What A Disappointment!

June 5, 2010 — Mitul Kotecha

Ok so after talking up US data releases over recent weeks the big one namely the May jobs report, came as a disappointment. To recap, payrolls rose 431k, which was less than market consensus. Hiring due to the census which by its nature will be transitory was however, in line with expectations, at 411k, leaving ex-census hiring at a measly +20k.

Believe it or not, the trend in payrolls is one of improvement but the May outcome came as a blow to a market with bullish expectations, especially following earlier comments from the US administration hinting at a robust outcome. The disappointment was compounded by talk of a +700k payrolls outcome, which proved widely off the mark. The unemployment rate did drop more than expected, by two ticks to 9.7%, but this was due to disaffected workers dropping out of the labor force rather than an inherent pick up in job conditions.

Combined with worries about a new target in the sovereign debt crisis in Europe, this time Hungary, markets quickly tanked and risk aversion jumped. So much for relative stability! The concerns were sparked by Hungarian officials themselves, with a spokesman for the Prime Minister warning about the fiscal mess inherited from the previous government. The real blow came when the spokesman compared Hungary to Greece and reportedly said that talk of a default was “not an exaggeration”.

Suffice to say, markets are set up for tense and nervous week in which risk trades are set to suffer further. EUR/USD once again proved to be the weak link dropping below the psychologically important level of 1.20 and the EUR introduction rate around 1.1830 has moved sharply into focus.

Posted in Currencies, Economics, Economy, equity markets, Europe, eurozone, Financial crisis, Fiscal/Budget, FX, Greece, US, US administration. Tags: , , , , , , . 1 Comment »

Wait And See

June 4, 2010 — Mitul Kotecha

It’s difficult to be too conclusive in my blog post today given that markets are in waiting mode for a number of events to pass. First and foremost is the US May jobs report. The consensus forecast is for a gain of 536k in nonfarm payrolls and a slight drop in the unemployment rate to 9.8%. Payrolls estimates range from a high of 750k to a low of 220k, the wide margin likely reflecting the uncertainty of the amount of census hiring.

On the face of it a 500k+ gain in payrolls looks strong, but the bulk of this, probably about three-quarters, will made up of census hiring which by its nature is transitory. Therefore, only about 100k in payrolls will be due to private sector jobs growth, which is still not bad. Most of the clues leading up to the jobs data are consistent with the consensus, including the 55k increase in the May ADP.

The second event is the change in Prime Minister in Japan. Naoto Kan, the previous Finance Minister is set to take over the helm. His job is going to tough, with all eyes on how and when the government begins to get to grips with Japan’s burgeoning debt burden which is approaching 200% of GDP. Most of this, around 96% is held by domestic investors, so Japan is less exposed to foreign investor sentiment.

Nonetheless, even domestic investors including many large life insurance companies are increasing their overseas investments at the expense of Japanese debt. Kan is also a supporter of weaker JPY so at the least the rhetoric from Japanese officials to weaken the JPY will step up, especially given the very painful move in EUR/JPY over recent months.

Finally, the G20 meeting beginning today in South Korea will garner attention. Topics will include bank regulation and capital requirements, the European debt crisis, and policy tools such as the recent suggestion by South Korea to make permanent the currency swap agreements between central banks. Aside from a commitment to keep policy supportive, and likely talking up the efforts to combat the crisis in Europe, it is difficult to see anything particularly market moving emerge from the meeting.

Posted in central banks, Currencies, Economics, Economy, Europe, eurozone, Financial crisis, Fiscal/Budget, FX, Interest rates, Japan, Politics, South Korea, US. Tags: , , , , , , , , , , , , . 1 Comment »

Renewed concerns

June 2, 2010 — Mitul Kotecha

Despite some positive US data, with both the May ISM manufacturing index and April construction spending coming in stronger than forecast, market sentiment soured. The relative calm that was exhibited at the end of May is giving way to renewed fears as equity markets weaken, volatility increases and risk aversion intensifies. Risk trades are set to remain on the back foot, with the EUR likely to remain the weakest link. After testing support close to 1.2110 EUR/USD bounced but remains vulnerable to a fresh test of this level in the short-term.

A combination of concerns including rumours of ratings downgrades, with France the new target, Middle East tensions, weaker Chinese manufacturing activity and worries about increasing bank writedowns in Europe, have conspired to drag markets lower. The failure to stem the hue oil-leak in the US contributed to the malaise as the US government announced a criminal probe.

For the most part, data releases were unhelpful to risk appetite as the majority of global purchasing managers indices (PMIs) slipped in May, led by China. Only a few increased, including India and notably Ireland, whilst the Spanish and Greek PMIs fell. Although the US ISM index slipped the components looked positive, especially the employment component which moved higher, suggesting some upside potential for Friday’s May payrolls data for which we look for a 500k increase.

A picture of divergence appears to be growing in the eurozone, which will act as another source of pressure on the EUR. Germany’s outperformance is widening as reflected by the fact the German unemployment dropped to 7.7% in May in contrast to a rise in eurozone unemployment, to 10.1%. Moreover, Germany was the only country where its PMI was actually revised higher relative to the flash reading. There are also growing divisions within the European Central Bank (ECB), in particular towards the purchase of government bonds, with German ECB members particularly critical.

Posted in central banks, China, Currencies, Economics, equity markets, Europe, eurozone, Financial crisis, Fiscal/Budget, FX, Germany, Greece, India, Monetary Policy, Spain, US. Tags: , , , , , , , , , , , , , , . Leave a Comment »
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