Jobs DAta is Often Anti-Climactic

The main focus today is on the US employment report. The fact that the service sector ISM is released shortly afterwards and that, given the Monday holiday in the US, and some markets will close early and could impact the market’s reaction to the jobs data itself. Yet, while the jobs report is regarded as among the most important economic releases of the month, the significance fore the foreign exchange market may not be as great as one might expect. Let’s review the recent history.

The May employment report in early June was a major disappointment. The market consensus was 139k too high for the private sector non-farm payrolls. The euro declined and experienced follow through selling the following Monday. This did, in hindsight; turn out to be the bottom for the euro, but developments in Europe were arguably key. The June employment data out in early July was also disappointing. The actual private sector employment gain was 27k less than consensus. The euro did rally, but there was no follow through on the following Monday. The July private sector employment was 19k below consensus and the euro rallied but that day, Aug 6, marks the near-term high and it is now about 3.75% lower.

There are two other observations about the jobs data. First, the fact that the ADP estimate of -10k represents the first decline since January may be a bit unsettling. Yet the ADP typically under-estimates (roughly 85% of the time) the private sector job growth and that average miss is about 55k. So, even an average miss now would produce a near-consensus report. Second, the BLS also has difficulty estimating job growth and revises the data. The January through May data was consistently revised higher. June was the first revision lower. Generally speaking, the revisions take place in the direction of the underlying trend. Watch the direction of the July revision.

In terms of policy, recent Fed comments suggest that it will likely take more than a slightly disappointing employment report to spur the central bank to resume its asset purchases. This would seem especially true for the Sept 21 FOMC meeting. The next meeting is Nov 03, which is the day after the midterm election. But as Bernanke recently noted, there are other policy levels in addition to the monetary. The Washington Post reports that the Obama Administration is considering possible tax cuts to spur employment and investment. The measures under considerations are thought to include a payroll tax holiday and renewing R&D tax incentives.

The euro zone service PMI came in a little better than the flash reading. The 55.9 headline compares with the 55.6 flash and 55.8 in July. As we suggested yesterday, given the uncertain economic outlook, the market’s attention is really on the forward looking indicators, like new orders.

In the non-manufacturing sector, new orders in the euro zone rose to 54.9 from 53.1 in July. Of note, Germany was a bit disappointing, coming in at 57.2 from 58.5 in the flash, but still better than the 56.5 in July. On the other hand, Italy, which had fallen below 50 in July popped back above in August (51.4). Spain was the weakest link with the first sub-50 reading since Feb. The euro zone remains a bifurcated economy. Just like the aggregate analysis conceals the largest deficits by Germany and the Netherlands surplus, so too does the aggregate analysis conceal the economic discrepancies. The debt market allows a clearer way to distinguish among the different members. When European officials claim, as they have recently, that there is no chance of a double dip, they seem to be cheerleading rather than offering a realistic assessment. If Germany and the Netherlands are the bright spots and they are largely export driven, isn’t that a real vulnerability if the risk of a double dip elsewhere materializes? The US economy expanded sharply in Q4 09 and Q1 10. Europe nearly stagnated then. The US slowed markedly in Q2 and into early Q3. The euro zone expanded smartly in aggregate in Q2. Is there really no chance whatsoever that the euro zone is simply lagging behind the US by 3-6 months as often appears to be the case?

Briefly turning to the UK, today’s service sector PMI disappointment caps the generally disappointing week. Each of the three purchasing managers’ surveys (mfg, construction and service) came in well below market expectations. For the record, the service PMI headline fell to 51.3 from 53.1 and the consensus had expected a smaller decline to 52.9. Sterling has the dubious honor along with the Canadian dollar as being the only G10 currencies to fall against the dollar this week. Sterling is off about 0.8%, but more telling that its performance against the dollar, it also appears to have reversed against the euro this week. The 5 and 20-day moving averages have crossed suggested further euro recovery against sterling in the days ahead.