Has US Growth Peaked?

The NFPs did not please. In fact the more we analyze the figures the uglier they look. The headline number printed at 108K against projections of 200K and although Novembers numbers were revised upward by nearly 100K making the two month average almost in line the overall expectation, the tone of the report showed little good news as wage growth remained stagnant. As General Glut's blog pointed out, “The seasonally unadjusted tally for private sector jobs in December was -197,000, the worst December since 2002. This follows on the heels of the worst September since 2001 and the worst October since 2002. Since Katrina hit, the US has added 416,000 seasonally adjusted private sector jobs. But of course, nobody actually works an SA job. The NSA tally of actual jobs in the US since Katrina is -162,000 -- the worst September-December stretch since 2002.”

With these numbers in tow, many speculators are now asking if US growth has peaked. As short rates edge closer to 4.5% and housing shows a discernable slowdown, US GDP growth in 2006 may be markedly less then the consensus call of 3.5%. None of this bodes well for the greenback of course as the unit lost serious ground across the board dropping to 2.65% against the euro.

Next week, however may see a bounce as the EUR is now approaching major long term resistance at 2250 level and US data including Trade Balance and Retail Sales are slated to show positive month to month comparisons.

Eurozone Recovery Continues

The euro showed no hesitation this week rising 265 basis points against the buck buoyed by strong performance in EZ PMI Services number which printed at 56.8 far better than 55.4 market consensus. The region continues to demonstrate that the export led recovery is chugging along though the strength of the industrial sector has yet to translate into consumer spending as German Retail sales posted a disappointing -1% decline versus calls for a 0.1% gain. But as we noted on Thursday, “the market anticipated some of the weakness after … listening to retailer sob stories earlier in the month.”

Next week kicks off with Retail PMI numbers, followed by ZEW on Tuesday and ends with EZ GDP which is expected to rise to 0.6% from 0.4% the period prior. If the past is prologue to the future the data should remain healthy providing further support to the unit. With short rates at 200 basis points below Fed funds, the ECB may become more focused on inflation especially if the data confirms the recovery, However should the numbers miss, the mood will quickly turn sour as fears about the health of the regions economy will resurface and the unit could drop back to the 1.2000 level as the search for the bottom in the pair continues.

Yen: L-I-Q-U-I-D-A-T-I-O-N

How do you spell carry trade liquidation? In the FX market you spell it YEN. The yen started 2006 the same way it ended 2005 with a massive rally against the greenback as traders dropped USD/JPY like a hot potato on the belief that the Fed tightening cycle is almost done. Still with the unit gaining 700 points on the greenback the correction may be coming to a close quite soon. One of the reasons underpinning yen strength is the belief that the Zero Interest Rate Policy will soon be abandoned as the country finally defeats deflation.

However the core tenet of that thesis is that consumer spending must revive. To that end this week's Household Spending figures will be of prime importance for the market to consider. If the figures disappoint once again as they did last month printing another negative month over month comparison, yen bulls will be hard pressed to argue that is all is well in the Land of the Rising Sun. The other piece of news this week that traders will be watching keenly is the Eco Watchers Survey. The number should remain above 50 but the more interesting question will be if it can exceed last months reading thus confirming that Japanese economic growth remains on track.

British Pound: Cable Sees Improvement

The pound had a nice bounce back this week gaining 294 basis points on the greenback and ending the week above the 1.77 figure. Both PMI Manufacturing and PMI Services improved with the latter materially so to 57.9 from 56.0 expected. The better results indicated that the UK economy is stabilizing as the lower interest rates by BOE may be having a mild positive effect on demand.

Next week the BRC Retail Sales Monitor will tell the story on the consumer side while Manufacturing and Industrial Production will look to rebound after a miserable string of declines in 2005. That data may in fact be key to the whole week, for if does not improve as the market expects it will demonstrate that UK Industrial sector remains mired in a recession and more BOE rate cuts will be necessary. The BOE in fact meets this Thursday, but the market does not anticipate any additional moves for the time being. Still, if weakness persists, the pressure on the Central Bank will become immense.

Swissie Strength

Although Swiss data was mildly disappointing, the franc put in the best performance of all the majors this week, gaining 340 basis points on the dollar. On the economic front the news was essentially positive with unemployment remaining at 3.8% and SVME PMI staying significantly higher than 50 at 56.9. However, what truly drove the Swissie this week was the flare up in geopolitical tensions which saw Russia butt heads with Ukraine over natural gas, Iran pursue its aggressive nuclear weapons acquisitions strategy despite global diplomatic effort to curtail it and Iraq dissolving into chaos once more with the highest weekly body count since 2003. If these events continue to spiral out of control the Swissie may see more gains in its traditional role as store of safe haven capital.

Boris Schlossberg is a Senior Currency Strategist at FXCM.