Though the US jobs data was pretty soft, it was clearly not bad enough to prevent the single currency from sliding to a fresh two-year low on Friday. Indeed, the euro’s price action in the second half of last week was quite dreadful, falling from around 1.26 on Wednesday to under 1.23. At the same time, Spanish bond yields soared over the final three days of last week to 7.0% from 6.2% on Wednesday. Europe’s policy-making cognoscenti will no doubt be alarmed that the honeymoon generated by the successful late-June EU Summit evaporated so incredibly quickly. Finance ministers meet again in Brussels today to discuss the implementation of the various initiatives agreed ten days ago, including how to funnel much-needed capital into Spain’s troubled banks. Not surprisingly, this latest episode of euro concern weighed heavily on risk assets and currencies on Friday and again overnight, with the Aussie back under 1.02 and the major Asian bourses down by between 1 - 2%. The dollar and the Japanese yen have made further forward progress – for instance, the dollar index is at a 2yr high. Commodities have been sinking as well, a product of growth fears and dollar strength. Despite the best efforts of global central banks to deliver yet more monetary stimulus, financial markets are clearly not convinced these boosts will be sufficient to ensure recovery. For now, there seems little to stop the upward momentum of both the dollar and the yen.
Commentary
The soggy US jobs market. Friday’s jobs numbers were, on the face of it, only a touch softer vs. market expectations, but they were still subdued. Quite apparent is that the labour market clearly lost momentum in the second quarter after a respectable pace of jobs growth in Q1. Back then, we saw payrolls’ growth exceed 200K for three consecutive months. The one bright spot in Friday’s report was the better than expected average hourly earnings figure which rose 2.0% in June vs. an anticipated 1.7% increase. Even here though, you have to look at the wider picture which remains one of subdued growth in earnings, with most of the past year seeing earnings lag behind inflation. Although disappointing, the jobs figures were not the smoking gun that Fed doves would have wished for in order to gain support for additional QE. At the same time, some recent economic releases such as the very weak manufacturing ISM gave their case renewed impetus.
The other currency war. Interesting data from the Swiss national bank on Friday showing its FX reserves growing a further CHF 60bln during June. The more interesting thing we don’t yet know is what exactly the bank is doing with them. Since the SNB said it would do whatever it takes to defend the 1.20 level on EUR/CHF, the latest data (to end March this year) shows the SNB holding around 50% of its reserves in euros. We’ll have to wait a few more weeks to see how that has changed. But all the signs are that the SNB has learnt from its 2009-10 experience (when EUR holdings pushed over 70%) and is swapping into other currencies to keep its portfolio more balanced. This was evident in the early bout of intervention when the CHF cap was first introduced and will likely be so again when the next SNB data is released. The impact of the SNB’s continued intervention is being felt far and wide, putting upward pressures on other currencies (such as the dollar and yen) as a result. It’s a quiet currency war, being fought under the radar.
Inflation the key policy driver in China. Although much of the commentary on Thursday’s surprise rate decision by the PBOC focused on the central bank’s supposed growth concerns, it is probably the case that rapidly declining inflation was actually the main driver. Inflation fell to 2.2% last month, down from 3.0% in May and a 29mth low. The price of food, which accounts for one-third of the consumer price basket, has been declining markedly over recent weeks. Also, oil and commodity prices have been declining and many businesses have found it harder to raise prices against the backdrop of weaker domestic and foreign demand. Back in the latter stages of 2010 and 2011, the focus of policy in Beijing was very much on taming the inflation genie. As such, with inflation now well below this year’s official target rate of 4.0%, policy officials clearly feel they have plenty of latitude to ease monetary conditions. So, it won’t be a surprise if further steps are taken over the course of the current quarter, including some further reductions in bank reserve requirements. At the same time, we can expect Chinese authorities to utilise this window of lower inflation to undertake much-needed price reform in critical areas such as utilities. Conscious that real interest rates will rise without any action, Beijing is clearly minded to ease financial conditions. It will remain a busy time for the PBOC in coming weeks in terms of calibrating appropriate monetary policy action.
