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Friday May 7, 2004 - 21:24:24 GMT -

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Dollar Soars On Strong Payrolls

Daily Forex Report 05-07-04

· US Non-Farm Payrolls Increase By 288k vs. 170k consensus
· Unexpected Decline in Weak German Industrial Production
· Japanese Cabinet Secretary Fukuda Resigns


US non-farm payrolls did not fail to disappoint – the market was anticipating a day of high volatility, and payrolls delivered just that. The euro catapulted from 1.2080 to 1.2140 two minutes before the number, reminiscent of last month’s suspected leak. However, any suspicion quickly evaporated, as the payrolls release surprised significantly to the upside, reversing the euro’s 60 pip spike. As the market digested the ramifications of the strong report, the euro continued its slide below 1.19. Yesterday, we noted that the highest estimate for non-farm payrolls from a Bloomberg survey of 44 economists was 250k. Not only did the actual report beat expectations by 38k, payrolls in March were also revised upwards from 308k to 337k. More encouragingly, the manufacturing sector is finally seeing job growth. Last month, manufacturing sector payrolls were revised from flat to +9k; 21k jobs were added in April. Even though the absolute change in payrolls was less than the previous month, the overall data was more positive than April. The unemployment rate declined from 5.7% to 5.6%, while average hourly earnings increased by 0.3% mom, as compared to 0.1% last month. Meanwhile, German industrial production declined by the largest amount in seven months in March. The market had expected IP to recover after a revised –0.4% drop last month, but instead, the index fell –2.3%. Germany’s economy continues to struggle, widening the growth differential and monetary policy outlook between the US and the Eurozone.
Today’s strong non-farm payrolls report confirms that the fear of a jobless recovery is a concern of the past. One of the last remaining pieces of the recovery story is finally unfolding positively and the rally in the Fed Funds futures contracts reflects the market’s collective optimism. July Fed Fund futures are currently pricing in a 90% probability of a 25bp rate hike in late June, up from 60% yesterday. With a summer rate hike essentially discounted, the next question is not when, but by how much the Fed will raise rates. We are already hearing talks that the Fed’s first move may be a 50bp instead of a 25bp hike. Although we doubt that the Fed will choose to be that aggressive, there is a negligible risk for a 50bp move. Supporting the Fed’s new favorite message of delivering “measured” rate hikes, the Bush Administration’s Council of Economic Advisors chief Friedman said today that measured rate hikes will not hurt recovery.


The British pound sold off against the dollar on broad dollar strength, but gained ground against the euro. Interest rate expectations continue to dominate market movements and the recent rate hike by the Bank of England has helped to spur gains in the pound. The week ahead should hold more good news for the UK. We are expecting industrial production, the NIESR GDP estimate, labor market data and the BoE inflation report. The manufacturing sector has been improving and the tight labor market conditions should be reflected in the claimant report. The central bank’s inflation report is expected to provide supporting evidence that inflationary pressures are expected to rise.


Since the prior day’s close, the dollar soared over 280 pips against the yen. The rally has been a result of 2 factors 1) broad dollar strength post payrolls and 2) the unexpected resignation of Japanese Chief Cabinet Secretary Fukuda. Fukuda resigned over a scandal involving his failure to contribute to a state pension plan. The government has recently been struggling with a string of rather embarrassing news that nearly half of the cabinet members have failed to contribute to the state pension plan, which is a project that the Japanese government has been aggressively marketing. Since Fukuda is not the only member who did not contribute, his resignation is most likely nothing more than a sacrifice to save his peers. He will be replaced by his current deputy, Hiroyuki Hosoda.


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