Payrolls report – market awaits strong numbers

October’s labor report suggested the labor market might be eventually picking up as it turned out that private employment was rising by more than 100k for 4 consecutive months. This time an increase may be even stronger or at least that is suggested by the data released so far. ADP was much higher than expected and a decline in claims accelerated. The official consensus is +140k for the headline but after the ADP it probably moved up and indeed one could expect a reading between 150 and 200k.

Equity markets – S&P500 at ’10 highs

Following a break out of the triangle formation we were describing in previous snapshots, the S&P500 stormed straight towards ’10 highs and tested them during the US late trading. In theory there is no reason for the market not to break the resistance (strong one – market reversed down from that point two times this year and up in 2006 and 2008) but it will take not only a very solid payrolls report (a solid one might be already priced in) but also a “fire cease” on the European front.

EURUSD – ECB made only short-lived noise

ECB is not going to expand the (peripheral) bond purchase program – at least for now. While it really cannot be surprising (given a strong resistance from the Bundesbank) some hoped for such move and thus the EURUSD declined after Trichet confirmed hands-off approach during the ECB’s conference. A decline was short lived though and the pair continues to advance. While there is still room for further advances – the nearest resistance is at 1,3334 – this climb is very sluggish, suggesting a significant risk of a turnaround (most likely on renewed fiscal concerns).

How could the pair react to the payrolls report? Strong reading should be positive for the dollar but at the same time a shift in focus to the US macro and away from the European problems helps the euro so the short term impact of the report is tricky to predict. After the ADP the second effect prevailed.

USDJPY – along the US market rates

In case of USDJPY, implications of the US data are fairly straightforward. One should notice that a rebound of the USDJPY since the Fed’s meeting a month ago went along a (substantial) rise in US market rates. A rise in FRA18x24 by more than 50 bp suggests the Fed might be forced to tighten monetary policy in late 2011/early 2012 much more than previously expected. Strong payrolls could fuel up these expectations and thus lift USDJPY higher, while disappointing report could reverse both moves.

Events to watch – payrolls reports in US and Canada, ISM services

The US payrolls report will be released at 8.30 ET (14.30 CET, consensus +140k) and will be preceded by a similar report from Canada (7.00 ET, 13.00 CET, consensus +15,6k). In the background there will be releases of reports on activity in Eurozone (3.58 ET, 9.58 CET, consensus 55,2 pts. – a final reading), UK (4.28 ET, 10.28 CET, consensus 53,2 pts.) and US (10.00 ET, 16.00 CET, consensus 54,9 pts.).

Przemysław Kwiecień PhD, Chief Economist

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