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Ambiguous NFP, Next Stop QE3?

Last updated 7/6/2012 4:34 PM EST (GMT -5) 0 Comments - Add your comment

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Neal Gilbert

Technical Analyst, GFT

Follow @FXexaminer

Ambiguous NFP, Next Stop QE3?

The US trading session was a one way ticket for the majority of markets as the main economic figure of the day, US Non-Farm Payrolls were middling. The consensus for today’s release was 90k, though most investors openly expected something around the 100k range; and when 80k flashed on trading screens across the globe, traders couldn’t hit sell fast enough. While 80k is still showing growth for the moribund employment sector, it wasn’t enough to create excitement; but it wasn’t bad enough to make the Fed hit the panic button either. So today’s result was more ambiguous than anything else. Unfortunately, ambiguity breeds uncertainty, and trader’s hate uncertainty, which prompted the selloff.

The main question now becomes: Is this bad enough for the Fed to introduce QE3 in August? On its own, the answer is a resounding NO. Despite the boon to Wall Street QE3 might provide, it is a very politically polarizing topic, and, as I described in today’s earlier post , President Obama may not want to fight that battle on the election trail. Even if Obama doesn’t make the call on QE3, you better believe that he has a profound influence on the leanings of Fed President Ben Bernanke. In order for QE3 to become a reality, US economic figures including housing, consumer sentiment, and inflation would have to turn negative, all of which are being released in the next few weeks leading up to the August 1 ^st FOMC decision.

In the interim, based on European Central Bank President Mario Draghi’s dour outlook yesterday, it appears the ECB will be providing more stimulus in the near future. With the Fed in neutral, and the ECB fully shifted in reverse, the euro may continue its inexorable decline. Despite the EUR/USD falling to 2 year lows after today’s news, support may not be found until 1.2150, and then 1.19 before sinking to levels not seen since 2005.

Bond Yields Rising Again

It seems so long ago that the EU Summit instilled confidence in the Eurozone and brought 10-year bond yields in Spain and Italy down to more manageable levels. Well don’t look now, but it appears the half-life of that move will only be one week. Spanish yields have returned to the threshold of 7% which is often deemed as being unsustainable for a debt the size of Spain’s, and Italy’s yields are now back above 6%, only 0.2% away from the high probed in mid-June. 

Draghi and ECB antagonistically held back monetary stimulus in the months leading up to the EU Summit prodding European leaders to fix their funding issues by creating a union-wide bank deposit guarantee, or some form of Eurobonds, but neither was realized. Instead, a flimsy agreement to use the underfunded and yet to be ratified European Stability Mechanism to fund banks directly without austerity measures came to fruition, and Europe was declared to be saved. Apparently that is not the case though as we are right back where we started. It appears Draghi has no choice now but to use the power of the ECB and force borrowing rates back down with a third leg of their Long Term Refinancing Operation. Perhaps that is the only thing that can save the euro from decline, unless of course, the Fed throws more money at the problem than the ECB.

Looking Forward

Next week will be a study of the economic system of China. In the months leading up to next week, Chinese economic figures have shown that their economy is healthy and continuing to grow. Many analysts look at these numbers with a skeptical eye since non-government figures have shown a decline for about the past year. With the surprise interest rate cut by the PBoC yesterday, they could be signaling that their upcoming economic figures may not be stellar. For a breakdown of all things fundamental in the markets next week, check out my FX Fundamental Outlook and be prepared for the high risk events that could impact you in the coming week.

For more intraday analysis and trade ideas, follow me on twitter ( @FXexaminer ) and/or Facebook (FX Examiner).

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About The Author

Neal Gilbert, an avid follower of the markets, began working at GFT in 2006, educating new and experienced traders in an easy-to-understand manner. His focus has been teaching common technical indicators, risk management, and sharing his favourite trading strategies. His Braving the Rapids strategy guide can be found on GFT’s website.

Neal conducts live webinars throughout the day, including his” Long and Short of It,” which is a Fundamental Live Market Analysis webinar centred on key economic releases. He also conducts webinars in Basic and Advanced Technical Indicators, Volatility and Risk Management, Trader’s Edge, and Fibonacci Trading and Theory.