EUR/USD: Will US Non-Farm Payrolls Disappoint Tomorrow?

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EUR/USD: Will US Non-Farm Payrolls Disappoint Tomorrow?

• Eurozone PMI Composite index amounted to 54.3 in August, up from 53.9 in July. PMI showed that the rate of job creation in the Eurozone accelerated to one of the fastest seen over the past four years. PMI showed also that average output charges increase negligibly in August, but it was the first increase since March 2012.
• PMI is indicating Eurozone growth close to 0.4% in the third quarter.
• The Commerce Department said new orders for US manufactured goods increased 0.4% after an upwardly revised 2.2% rise in June. Factory activity has been hobbled by a strong dollar and spending cuts in the energy sector after last year’s sharp plunge in crude oil prices. Tepid global demand is also hurting manufacturing, which accounts for about 12% of the domestic economy. The market had forecast factory orders rising 0.9% in July after a previously reported 1.8% increase in June.
• The Commerce Department also said orders for non-defense capital goods excluding aircraft – seen as a measure of business confidence and spending plans – increased 2.1% instead of the 2.2% rise reported last month. Shipments of these so-called core capital goods, which are used to calculate business equipment spending in the GDP report, increased 0.6% in July, unchanged from last month’s estimate.
• Inventories of factory goods slipped 0.1% after three straight months of gains. That left the inventories-to-shipments ratio at 1.35, unchanged from June. That suggests manufacturers might be sitting on a pile of unwanted goods, which could hurt production and weigh on growth in the coming quarters.
• The Labor Department revised productivity to show it rising at a 3.3% annual rate in the second quarter, the quickest since the fourth quarter of 2013, instead of the 1.3% pace reported last month. Productivity contracted at a 1.1% rate in the first quarter. Productivity rose 0.7% from a year ago instead of the 0.3% increase reported last month.
• Unit labor costs, the price of labor per single unit of output, fell at a 1.4% rate in the second quarter, rather than increasing at a 0.5% rate as previously reported. Unit labor costs rose 1.7% compared to the second quarter of 2014. They increased at a 2.6% rate in the first quarter. Lower growth in unit labor costs keeps wage inflation subdued for now.
• The Fed said in its Beige Book report that overall US economic activity continued to expand across most regions and sectors from July to mid-August. The report said US labor markets were tight enough to fuel small wage gains in some professions in recent weeks, though some companies already were feeling a chill from an economic slowdown in China.
• The ADP National Employment Report showed private employers added 190k jobs in August, below market expectations of 201k jobs. Private payroll gains in July were revised down to 177k from an originally reported 185k increase.
• ADP data are bad news before Friday’s non-farm payrolls report. Fed Vice Chair Stan Fischer said during his Jackson Hole speech on Saturday: “We now await the results of the August employment survey  which are due to be published on September 4.” Some market observers took this as a hint that the next payroll number will decide whether the Fed begins to raise rates at its upcoming meeting in September or not. We think that goes a bit too far, as a single employment number is not going to move the needle in the one or the other direction. That notwithstanding, Friday’s report will in the current environment be watched even closer by markets than usual.
• The market is looking for total US employment to have grown by 220k jobs in August, a modest climb from July’s 215k figure. The unemployment rate is forecast to tick down to 5.2% from the 5.3% in July. In our opinion the risk for a negative surprise in August after weaker-than-expected ADP data and low employment ISM subindex released on Tuesday seems to be much larger than the risk for a positive surprise.
• What is more, over the past three years the first estimate for payroll gains in August averaged a mere 102k. That is substantially less than the 166k recorded for the other eleven months. Over time, this initially reported weakness has been revised away – August enjoyed by far larger revisions than any other month. But we should also know that the Bureau of Labor Statistics constantly adjusts its seasonal factors. So the past years’ pattern does not have to repeat itself.
• The ECB is widely expect to keep its monetary policy unchanged today. Investors will closely watch Mario Draghi’s press conference today at 11:45 GMT, particularly with respect to the ECB president’s rhetoric on the path of inflation and the target and timing of asset purchases. The ECB is likely to sound more dovish than in July due to the downward revisions in the headline inflation trajectory caused by lower oil prices. In our opinion, the negative impact on the EUR should be limited and may be an opportunity to buy the EUR/USD. In fact, markets are aware that lower oil prices are a boost rather than a problem for the EU economy.
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Significant technical analysis’ levels:

Resistance: 1.1285 (200-dma), 1.1326 (10-dma), 1.1332 (high Sep 1)

Support: 1.1205 (hourly low Sep 3), 1.1156 (low Aug 28), 1.1154 (61.8% of 1.0808-1.1715)

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