US non-farm payroll data disappoints but not seen as weak enough to bring on QE III

by Mike Jones

NZD

After shuffling sideways for most of the week, the NZD/USD finally lost some of its lustre on Friday. Soft-looking US employment figures saw investors reign in their risk appetite a touch.

Global growth fears intensified last week. Not only is Europe still mired in recession, but last week’s PMIs showed global manufacturing activity is heading south. Friday’s lacklustre US non-farm payrolls data simply reinforced nervousness about the global backdrop.

Policy makers are doing their best to shore up global confidence – the ECB, Bank of England, and the People’s Bank of China (PBOC) all eased policy last week. The Bank of Japan may well join the party this week (meeting Thursday). Nonetheless, to date, central bank attempts to bolster market sentiment have fallen a little flat.

Commodity prices have struggled against this backdrop. The CRB global commodity price index fell over 2% on Friday and NZ dairy prices slipped 5.9% last week.

Still, so far, the NZD has held its ground pretty well despite the headwinds from falling commodity prices and shaky global risk appetite. This likely reflects the support from a widening interest rate differential. Indicative of such, NZ-US 3-year swap differentials increased around 10bps last week, to 235bps.

Looking ahead, there is a risk this differential narrows a little in the near-term, should local markets begin to price RBNZ rate cuts again. And with global slowdown fears increasingly pervasive, this could begin to expose some chinks in the NZ dollar’s armour. The NZD (and more so AUD) is particularly sensitive to any weakness in Chinese data. So this week’s Chinese data bonanza will be important in setting the tone for the NZD in coming weeks. Signs of a faster than expected slowdown in Chinese activity (watch Friday’s GDP figures) would see the NZD and AUD underperform.

There’s also a bunch of data due for release in NZ this week. Tuesday’s QSBO business survey will be the most important, not that it ever seems to move the NZD. We expect the QSBO to maintain a moderately positive view on GDP growth, employment and investment (albeit with confidence flattened by Europe). But also to remind of the economy’s limited spare capacity.       

All up, we expect nervousness about the global backdrop to keep risk appetite and ‘risk-sensitive’ currencies like the NZD under pressure this week. The NZD/USD may struggle to sustain bounces above 0.8000. The bigger risk is for a pullback back towards support at 0.7870.

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Majors

Market sentiment continued to sour on Friday night as the disappointing US payrolls report compounded fears of a global economic slowdown. Global equity markets and commodity prices recorded heavy losses, bond yields declined, and ‘safe-haven’ currencies like the USD and JPY outperformed.

The June non-farm payrolls number wasn’t far off market expectations (80k jobs added vs. 100k expected), but it still seemed to hit a nerve. Perhaps this was because, although the data was disappointing, it wasn’t viewed as weak enough to guarantee another round of monetary easing from the US Federal Reserve.

We’ll get more insight into Fed thinking this week with the release of the June FOMC minutes on Wednesday. But for possible hints on the likelihood of quantitative easing mark III, we’ll likely have to wait for Chairman Bernanke’s testimony to Congress on July 17/18.

Elsewhere this week, expect plenty of attention on a slew of Chinese data. Friday’s GDP figures will be key (we expect 7.5%y/y from 8.1% in Q1, market 7.9%). Chinese growth momentum has been cooling rather than freezing lately, but the surprise Chinese rate cut on Thursday has the market wondering if this week’s data will show renewed weakness. Should the data reinforce slowdown worries, we’d expect the ‘commodity-linked’ AUD and NZD give up some of their recent gains.

There will also be the usual focus on European politicking. Tonight, European finance ministers meet to discuss some of the detail around the policy decisions from the EU Summit. Officials have already dampened down expectations for significant progress. The risk is the meeting exposes more cracks in European ‘unity’ (as we saw last week with Finland threatening to leave), weighing on EUR sentiment. EUR momentum switched convincingly to the downside last week (our momentum model is short from 1.2407). A daily EUR/USD close below key support at 1.2285 would be consistent with a deeper pullback towards 1.2150.

Other news: China Premier Wen says the government will act to dampen property price gains.
 

Event Calendar:
9 July: JN current account; CH CPI/PPI; US Fed’s Evans speaks; EU finance ministers meeting; 10 July: NZ QSBO business confidence; NZ retail data; UK RICS house price balance; AU NAB business confidence; UK IP, manufacturing production, & trade balance; US Fed’s Bullard speaks;11 July: AU home loans; US trade balance; US FOMC minutes; 12 July: NZ PMI; NZ food prices; AU employment; Bank of Japan meeting; EU ECB monthly report; EU IP; US Fed’s Williams & Lockhart speak; 13 July: CH IP, GDP, retail sales, & investment; JN IP; US PPI;

All its research is available here.