Intraday Market Thoughts

Euro Hurts After ECB Cut, Signs Point to Better NFP

by Patrik Urban
Jul 6, 2012 1:13

The ECB followed up easing from China and the UK with a rate cut of its own. In the US, the ISM non-manufacturing index disappointed but indications on employment were better ahead of non-farm payrolls. The Australian dollar was the best performer while the euro lagged. Ashrafs piece on Central Banks farewell to inflation is below.

It was an action packed session that had the volatility to match. The ECB lowered the refi rate by 25 basis points to 0.75% and took the deposit rate to zero to encourage lending. Draghi said downside risks have materialized but quashed hopes for non-standard measures, hurting sentiment further.

The euro fell and closed below the June low of 1.2406, wiping out the EU Summit euphoria. The drop makes a technical case for a fall to the May bottom of 1.2286. EUR/AUD also fell to an all-time low. The market interpreted the near-simultaneous cuts as a sign of economic weakness rather than a move that will stimulate the global economy.

The most troubling signs were in the periphery bond market, which was begging for extraordinary action to lower borrowing costs. It didnt come and Spanish 10-year yields jumped 37 basis points to 6.78%. Italian 10s also crested above 6%.

Economic data was mixed. On the downside, the ISM services index slipped to 52.1 compared to the 53.0 consensus. The good news was that the employment component improved to 52.3 from 50.8. That coincided with a rise in ADP employment to 176K. That beat the prior reading and +100K consensus. Initial jobless claims were also better than expected.

The consensus estimate for NFP is +90K but the latest indicators point to a slightly higher reading. That could be balanced out by downward revisions and the unemployment rate is always a market-mover.

Given the broad market sentiment, an upside surprise will be viewed as an aberration while a weak reading will be interpreted as a warning that growth may fall below 2%.

The lone item on the Asia-Pacific calendar is the Japanese leading index for May. The consensus is for 95.0 after a 95.6 reading in April but it is a lower-tier indicator.

Ashrafs piece on the rapid convergence between Chinese and UK infkation rates and the implications for risk and central bank armory.


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