Rates: Payrolls strong enough to overrule Fed?
Core bonds proved to be more resilient of late as the ECB and Fed respectively signaled no haste to start the normalization process and to step up the gradual rate hike cycle. US payrolls are expected to match or beat consensus today, but will they be strong enough to overrule the recent cautious rhetoric?
Currencies: Dollar probably needs excellent payrolls to extend rebound
Yesterday, the dollar took a breather as the Fed indicated that it is in no hurry to step up the pace of rate hikes. Today’s US payrolls might clarify whether there is room for additional USD gains. For that to happen a combination of good payrolls growth and solid wages is probably needed. EUR/USD 1.1915/35 is the next important technical reference.
The Sunrise Headlines
- US stock markets ended between flat and 0.25% lower. Losses on Asian equity markets tend to be slightly bigger overnight.
- Argentina raised interest rates for the 2nd time in a week (to 33.25%) after more than $5bn of central bank intervention failed to stop a steep fall in the peso, highlighting the intensifying pressure on EM currencies in recent weeks. (FT)
- The April Caixin services PMI unexpectedly picked up from 52.3 to 52.9 as new business and employment grew at a faster rate, signalling a solid rise in a sector that Beijing is counting on to maintain economic growth. (Reuters)
- A US trade delegation in China has been having very good conversations, US Treasury Secretary Mnuchin said, as he heads into the second and likely last day of talks in Beijing. A breakthrough deal is viewed as highly unlikely. (Reuters)
- North Korea said to have agreed in principle with US for “complete” denuclearization by 2020, South Korea’s Dong-A Ilbo newspaper reports, citing unidentified intelligence sources. (BB)
- UK PM May’s Conservative Party avoided a wipeout in London local elections and eked out gains in Brexit-supporting regions elsewhere, early results showed, although her Labour opponents gained ground in the capital. (Reuters)
- Today’s eco calendar contains US payrolls, unemployment rate and average hourly earnings. EMU retail sales and the final services PMI feature on the agenda as well. Several ECB & Fed governors speak
Currencies: Dollar Probably Needs Excellent Payrolls To Extend Rebound
Payrolls strong enough for further USD gains?
EUR/USD faced conflicting signals yesterday. The dollar rally slowed as the Fed suggested that it won’t immediately react to a limited overshoot of the inflation target. This blocked the rise in US yields and the USD. On the euro side of the story, EMU April inflation again missed the consensus by quite a big margin (1.2% Y/Y). Both conflicting stories kept EUR/USD in a tight range mostly in the upper half of the 1.19 big figure. Uncertainty the high level US-Chinese trade talks caused some caution in global risk sentiment. The impact on the major FX cross rates stayed modest but the yen developed a tentative rebound. USD/JPY drifted south off the 110 area. EUR/JPY showed a sharp intraday setback.
Overnight, Asian equities continued the recent lacklustre performance. Investors are monitoring the China-US trade talks and are looking forward to the US payrolls. The (trade weighted) USD is holding slightly off the recent peak. EUR/USD hovers just below 1.20. USD/JPY struggles not to fall below the 1.09 handle. The Reserve bank of Australia sees good growth in 2018/2019 (3 % +), but expects inflation to stay in the lower part of the 2-3% target band. The Aussie dollar rebounded a few more ticks and trades again in the AUD/USD 75.50 area.
Today, the final EMU services PMI’s will be published. Markets will look out whether the recent easing in the EMU economic momentum might bottom. However, the focus is on the US payrolls report. US April job growth is expected to return to its recent trend close to 200k. Earnings growth (0.2% M/M and 2.7% Y/Y expected) will also be key for the market reaction. After Wednesday’s balanced Fed communication, we assume that the dollar needs a positive surprise to extend its recent rally. In that case, we look out whether EUR/USD will be able to break the 1.1915/36 support area. Given yesterday’s post-Fed reaction, this might not be that easy. Of course there is still the euro side of the story. For USD/JPY the 110 area is the next topside reference.
Yesterday, sterling traded with a negative bias. The political stalemate on Brexit within the Conservative party remains an underlying negative for sterling. The UK services PMI also disappointed, indicating ongoing slow growth the start of Q2 and further reducing the chances of a May BoE rate hike. Today, there are no important data in the UK. EUR/GBP tries to sustain north of 0.88. Negative news might push the pair higher to the 0.8868/0.9033 resistance ahead of next week’s BoE meeting.
D: will payrolls be strong enough for USD to rally below 1.1936/15 support?
