Last Friday’s Non-Farm Payroll (NFP) expresses another view compared to Institute for Supply Management (ISM) and Automatic Data Processing (ADP)
- The tapering sentiment dominated the entire busy week. The Dollar took the initiative and reversed the recent downtrend when bets rose on the Federal Reserve (Fed) tapering as soon as the next Federal Open Market Committee (FOMC) meeting, fuelled by the ADP and Gross Domestic Product (GDP) releases earlier this week. However, a slightly dovish statement from the FOMC suggested that tapering in six weeks looks unreasonable (due to inflation concern, moderate to modest growth and higher Mortgage rates).
- Given the average weekly jobless claims, and the ADP in July being nearly the same compared to June, the NFP was supposed to outperform. However, the actual result disappointed the market and “QE (Quantitative Easing) fans” celebrated the party.
It looks like there will be a higher chance in December since various “uncertainties” still exist. I’ve held this view since May.
The market adds bets on September due to improving data; there’s nothing wrong with that. BUT I think the data itself tells us that the Fed is ready to taper within the year. However, they may not do it earlier because the recent labor market growth just meets the Fed’s expectation.
- Growth in the Labor market hasn’t exceeded the Fed’s forecast yet – In the past 12 months, the average NFP grew 191k per month, pushing the unemployment rate down by 0.6%. The Fed’s current projection for the unemployment rate is to reach 7% from the current 7.6% by the middle of 2014. With that said, things happening now are not beyond the Fed’s expectation.
- Recovery sustainability concern – U.S. Treasuries seem very sensitive to policy outlook. A rising yield increases long-term borrowing costs and mortgage rates, dampening housing activities. After the FOMC meeting on 18June, U.S. equities retraced lower by 5% before Ben Bernanke appeared “dovish.” I expect a similar reaction after tapering. Thus, the Fed will be cautious.
- No press conference in October – No verbal communication increases the risk of “misunderstanding.” I believe the Fed is very aware of this.
- Chairman or Chairwoman – The outcome may only be released at the end of September. The Fed will likely make any “policy adjustment” after a candidate is nominated.
No worries on Dollar if tapering doesn’t occur in September
Some “knee jerk” reactions for the Greenback selling-off might be expected. However, I think the Dollar might perform better and stay in a more sustainable uptrend this year if the Fed chooses not to taper in September, for the reasons below:
1) If tapering occurs in September, Bond yield defending may arrive again.
Immediately after the tapering announcement, we can expect to see a steepening yield curve in U.S. Treasuries and a higher long tenor borrowing cost. I believe the Fed wants to defend these “negative factors,” similar to what we saw last month. If that was a good benchmark, the price of the Greenback may repeat its recent reaction when Bernanke showed dovish language before Congress.
2) If not, nearly all bets expect to see action in December.
December is only three months away, and disagreement reduced sharply. The good news is that jobs creation tends to accelerate in the last quarter due to the Christmas seasonal effect, adding further confidence for the USD. This will likely bring a bullish sentiment to early 2014.
European Central Bank (ECB) press conference updates: Unclear forward guidance, but dovish bias for now
There is no major change compared to the previous statement, with a continuous dovish bias from Mario Draghi. Thus, the EUR didn’t react much to this meeting and the conference meeting wasn’t an event in the end.
We expect the EUR to outperform commodity currencies (AUD and CAD) due to:
1) European currencies did not really benefit from Fed stimulus since 2009, partly due to its debts crisis. With that said, the EUR shouldn’t be that sensitive to QE tapering compared to commodity currencies.
2) Recent data in the Euro Zone suggests that the economy reached bottom according to its manufacturing data, confidence, and even the unemployment rate edging slightly lower in June. But a higher Euro doesn’t benefit its vulnerable manufacturing sectors. Draghi’s continuous dovish bias may cap the EURUSD below 1.3420, with a possible USD hike toward year-end.
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