DAILY MARKET COMMENTARY
3 May 2012 – 8:00 GMT
Thursday
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Market Analysis Desk
Foreign Exchange Research: www.fibosignals.com/5585/resources.html
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FUNDAMENTAL ANALYSIS at 0800 GMT
WORLD
Expectations are building that today's ECB press conference could see the central bank turn significantly more dovish., with euro negative consequences. Wednesday's series of worrisome Eurozone data prints would certainly seem to warrant a rhetorical shift. It has also not gone unnoticed that President Draghi endorsed the concept of a "growth compact" in parliamentary testimony last week for the first time. Investors have also remarked on the meeting's location - in Barcelona for a change - in the expectation that this will somehow concentrate minds on the gravity of the situation facing the periphery, thus provoking a more dovish outcome.
These observations are not without merit, but market speculation of a possible rate cut - either to the deposit rate or to the refi rate itself - does seem to be wide of the mark. Our European economics team think it is unlikely that any rate adjustments will be made, and economists surveyed by Bloomberg are unanimous in their expectation that the refi rate will remain at 1%. However, we also note that collective bargaining negotiations over unionized pay are still ongoing in Germany, and these could ultimately yield wage increases of well above the prevailing inflation rate. Awareness of this on the Governing Council could help push the rhetoric needle out of the "deeply dovish" zone, and back towards "merely dovish". Given that a rate adjustment is so unlikely investors will be particularly alert for any hint of an upcoming policy response, whether that would come via a rate adjustment or by means of further 3y LTROs.
Before the ECB meeting, the focus will temporarily come to rest on Spain where an auction of bonos is scheduled. Our analysts note that this auction coincides with heavy Spanish redemptions and coupon payments, freeing up plenty cash that could be ploughed back in to help absorb today's supply. In the US, the ADP estimate of private sector payrolls disappointed at only +119k (cons. +170k). USDJPY dropped 20 pips on that. Our analysts note though that ADP has been an unreliable indicator of the official change in private payrolls as reported by the Bureau of Labour Statistics (BLS). They have also noticed that, for April data in particular over the past two years, ADP has significantly underestimated the official BLS reading. So, our economists stick to their BLS nonfarm payrolls forecast of +180k (cons. +167k). After three weeks of higher initial jobless claims, Thursday's update will be even more closely watched than usual - although the ECB press conference which begins at the same time will provide some distraction.
EUR
The euro came under pressure on Wednesday after a series of poor data prints out of the Eurozone. Eurozone manufacturing PMI fell to 45.9 (cons. 46.0), a 34-month low. Readings in the periphery were more concerning however: Spanish manufacturing PMI fell to 43.6 from 44.5, while the output sub-component dropped to 41.7. Italian PMI was well below expectations at 43.8, down from 47.9 in March. German and French numbers were also marked down - France to 46.9 and Germany to 46.2 - an indication that the economic weakness is not just affecting the periphery.
German unemployment increased by 19K (cons -10K), pushing the unemployment rate to 6.8%, still close to all-time lows. The Italian unemployment rate increased for the fifth consecutive month, jumping to 9.8% from 9.4% in March (it was 8.3% in July). As a consequence, euro area unemployment nudged up to 10.9% from 10.8 in February, the 9th consecutive increase.
GBP
Manufacturing PMI fell to 50.5 after a downwardly-revised 51.9 in March. Most of the components of the report were weak with new orders at the lowest levels since November and exports at the lowest level since May 2009. The all-important Services PMI is due on Thursday.
Governor King said that inflation in the UK is too high and that the recovery is proving slower than hoped. Somewhat ominously he added that the crisis is "far from over" and that an escalation of the sovereign debt crisis inside the Eurozone may endanger UK banks.
NZD
New Zealand's unemployment rate unexpectedly jumped to 6.7% (cons. 6.3%, prev. 6.4%) prompting a sharp kiwi selloff. A closer look at the data showed a large jump in the participation rate too, which went some way towards explaining the higher unemployment rate, and NZDUSD eventually steadied.
A. White
Analyst at Fibosignals.com
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