It's All About The Jobs Report, Isn't It?

The US dollar is somewhat softer against the majors and most of the emerging market currencies. The yen and Antipodean currencies have built on yesterday's gains while the euro and sterling are consolidating yesterday's impressive recovery.

With the ECB out of the way, the market's attention is back on the US for non-farm payroll Friday. However, we do not think this is a main driver under current conditions, where the measured Fed tapering is well entrenched. A contracting GDP is insufficient to spur a change and for all practical purposes, there is little in the jobs report that will move Fed officials.

There are two main considerations behind such a conclusion. First, Yellen's guidance has directed investors away from more volatile measures of the labor market such as the unemployment rate, and toward slower moving measures, such as compensation, people taking part-time jobs in lieu of full-time jobs, and the participation rate. Second, net jobs growth has been amazingly steady - the 6-month average is 203k; the 12-month average is 197k, and the 24-month average is 187k.

The higher shorter-term numbers show a slight, gradual improvement. However, the 288k increase in April seems to overstate the case. The inputs for today's data are mixed. The ADP data was softer than expected, and Challenger reported an increase in lay-offs, while the employment component of the service PMI increased and the weekly initial jobs claims were largely flat. May regional Fed surveys have generally shown improvement and auto sales were strong. The MNI consensus is for a 210k increase in non-farm payrolls, and the unemployment rate is expected to tick up to 6.4% from 6.3%. Average hourly earnings are expected to rise by 0.2% to lift the year-over-year rate to 2%.

Barring a significant surprise, we expect the US dollar to trade generally lower. Today's German data illustrates why the ECB measures are not going to derail the euro just yet. Germany reported a 17.7 bln euro trade surplus in April. The market expected a 15.2 bln surplus after 15.0 bln in March. The current account, which includes merchandise and service trade and some other activity, such as investment income and tourism among others, stood at 18.5 bln euros, almost 20% larger than economists expected. Exports, which is the growth it borrows from other countries, rose 3%, while imports rose 0.1%.

The current account surplus is no longer needed to offset the deficits in the periphery. Those deficits have been dramatically reduced. On top of the current account surplus, the Euro area continues to draw capital inflows. There has been a strong rally in peripheral European bond markets today. Italy and Spain's 10-year benchmark yields are 11-12 bp lower; Greece is 23 bp lower and Portugal, which has to sort new savings after the Constitutional Court again rejected the government's austerity measures, is off 9 bp.

There is a reasonable chance that S&P upgrades Italy's credit outlook to stable from negative. It is also reviewing Ireland's BBB+ rating with a positive outlook. Moody's could cut the outlook of Finland today, which would put it in line with S&P. Moody's also review ESM and EFSF ratings and a stable outlook may be adopted.

The UK reported its trade figures - another blow out. It appears to be the widest deficit since January, but when the figures were released they did not include GBP700 mln of oil exports to the EU and the time series will not be fixed until next month. Adjusted, the data suggests a GBP8.92 bln shortfall on the back of a 1.5% decline in exports and a 0.8% increase in imports. This is for merchandise. The UK has a huge surplus on services (~GBP7 bln) and, adjusted for the statistical issue, it looks like the overall deficit was about GBP1.84 bln compared with GBP1.05 bln in March.

Separately we note that the Tories won the by-election in Newark. The UKIP came in second. Between the UK's current account deficit, the political risks posed by the Scottish referendum on one hand, the rise of the UKIP on the other, and the personnel changes taking place at the BOE; it is the sterling bulls that recognize the BOE as most likely to be the first G7 country to raise interest rates. That said, technically we see potential for sterling to re-test the $1.70 area in the coming weeks.

Canada also reports jobs data today. Unlike with what we saw in the US, the shorter term average job growth is lower than the longer averages. To wit, the 12 and 24-month averages are around 12.5k, while the 6-month average is just below 3k and the 3-month average is close to 2k. Since last November, the monthly figures have followed a saw-tooth pattern, up one month down the next. April saw a job loss of almost 29k. Expect the May report to offset the lion’s share of this loss. The Bloomberg consensus is for a 25k increase. Support for the US dollar is pegged in the CAD1.0880-CAD1.0900 area. Resistance is seen near yesterday’s high (~CAD1.0965). Technical indicators are broadly neutral.