The USD remained under broad based pressure following the worse than expected ISM survey. The headline index slipped into contraction territory at 49.5 below expectations for a rebound from 51.2 to 51.5. Weakness was generalised, with employment and new orders falling into contraction territory, the latter component under 50 for the first time since April 2003.
Nowhere might it be clearer than in this release that slower growth should gain more FOMC emphasis than rising inflation. EUR/USD has seen some profit taking after reaching a high of 1.3370 and given market positioning (with the latest CFTC data signalling USD net shorts hitting a 5 month high), further downside over the next few days cannot be ruled out. Nonetheless, EUR/USD pullbacks are seen to be good buying opportunities.
The ECB press conference will be in focus for the EUR this week. Although the EUR has appreciated strongly against some currencies (namely, the USD and JPY), the trade weighted EUR shows more modest appreciation. This together with the upcoming German wage round and strong forecasts from the ECB staff report mean that Trichet is unlikely to let go of the ECB’s tightening bias and that he should show concern over the exchange rate. Moreover, the employment report will be the focus for the USD.
Friday’s release of the weak manufacturing ISM suggests that along with the housing market, manufacturing is at risk of slipping into recession. The decline of the employment sub-index and the jump of Thursday’s initial claims do not bode well for
Friday’s US labour market report.
Nonetheless, risks for the USD continue to hover with the release of the employment report at the end of the week. The median forecast lies at 105k for November payrolls, below the 3 month moving average. BNP Paribas economists look for a weaker reading of 50k with manufacturing and construction jobs to be shed heavily.
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Wage demands
The euro will receive a boost from comments made by the head of the German metal sector employers association. Herr Kannegieser suggested that employees should receive a bigger pay rise this year as the sector is running at a high level of profitability, promising a generous wage round. The ‘IG Metall’ labour union is currently discussing its wage claim. So far it suggested the claim will come in between 5-7%. After Kannegieser’s announcement the claim is likely coming in near 7%.
The ECB has repeatedly warned that wage acceleration would lead to higher interest rates and ahead of Thursday’s ECB press conference and the release of the bank’s staff projection on economic growth and inflation the markets are unlikely to ignore recent developments on the German wage front. It speaks for itself when the German metal sector, which is probably the most export exposed European business sector, signals higher wage increases.
There has been some talk that the ECB might use Thursday’s press conference to calm the euros uptrend. We raise the question why should the ECB verbally intervene against euro strength if the export Industry sees itself positioned to provide generous salary increases. Instead, the metal sector wage news will support the ultra-hawks within the ECB pressing for further rate hikes, leaving the euro supported.
The US yield curve (2s vs 10s) has steepened since Thursday from -19 to -7 indicating that Friday’s hawkish FED talk (Plosser) has lost its credibility. Plosser claimed that the spill over from the housing market has not yet materialised, that core inflation would be too high and that FED Funds rates are not particularly high now. The more the
This steepening comes irrespective of tough Fed talk with the bond market expecting a higher chance of a cut sooner.
In the
include the HBOS house price survey for November together with the BRC retail sales monitor and PMI services survey this week. Strength in the housing sector contrasts sharply with that seen in the
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