What Really Matters in Today’s NFPs

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Market Drivers for October 3 2014

EZ Final Services PMIs are lower

UK Services PMI

Nikkei .30% Europe .45%

Oil $91/bbl

Gold $1207/oz.

Europe and Asia:

CNY Services PMI 54 vs. 54.4
EUR Final Services 52.4 vs. 52.8

GBP UK PMI Services 64.2 vs.61.7

North America:

USD NFPs 8:30

USD ISM Services 10:00

Further weakness in European and UK data pressured the the majors in the relatively quiet final trading session of the week as markets turn their focus to US Non Farm payrolls due later in the day.

In the EZ the final PMI services reading for both Italy and France were worse that the initial flash reading while German results were slightly better. Overall EZ PMI Services report came in 52.4 versus 52.8 showing the activity in the periphery has slowed. The news weighed on the EUR/USD which drifted lower for most of the night and was trading at session lows of 1.2630 by mid-morning European dealing.

The pair saw a small boost of short covering action yesterday after Mario Draghi failed to offer any fresh stimulus at his monthly ECB press conference, refusing to project the size and scope of the proposed ABS program. The lack of any further easing from the ECB may provide a modicum of support for the pair, but the fundamental picture in the region remains dour and is likely to frustrate any rallies in the EUR/USD for the time being. According to estimates by various analysts growth in the EZ is barely above flatline in H2 of the year with Germany faring best at 0.4%.

In UK the PMI Services also printed worse than forecast at 58.7 versus 59.1 eyed and nearly 2 points lower than the month prior when the index was at 60.5. The composite index was at its lowest level since June 2013, but the headline data masked some relatively good news. The news business component was up to 60.1 from 58.8 prior and both employment and confidence gauges were up as well. UK economy continues to perform best in Europe with most analysts expecting Q3 growth to be around 0.8%.

Cable had been aggressively pre-sold ahead of the PMI release with the pair breaching the 1.6100 level for the first time since the spike lows set during the Scottish referendum fears. However there was very little follow through on the downside after the release as most of the news was priced in.

With European data out of the way the focus will turn squarely on the marquee event of the week as market steels itself for the US NFP report. The consensus view is that the payroll number should come in at 200K especially given the ADP reading that forecast a print of 213K versus 202K the month prior. ADP was far too optimistic in last month’s estimate but this month the strong expectations are boosted by the sharp declines in weekly jobless claims which suggest that labor market remain robust. The best predictor of the NFP data – the employment component of ISM Services report – will not be available until after the NFPs release and the ISM Manufacturing employment index showed a decrease of 3.5 points to 54.6.

More important than the number itself will be the revisions to prior months and the wage growth numbers. If the revisions show an upward trend the market may ignore any print below 200K on the assumption that BLS will adjust higher later, The key however will be the wage data as the market will need to see growth in order to feel confident that the Fed will start it tightening path early next year. USD/JPY staged a sharp reversal off the 110 level on Wednesday and the pair will need to see a blowout number to stage a second run at that key level. For now, despite relatively strong growth in both US GDP and labor data numbers, the markets – especially the fixed income ones – remain unconvinced about the sustainability of US growth and that has capped the dollar rally for now

Boris Schlossberg
Managing Director

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