Euro Finds Support On Improved Retail Sales, Markets Focus On NFP Report

A better than expected Euro-Zone retail sales report woke up currency markets which had been consolidating ahead of the U.S. Non-Farm payroll report. The Euro jumped 50 bps when the consumption report showed a 0.6% gain in November versus expectations of flat sales.

Talking Points
• Japanese Yen: Finds Support At 90.60
• Pound: Manufacturing Falls For Ninth Month
• Euro: Retail Sales Improved n November
• US Dollar: NFP On Tap

Euro Finds Support On Improved Retail Sales, Markets Focus On NFP Report

A better than expected Euro-Zone retail sales report woke up currency markets which had been consolidating ahead of the U.S. Non-Farm payroll report. The Euro jumped 50 bps when the consumption report showed a 0.6% gain in November versus expectations of flat sales. A 0.5% gain in food sales led the improvement from the month’s prior 1.0% decline. Germany led the way with a 0.7% increase, with developing nations Poland and Romania also seeing improvements. The Euro would reach as high as 1.3732 before finding resistance as traders are reluctant to make major bets ahead of the U.S. labor report.

The improvement in consumption may have little longer term implications for the Euro as recent evidence that the economy’s downturn has steepened will dampen expectations. Manufacturing and service activity in the region has contracted for the past seven months which is forcing companies to slash costs. Therefore, expectations are that the labor picture which saw unemployment rise to 7.8% in November will continue to deteriorate going forward. Nevertheless, any positive data may be enough for the ECB to justify refraining from further easing. Yet, with process continuing to free fall the mounting deflation concerns may leave the central bank no alternative as they adhere to their price stability mandate.

The Pound traded choppy during European trading as it fell to 1.5118 after reaching a high of 1.5269 on weak manufacturing data and falling producer prices. However, the Sterling would find support from the positive European retail sales numbers on expectations that a weak pound will lead to greater future demand. Indeed, the BoE cited the currency’s weakness as a source of stimulus as it creates greater demand for U.K. products and a reason that they weren’t more aggressive in their easing. However, November’s manufacturing data demonstrates that the benefits haven’t started to be realized as activity fell for a ninth month to its lowest levels since 1980. The 2.9% decline was led by a 6.2% drop in chemicals and an 11.0% fall in metals as the global slowdown has dampened demand for raw materials. Meanwhile, factory gate prices fell to 4.7% from 5.1%, but were far greater than the 4.0% that was predicted which may lead the BoE to pause their current easing cycle. The Pound appears to be settling into a range between 1.4500- 1.500 where it could trade for sometime as markets look for signs as to which economies will be the first to emerge from the current downturn

The estimates for the upcoming Non-Farm payroll report have continued to fall from initial prediction of -475,000 to the current if 525,000. Wednesday ADP report which was reconfigured to take into account similar factors as the NFP release showed job losses of 693,000 for December which has some market participants looking for a loss of as high as 1 million. Therefore, we could see bearish price action if the labor report significantly misses to the downside. Conversely, with such low expectations an inline or better print may spark bullish price action as it would reinforce notions that the U.S. is best positioned to emerge from the current economic downturn. Another number to watch will be the unemployment rate, which is expected to shoot to 7.0% from 6.7%. An inline or worse print will increase fears that the jobless rate will climb to as high as 9.0% which will dim the outlook for domestic growth and a potential turn around in 2009.