Sentiment weakened on scepticism around a Eurozone solution plus a disappointing US labour report. Europe's permanent bailout fund (ESM) is unlikely to start as scheduled due to legal objections from Germany and any Italian approval not forthcoming until month-end, and Spain's banking sector bailout may not proceed in the manner originally intended, ongoing examples of implementation disappointments from the region. US payrolls only grew by 80,000 in June - less than the 100,000 expected – immediately pushing equities and treasury yields lower and the US dollar higher. The S&,P500 closed down 0.9%, and the CRB commodities index closed down -2.1% (oil -3.2%, copper -2.4%, gold -1.3%). US 10yr treasury yields fell from 1.59% to 1.54%. Eurozone peripheral yields pushed higher, Spain trading as high as 7.04% before closing 18bp higher at 6.96%.
The US dollar index (DXY) rose by around 0.7% after the US payrolls release, making a six-week high. EUR fell from 1.2402 to 1.2260, opening this morning at 1.2252. USD/JPY fell from 79.93 to 79.50 and then consolidated to 79.70. AUD peaked early London at 1.0280 and fell to 1.0180 in the US payrolls aftermath, recovering to 1.0230 late NY. It opened this morning at 1.0175. NZD fell from 0.8033 to 0.7957 and opened this morning at 0.7955. AUD/NZD fi rmed slightly from 1.2780 to 1.2810.
Economic wrap
US non-farm payrolls rise 80k in June, jobless rate steady at 8.2%. The payrolls headline was soft and there was a slight 1k downward revision to April-May. On the plus side household survey jobs rose 128k after 422k in May, hourly earnings were up 0.3% and hours worked up 0.4%, both the strongest for some months, and the industry breakdown showed the fi rst rise in construction jobs (but only 2k) after losing 57k jobs in Feb-May. The 3 sub-100k payrolls gains through Q2 look just like the slower jobs growth reported from May 2011, when jobs growth averaged just 80k over the four months till August following a 207k average in the fi rst four months of last year. It remains to be seen whether the late year recovery in jobs growth that occurred in 2011 (and 2010) is repeated this year. We doubt it (but were surprised last year by what proved to be unsustainably strong jobs growth).
European Stability Mechanism delays to hit Spanish bank rescue. Legal and political issues in Italy, Germany and Finland and “troika” report delays may not be resolved quickly enough for the ESM to be ready to directly capitalise the Spanish banks, which means that the June EU leaders' commitment to do just that may instead have to go via a Spanish state agency, adding to the sovereign's debt levels.
German industrial production rose 1.6% in May, partially reversing the April fall of 2.1%. That left production fl at compared to a year ago, at the lower end of the range of annual growth outcomes reported in the fi rst couple of quarters of the 2008 recession.
UK producer prices rise 2.0% yr in June on core output measure. the slowest since 2010. Input, output and core output prices all fell in the month, demonstrating further the recent defl ation of upstream price pressures.
IMF to reduce global growth forecast for 2012 from April's 3.5%, but the lower forecast (to be published July 16) will assume “the right policy actions being taken”, said MD Christine Lagarde. That would be a reference to the IMF's advice, for example, to the ECB to fi re up its bond buying program again.
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