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About GAIN: News & Events |
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RESEARCH NOTE: ECB Rate Decision and US NFP Will Make For a Volatile Thursday
Brian Dolan, Chief Currency Strategist
Jacob Oubina, Currency Strategist
With the above in mind, we would also note that the ECB "never pre-commits" to any particular decision, despite any signals they might put out, and this leaves open the risk that the ECB may ultimately hold rates steady. Indeed, the most recent Eurozone sentiment data (IFO, ZEW, PMI's and EC surveys) suggests eroding business and consumer confidence, and European stock markets are down significantly YTD, potentially providing the ECB a weak growth/market instability 'excuse' to hold its fire. But inflation readings continue to come in above expectations and are well above ECB comfort levels. Since the ECB has only one mandate -- to ensure price stability -- we will accept the ECB rhetoric and look for a 25 bps rate hike.
We believe current FX rates (EUR/USD 1.57-59) represent the full 'pricing-in' of 25 bps rate hike expectations, so the Forex market impact will come from the future guidance given by Mr. Trichet in his 0830EDT/1230GMT press conference. If the ECB does hike by 25 bps, we think Trichet will expend a great deal of effort to rein in expectations of further tightening. He could signal such an intention by using language that indicates the new benchmark rate is considered "appropriate" to bring inflation down to target levels in the medium term, implying rates are then on hold. He would also need to drop the language that the ECB is in a state of "heightened alertness." We would expect the EUR to come under selling pressure if Trichet does signal that ECB rates are likely on hold after Thursday's adjustment. If the ECB raises rates by anything less than 25 bps, and this would be known at the 0745EDT/1145GMT announcement time, it would be a clear signal that a consensus could not be found for a more aggressive tightening or as a way of signaling that this is a one-time policy adjustment. Either way, it would be interpreted as a 'one and done' rate hike and we would look for EUR selling to follow. On the outside chance that Trichet would leave the door open to further rate hikes, we would expect to see further EUR gains.
What will make this upcoming NY morning even more interesting is that the BLS has moved up the release of the US June employment report to Thursday in light of the Independence Day holiday. The report will be released at 0830EDT/1230GMT, right when ECB President Trichet is scheduled to give his press conference and hopefully hint at what the ECB's plans are for rates going forward. The market is looking for nonfarm payrolls to decline by 60k on the month, following a -49k result in May. This would mark the sixth consecutive monthly decline in US jobs, as we have yet to register a positive print in all of 2008. The unemployment rate, the other vital statistic in the report, is expected to pull back to 5.4% from 5.5%. Given the data we have in hand, however, we believe the employment report will disappoint with a larger decline in payrolls and an unchanged unemployment rate.
Our base case is that we will get the first triple digit decline in NFP in this report. Using the ADP employment report as a guide, we believe a decline of 100k in NFP is very likely. ADP disappointed markets by printing a -79k result for June, on the heels of a modest 25k increase the prior month. When we take into account that this metric has overestimated private NFP by an average of 64k over the last 12 months, we believe this sharp decline to be an ominous sign for payrolls. If we assume a similar overshoot this month of 64k and add in 20k to account for the add from government jobs, the June ADP report tells us that an NFP result of roughly -120k is in store.
For the unemployment rate we look for a steady 5.5% result and believe the market's expected decline to 5.4% is unlikely. June initial jobless claims have run consistently above the 380k level, which is an upswing from the 370k average in May. Moreover, continuing claims remain around the 3.1 million mark suggesting that people are finding it just as hard to get a new job once one is lost as the previous month. And confidence in the job market deteriorated further on the month as well. The Conference Board consumer confidence "labor differential" -- which is the difference between the respondents who think jobs are hard to get versus those who see jobs as easy to get -- plunged to -16.4 in June from -12.2 the prior month. This indicator leads the unemployment rate and right now it is suggesting an increase there.
In terms of what this means for the USD, we would expect significant selling on an NFP decline of the triple digit magnitude in the order of roughly 100 pips in both EUR/USD and USD/JPY. If a weaker than expected report is coupled with Trichet coming out more hawkish than expected and signaling that the rate hike is not a "one and done" event, then EUR/USD should test back up towards the 1.60 area and USD/JPY near the 103.00 mark. The upside to the greenback is likely to be short lived on a better employment report and will only be sustainable if it is coupled with Trichet signaling that ECB rates are on hold after the 25 bps increase. Stay tuned.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
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