Today’s Forex Guide

US Jobs Report – New European QE


Mar.06.2015

In the US, there's more talk about interest rates and how the inflation forecasts mean they should be on the up sooner rather than later. This is being reflected in the price of Ms. USA (also known as US dollar), as she continues to appreciate against just about all of her dancing partners. The problem the US economy is facing because of this is pressure in the manufacturing sector, where exporting to other countries becomes expensive and imports of similar products made overseas are very attractively priced. At some point the results of this dilemma will feed into the labor market.

- NFP Update -

As expected the US jobs report came in better than expected at 295K comparing to the 240K forecast.

Jobless rate was lowered in February to 5.5% comparing to the 5.6% forecast.

MS. USA is rocking the forex dance floor.

happy friday euro dollar sad

 

What to Watch For on US Jobs Report

US banks will be an attractive target for investors today following the announcement from the Fed that their stress tests revealed that all major US banks are strong enough to withstand the toughest of financial conditions and maintain close to business as usual. The news should lead to banks being able to increase dividend payments and even start to buy back some of their shares from the market.

As Washington dusts off another round of snow, the Labor Department is scheduled to release the monthly jobs figures Friday at 8:30 a.m. These February numbers already had a high hurdle to beat last month's report, and severe weather and disruptions from the work slowdown at West Coast ports also could have weighed on the labor market.

The latest snowfall has delayed government agencies' opening by two hours on Friday. The Labor Department has said it will make every effort to put the data on its website at 8:30 a.m. or soon thereafter.

 

What is this report all about?

If you’re new to all this, then allow me to give you a quick rundown of why the Non-Farm Payrolls (NFP)  is such a big deal. This US-specific employment change report indicates how many jobs were gained or lost during the reporting period so it provides a pretty good picture of how the labor situation is. Meanwhile, the jobless rate shows the percentage of the labor force that is unemployed so a lower figure is generally good for the economy.

How did the previous releases turn out?

The U.S. economy has been posting one rocking jobs report after another for the past five months, as the NFP reading consistently surpassed market expectations and eventually brought the jobless rate to record lows. In January, the economy added 257K jobs and even showed upward revisions in previous reports. Underlying data suggests that the improvements might continue, as the participation rate indicated that more Americans are returning to the labor force to resume their job hunt.

Wage growth has also been promising, with average hourly earnings picking up by 0.5% in January. This confirms that the positive momentum in the labor sector is translating to higher salaries, as job openings have also reached record levels.

However, the Fed is still intently monitoring some underlying measures of health in the employment picture. Several measures of slack, including underemployment and long-term unemployment, have remained elevated even as overall hiring has improved.

The so-called U-6 or "underemployment" rate edged up to 11.3 percent in January — still a blemish for the economy if you consider that the measure averaged 8.8 percent in the four years leading up to the last recession. This gauge includes workers such as those in part-time roles who would take full-time gigs.

What is expected this time?

For the month of February, the U.S. is expected to have added 241K jobs, slightly lower than the previous month’s 257K gain. The jobless rate is projected to fall from 5.7% to 5.6% for that period while average hourly earnings could see a mere 0.2% uptick.

But if the earlier jobs releases are any indication, it’s that forex market participants seem to be bracing themselves for another upside surprise. I mean, it’s hard to imagine that the U.S. economy will print an NFP figure that’s below its average of 259K in hiring gains for the past year!

How could the U.S. dollar react?

Based on previous NFP releases, stronger than expected data typically leads to more gains for the U.S. dollar while weak readings spark a selloff. After all, strengthening labor market trends could push the Fed closer to hiking interest rates or at least altering their forward guidance to indicate that they are thinking about tightening.

So far, Fed policymakers are already acknowledging the improvements in employment but it looks like they’re still waiting for more clues that this recovery can be sustained. Another month of better than expected jobs figures might be enough to convince the FOMC to take a more hawkish stance, which could lead to another wave higher for the U.S. dollar.

What Does New European QE Program Mean for Euro and EU Stocks?

Across the waters in Europe, the ECB gave details about its QE program yesterday, which they don't want branded as QE, so they've chosen the rather catchy, Public Sector Purchase Programme, or PSPP (not to be confused with PMS.) The program will allow national central banks to start purchasing their own government's debt from Monday and as such will mean only 20% of the total purchases will be a shared risk, with the remaining 80% resting squarely on the shoulders of the national central banks.

The whole PSPP thing will carry on for the next 18 months.

The ECB also said that it would allow central banks to buy at all ends of the yield curve, right out to 30 year debt, to try and maintain market neutrality. Though the intention is for market neutrality, it is likely that we will see more disruption and a push down in yields in the longer dated bond market, as previously it wasn't thought the ECB would look this far.

As expected, Europe equity markets rallied on the announcements, giving themselves a fighting chance of going into the weekend with record high closes - a theme which we are likely to see continue.

On the forex dance floor, Mr. euro continued to fall, with many analysts now saying that parity with the US dollar is a matter of time. Further weakness is an overall favorable outcome for Europe, with a lot of competitiveness in global markets restored, thanks to the 20% drop in value of the currency in the last year.

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