Non-Farm Payrolls overlooked as Draghi fills QE3 void

<p>The Fed is no longer the only firefighter in town. Draghi’s OMT does for the markets what Bernanke’s QE was trusted to do (See more […]</p>

The Fed is no longer the only firefighter in town. Draghi’s OMT does for the markets what Bernanke’s QE was trusted to do (See more below).

The August jobs report was the opposite of the July report, as both Non-Farm Payrolls and unemployment declined after both increased in July.

August unemployment declined to 8.1% from 8.3% due a decline in the labour participation rate reaching a 30-year low at 63.5%. The BLS warned that the decline in the labour force stemmed from education workers declaring themselves unemployed after taking lump-sum payments, which made ‘the small growth in payrolls … not consistent with an ever-declining unemployment rate’. Non-farm payrolls slowed to 96K from a revised 141K, while US manufacturing shed jobs for the first time in 11 months.

The markets may end up in the red later on today due to the payrolls disappointment, but the decline in unemployment is likely to offset the ensuing ‘negativity’. The retreat back to the April lows of 8.1% increases chances of a sub 8% break ahead of the presidential elections.

Non-Farm Payrolls not bad enough for September QE3
Falling unemployment rate, improving services ISM and rising retail sales are among the few variables standing against a September QE3. Fed Chairman Bernanke will prominently reiterate the Fed’s readiness to unload QE3 at this month’s FOMC meeting in the event of future deterioration in conditions. The markets will likely continue avoiding 7%-8% declines off their recent highs upon the realisation that both the ECB and Fed are able to deliver monetary stimuli, instead of only the Fed as was the case over the last 2 years. The perception that there are two capable firefighters in the global monetary system increases the potential for S&P 500, Dow 30, DAX 30 and FTSE 100 to attempt 1465, 13900, 7700 and 5865 respectively by late Q4.

Final words on Draghi
Although ECB president Draghi’s bond-purchase programme may not be a direct solution to Europe’s high debt/low growth problem, it buys invaluable time for national governments to pursue their austerity policies by keeping yields in check and equities supported.

The remarkable aspect of Draghi’s programme is its ability to do for markets (and the euro) what the Fed’s QE3 was anticipated to do. By combining conditionality, sterilisation, and unlimited purchases into the Outright Market Transactions programme, Draghi has integrated monetary policy into fiscal policy.

EUR/USD breaks an important 12-month trendline resistance (1.2745), calling in place the 200-day moving average (1.2840). The last time the 200-DMA was probed was in October 2011, but only temporarily, as optimism ahead of a Sarkozy/Merkel Summit ended in shambles. The ensuing market sell-off and spike in peripheral yields paved the way for LTRO-1 in December, which put in the floor for equities.

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.