projections in the FX Charts Strategy to 0.7540 and we could see 0.7580 by next week after the BoE rate cut. All GBP crosses should be expected to resume their sell off.
Markets await the 10 am release of the ISM manufacturing index expected to come in at 47.4 in Jan from 48.4, which affirms recession conditions as the figure remains below 50. Note that each of the production, new orders and employment components fell below 50 in December. The new orders and employment components of yesterday’s release of the January Chicago PMI also fell below 50.
The 10 am release of the University of Michigan consumer sentiment survey is seen dropping to 78.5 in January from 80.5, but given the dismal turn of events on financial markets and deteriorating jobs conditions, we could see the index closer to the 75 level.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
