NFP Keeps Taper on Track, Yields on Crack

<p>US June non-farm payrolls rose by 195K, surpassing forerecasts of 165K, with the unemployment rate remaining unchanged at 7.6%. You’d have to go back to […]</p>

US June non-farm payrolls rose by 195K, surpassing forerecasts of 165K, with the unemployment rate remaining unchanged at 7.6%.

You’d have to go back to 1999-2000 to find 12 consecutive monthly readings of +100K NFP. Not only non-farm payrolls have shown three consecutive monthly net additions of greater than 190K, but 12 consecutive monthly readings above 100K, the last time this was seen was in May 1999-May 2000.

The strong US jobs report means the Fed’s timing for autumn tapering remains on track, implying additional yield divergence between the US and Eurozone/UK to the detriment of prolonged losses in EUR and GBP vs USD.

US-German Yield Spread at 7-Year Highs (German-US at 7-yr lows)

The second half of the year started with a bang from the ECB & BoE (talking down rates), in response to the thump in the final weeks of the first half of the year from the Fed (timing of tapering).

Looking into next week (and rest of the quarter), markets will closely watch the extent of the divergence between hawkish rhetoric at the Fed (partly in function of data) and dovish stance from Draghi & Carney. If the Fed finds no reason (from the data) to remove tapering plans from autumn, then markets will witness a sharp divergence in rates between US yields and UK and Eurozone yields, leading to a the next leg down in EURUSD and GBPUSD.

We continue to prefer EUR over GBP as EURGBP breaks above the 4-year channel (as per yesterday’s piece) and the weak GBP becomes part and parcel of the Cameron-Osborne-Carney trio, whereas Draghi’s priority remains that of lower yields. Eyeing 0.89 remains our medium term view for EURGBP.

The main events to watch next week are: Wednesday’s release of the FOMC minutes (will reveal comments from more hawkish members than Bernanke) and the Thursday’s BoJ meeting and subsequent conference from Kuroda, which will likely grease the wheels of further yen weakness ahead of the Upper House elections – source of Abe’s power consolidation from both houses.

 


Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.