Payrolls: only one part of the QE puzzle

So everyone was geared up for payrolls to be the sole focus of the market’s attention today, however, Greek problems are encroaching on investors’ attentions after reports surfaced that international debt inspectors have paused their review of Greece’s austerity reforms. The inspectors include the International Monetary Fund, the EU and the European Central Bank (ECB), and they are apparently pressing for faster reforms than Athens is currently enforcing.

Speculation has been growing that there is a disagreement between the Greek authorities and the debt inspectors, but this has been denied by the Greek finance minister at a press conference this morning. However, he had more bad news to deliver after he announced that the economy is expected to contract by 5 per cent this year, more than originally forecast. He is probably hoping that Non-Farms will distract attention from his country’s woes, but this is unlikely to last for long. Greece needs its second tranche of bailout funds this month and the EU is fast running out of time to solve this crisis.

The markets will still be whipped into a frenzy over today’s Non-Farm Payroll report. With all of this uncertainty and dual concerns in the US and Europe to worry about it is no wonder that stocks have taken a knock this morning. This environment has been extremely bullish for safe havens including the Swissie, the gold and the dollar. The Aussie - one of the most risk sensitive currencies across the FX spectrum – has led the euro and the pound lower today. Gold has also jumped by $20 since the start of the European session, although it is running into some resistance at $1,855.

Investors remain on edge as we lead up to an even more loaded patrols figure than normal due to heightened expectations for QEIII. Currently the average analyst estimate on Bloomberg is 68,000, however this month there is an unusually wide range in opinion – the lowest forecast being a drop of 20,000 and the highest being 160,000; investment bank Goldman Sachs reduced its forecast to 25,000 from 50,000 this week.

A figure between 60,000 and 90,000 would be extremely disappointing since it would not be enough to lower the unemployment rate, which stands at a mighty 9.1 per cent, and would confirm that the economy is indeed slowing. We believe a reading of 150,000 or over would be needed to change the market’s mind that more policy support will not be forthcoming from the US central bank. A weak reading could, perversely, spur a risk rally as it would boost expectations of more QE from the Federal Reserve.

However, complicating the picture even more is the strike by more than 40,000 Verizon workers that may have artificially inflated the unemployment numbers. I foresee the following scenarios for payrolls today: Weak payrolls: more QE from the Fed = weak dollar, higher stocks, commodities and gold. Mediocre payrolls = slump in risk, safe havens rise along with dollar, but we may end relatively flat on the day. Strong number: Risk falls sharply to price out QEIII expectations. Dollar rallies, gold falls.
 
We might be at the start of a fundamental shift in the euro. It has been supported against the dollar for most of this year due to its yield differential as the ECB has been notably more hawkish than the Federal Reserve. However, the weakness of Europe’s economic data combined with signs of easing inflation pressures, suggest that the Bank may need to loosen policy at some stage. Some members of the shadow ECB, which does not set policy, have recommended that the ECB cuts rates after hiking twice this year. This could weigh on the euro going forward.

EUR/CHF has been one of the major movers this week, dropping from 1.1600 to 1.1100 at the time of writing. This enhances the chance of more intervention from the Swiss National Bank, especially if the pace of these moves is sustained. USD/CHF is finding some support at 0.7800. If intervention fears rise then we may see a sharp reversal in the Swissie, as we did at the start of August, so investors need to be nimble.

Overall, it’s Labor Day weekend in the US, so volumes may be thin, which may just exacerbate moves post-payrolls. Overall though, payrolls are only one part of the puzzle, not the entire picture, so we could stay range bound and rocky until the conclusion of the Fed meeting on the 21 September.

Kathleen Brooks is research director at Forex.com

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