Markets poised for a Big Bazooka from the Fed

n an environment where central banks are driving price action then a bad payrolls number can negate the safe haven impact of the dollar and cause the euro and stocks to surge. Payrolls increased by a dismal 96k in August, the rate was dragged lower by net job losses in the government, mining and manufacturing sectors. Earnings data also fell, with the average weekly wage dropping to $809.09 vs. $809.43 in July.

The drop in the unemployment rate isn’t even the silver lining to the NFP cloud as its decline was due to a steep fall in the participation rate (the number of people in the labour force), which fell to 63.7% from 64.3% in July. This is a huge drop and it will be interesting to see what has caused this decline and if it is a structural shift in the US labour force or if it is reflective of shorter term influences. The participation rate seems to have gathered as many headlines as the NFP figure today, suggesting that people can see through the drop in the unemployment rate for what it was: a statistical quirk. Either way this labour market report has been a gift to the Republican Party. It was always going to be a deeply political report due to its timing, which is so close to the Democratic and Republican conventions, and this one is probably better news for Romney and co. than it is for team Obama.

The Federal Reserve meeting now comes into sharp focus. Read our Week Ahead report later today to find out our take on what to expect when the FOMC meeting concludes next Thursday. However, after that payrolls report the markets are pricing in a 75% probability of more QE from the Fed next week.

Elsewhere, the ECB bond-buying programme continues to have a positive impact on the market. The euro has rallied all day and was above 1.27 before the payrolls report. It is moving higher in line with the decline in Spanish bond yields, which are back at 5.75%. If we get back to the 5% zone in the coming days then this rally could be extended towards 1.30. Even the economic data was supporting a stronger euro today. German imports and exports both rebounded in July; likewise, the trade balance was stronger for July at EU16.9bn, vs. exp of EU15.3bn. Industrial production also jumped, rising 1.3% on the month. Production data was also stronger in the UK, with manufacturing production rising 3.2% in July. This is another sign that the economy bounced back in Q3 after the Jubilee bank-holiday induced slowdown in Q2.

So as we get to the end of the European week, we choose three Ones to Watc

Source: Forex.com

07.09.2012