We’re reversing yesterday’s reversal after strong NFP

The US employment report was somewhat mixed, but the market is taking it in stride and risk is storming higher, as yesterday’s climax reversal appears so far to be a one-day wonder.

The US employment report had something for everyone, with a strong NFP reading countered by a weak Household Survey (-195k, the worst since June 2011) and rise in the unemployment and underemployment rates. For the pro-QE3 camp, this is possible good news if the focus is on the negative side of the data (as in “Hurray, bad data means more money printing and therefore we should bid up risk assets.”). Meanwhile, the tradition has been to pay more attention to the NFP number, and it is worth noting the recent pair of strong jobless claims numbers plus the equal strength of the July ADP number support the positive impression of the job market more than the negative one for the moment. Another something we must note: employment is a lagging indicator, and addressing employment is half of the Fed’s dual mandate. So are Fed policy moves the most lagging of all indicators? One might argue this is the case…

The market’s initial reaction seems to be a positive one (as in, moving in the belief that this data suggests that the economy is doing better than expected). Bonds are further off on the day, and flat precious metal prices suggest a no change in QE anticipation. But the equity market remains in rally mode and the USD is weak in the knees. There’s a bit of cognitive dissonance there if it supposedly was only the anticipation of QE3 that was driving risk prior to today.

No matter, the market will do what it wants to and we’ll have to sort things out after the end of the day - today's move could be just as much about the market revisiting its reaction to the ECB yesterday as it is about the US employment report. For now, equities look very strong, bonds very weak, and the USD pretty weak too, which is particularly surprising after yesterday’s climax reversal. So again, if we’re closing the day well above 1.2250 and particularly above 1.2300 in EURUSD and way above 1.0500 in AUDUSD, it looks like the reversal of yesterday is in danger of being fully reversed itself and setting up for further gains next week. And certainly if bonds remain weak, the JPY could prove the weakest of all – just look at the action in EURJPY on the day.

Chart: EURJPY
EURJPY has seen a climax reversal of the reversal today, in line with the reversal in equities and bonds on the day, which suggests a high risk that yesterday’s reaction to the ECB was a head fake. Let’s see how the ISM non-manufacturing survey turns out and how we close the North American session, but this is a powerful move so far…

Economic Data Highlights

• Australia AiG Performance of Services Index out at 46.5 vs. 48.8 in Jun.
• China Jul. Non-manufacturing PMI out at 55.6 vs. 56.7 in Jun.
• China Jul. HSBC Services PMI out at 53.1 vs. 52.3 in Jun.
• Sweden Jul. Services PMI out at 54.8 vs. 47.4 in Jun.
• Spain Jul. Services PMI out at 43.7 vs. 42.9 expected and 43.4 in Jun.
• Italy Jul. Services PMI out at 43.0 vs. 43.5 expected and 43.1 in Jun.
• Germany Jul. Final Services PMI out at 50.3 vs. 49.7 initial estimate and 49.9 in Jun.
• Euro Zone Jul. Final Services PMI out at 47.9 vs. 47.6 previous estimate and 47.1 in Jun.
• UK Jul. Services PMI out at 51.0 vs. 51.6 expected and 51.3 in Jun.
• Euro Zone Jun. Retail Sales out at +0.1% MoM and -1.2% YoY vs. -0.1%/-1.9% expected, respectively and vs. -1.7% YoY in May
• US Jul. Change in Nonfarm Payrolls out at +163k vs. 100k expected and +64k in Jun.
• US Change in Private Payrolls out at +172k vs. +110k expected and +73k in Jun.
• US Jul. Unemployment Rate out at 8.3% vs. 8.2% expected and 8.2% in Jun.
• US Jul. Change in Household Employment Survey out at -195k vs. +128k in Jun.

Upcoming Economic Calendar Highlights

• US Jul. ISM Non-manufacturing Survey (1400)