Risk sentiment rebounded after Thursday's ECB disappointment. US jobs growth beat expectations, and there may have been some reassessment of the chances of near-term ECB bond intervention. Spanish 10yr bond yields initially rose from 7.17% to 7.44% but reversed sharply down to 6.85% on rumours Spain would officially request a bailout (in turn paving the way for greater ECB involvement). The Spanish PM later confirmed a rescue was under consideration. Also supporting ECB expectations were signals from Germany's coalition partners they would not object to the ECB's bond purchase plans. European equities closed 4.8% higher and the S&P500 closed up 1.9% at a three-month high. The CRB commodities index closed up 2.1%. US 10yr treasury yields rose from 1.47% to 1.59%, the initial 5bp selloff driven by the Spain/ECB rumours and the remainder by the US payrolls surprise.
The US dollar index (DXY) fell by around 1.2%. EUR rose from 1.2180 to 1.2293 on the Spain/ECB rumours, and then from 1.2220 to 1.2392 on the US payrolls result. It opened at 1.2280 this morning. USD/JPY rose from 78.20 to 78.77. AUD followed EUR's lead, rising from 1.0475 to 1.0571. NZD rose from 0.8130 to 0.8199. AUD/NZD consolidated between 1.2880 and 1.2930
Economic wrap
US non-farm payrolls rise 163k in Jul. That is the fastest gain since February and followed gains averaging just 73k per months in Q2. That said, 3 month average payrolls growth of 105k in May-Jul was still down from 157k in Feb-Apr, so the overall impression is still one of a slower job market relative to earlier this year. The separate household survey reinforces that message: in July its jobs count was down 195k after rising 550k in May-June and that pushed the jobless rate back up to 8.3% from 8.2% in June and the April low of 8.1%. In the four months since the start of Q2, household survey employment growth averaged 47k per month, compared to 355k per month in the previous four months (or 190k average in Dec, Jan and Feb excluding Jan's 847k gain which was partly due to a break in the survey related to a new population count). Hours worked and earnings growth in July were both soft at 0.1%. By industry, construction jobs continued to trend lower (but were down just 1k in July), while manufacturing jobs jumped 25k (up to 13k of that is related to the shorter summer auto factory shutdown this year and should drop out in Aug) and every other industry sector posted gains, except for ongoing public sector job losses (down 9k in July).
US ISM non-manufacturing rises from 52.0 to 52.6 in Jul. That is still the second weakest reading for the year so far and indeed June-July together are the lowest back to back readings since Q1 2010. The July detail showed business activity rising 5.5 pts to 57.2 (highest since March); orders rose 1 pt to 54.3; but jobs fell 3 pts to 49.3, their first contraction (ie sub 50 reading) for the year.
Euroland retail sales rose 0.1% in June, and with May up 0.8% that is the first back to back gain in retail since June-July last year. The annual pace of sales volumes growth continued to contract, at –1.2% yr. Separately, an upward revision to the July services PMI from 47.6 to 47.9 meant the Euroland composite PMI was revised from 46.4 to 46.5, still broadly in line with the average 46.4 reading in Q2 and down from 49.6 in Q1.
UK services PMI slips from 51.3 to 51.0 in July, its lowest reading since the previous recession in 2009 apart from the Dec 2010 drop to 49.7 due to snow disruption that promptly reversed the next month. The gradual decline in the services PMI in recent months, seemingly unaffected by weather and public holiday distortions, is further evidence that while Q2 GDP overstated the underlying weakness in the economy, the UK economy is at best stalled and more likely still in mild recession.
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