Poor activity, more unemployed

After disappointing residential data released on Wednesday, Thursday’s figures continued to fuel worries on the speed of the recovery in the US. The number of people registering for unemployment benefits increased to 472k, while the market expected a slide to 452k (the figure for the previous week was revised up to 460k). The figure still remains in a 440-480k range suggesting little improvement on the labor market this year and confirming a poor payrolls reading for May. A solid improvement on the labor market would be signaled by an evident drop of the figure below the 400k threshold.

On top of that, regional indicators suggest a drop in activity. The Philly Fed index slipped down to a mere 8 points against 21,4 in May and expected 21,1. While it doesn’t need to be confirmed in national indices, it comes after a weak reading of a similar index for New York in May, which was confirmed in June.

The US data pose increased risk for equity markets but the impact on the EURUSD is less certain. Weaker data may postpone Fed’s actions for even longer which is dollar negative but a slide on major stock indices will almost certainly cause a flight to quality, which is euro negative.  

Stock markets – bulls attack before the bell

The poor macroeconomic data from the US resulted in a nervous opening of the cash session on Wall Street, but the final hour – a good measure of a current sentiment – saved the day. Buyers cited a “successful” auction of the Spanish bonds as a major reason for optimism. It is some success to sell a nearly 3,5 bln EUR of 10Y and 30Y bonds just a day after markets speculated about Spanish government’s inability to tap capital markets, yet it came at a price of a record spread vs. German bunds (over 220 bps for 10Y). High spreads in Europe and deteriorating macroeconomic picture in the US are reasons to be cautious when it comes to a period longer than the next few days.  

Events to watch – tranquil Friday?

With no crucial data on the agenda and the optimistic tone from the Wall Street’s close, investors might just as well start the weekend on Friday. However, it is worth to remember that quite recently such “silent” Fridays went awry first due to the cut of the Spanish rating (from Fitch) and second due to the mess caused by reckless Hungarian politicians.

Przemysław Kwiecień Chief Economist

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