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Weak Payrolls Confirm Slowing Growth

US non-farm payrolls rose by 121K in June from a revised increase of 92K in May, while the unemployment rate remained steady at 4.6%. Average hourly earnings jumped by 0.5% from 0.1%. The revisions for the April and May payrolls totaled a net increase of 3K.

The disappointing payrolls figure and the dollar decline are highlighted by the lofty expectations set by the ADP report's forecast of 368K. We noted in our Pre-payrolls preview that: "the risk for the dollar to have become slanted mainly to the downside as there stands greater room for disappointment than for upside surprise after the release".

The 0.5% increase in average hourly earnings validates the inflationary concerns for the inflation-fighting Federal Reserve and is the main reason behind the deepened inversion in the yield curve. The inversion began on Wednesday's release of the unexpectedly strong ADP report, which pushed up 2-year yields to 5.24% from 5.17% and 10-year yields to 5.23% from 5.15%. The combination of a weak payrolls and strong hourly earnings pave the way for weaker growth ahead (suggesting lower long term yields) along with upside inflation risks (steady short-term yields).

The weak payrolls further accentuate the slowing trend of the US economy. Even in this short trading week, we saw lucid signs of a cooling activity. Thursday's release of the US services ISM showed a 5-month low at a worse than expected 57.0 in June from May's 60.1. The employment index also hit a 5-month low at 52.0 from May's 58.0, while the price paid index fell to 73.9 from May's 77.5, which was the highest level since September. Monday's release of the June manufacturing ISM of 53.8 was the lowest since the Hurricane Katrina lows of August 2005. That figure was the lowest since May 2005. The "slow growth" argument for holding interest rates unchanged next month is growing. The Fed has 4 weeks to determine whether the inflation argument remains valid for pushing rates to 5.50% next month.

Looking in greater detail at the payrolls report, the 4K decrease in construction jobs bears significant implications for the housing sector and the economy as a whole. With construction spending falling for the 2nd month in a row, and mortgage applications hitting 4-year lows, the cooling in the housing sector is now confirmed. The loss in construction jobs in June is the first monthly drop since January 2005. The 3-month average has fallen to 3K, the lowest level since April 2003. This clearly indicates that the real estate slowdown has not only manifested itself via cooling home sales, but also via the construction of residential homes.

The 11K, 12K and 13K net increases in manufacturing, leisure & hospitality and government jobs helped prevented a disappointing report from turning gloomy. But the durability of these jobs remains doubtful, considering the volatility in those sectors.

What's for the dollar after ADP distortion?

Considering that the erroneous ADP report was largely responsible for the dollar rally in Wednesday and Thursday, we expect further cautious dollar selling ahead into next week. The lack of key US data on Monday and Tuesday will be followed by Wednesday's May trade figures, which we expect to have bounced to $65.5 bin. The Bank of Canada decision on Wednesday (no rate hike expected) and the Bank of Japan's widely anticipated rate hike on Friday could be dollar positive. Friday's release of US June retail sales and the preliminary consumer sentiment survey from the Univ of Michigan will be essential in supplying the Fed with its data dependence.

Barring any negative surprises in the retail sales report, we do not expect any real shift in the current yield inversion until the following week's marquis event--Fed Chairman Bernanke's semi annual testimony and the June CPI on July 19, followed by the FOMC minutes of the June meeting due out on July 20.

July 2006 FX Forecast
  Current Rate* End of
July 2006
End of
Sep 2006
End of
Dec 2006
End of
Jun 2007
EUR/USD 1.2721 1.2850 1.3100 1.3200 1.2900
USD/JPY 115.55 113.00 109.00 107.00 105.00
GBP/USD 1.8346 1.8480 1.8800 1.9100 1.8800
USD/CHF 1.2321 1.2200 1.1970 1.1850 1.2150
USD/CAD 1.1119 1.1050 1.0900 1.0850 1.1100
AUD/USD 0.7410 0.7500 0.7550 0.7650 0.7500
CNY/USD 7.9955 7.9000 7.9000 7.9000 7.9010
* July 05, 2006

A few Facts Ahead of Sunday's World Cup Final

Italy hasn't beaten France since 1978. Italy won all of the last official 2 encounters

Italy is the ONLY team that won ALL of its games, except for one where it tied with the US thanks to an own goal.

France is the ONLY team in this WC that beat teams that have won all of their games (Spain, Brazil and Portugal)

Unlike Portugal, Italy has prolific finishers. Unlike Brazil, Italy has intimidating defense.

Italy conceded ONLY one goal in the WCup and that was an OWN goal.

This is Italy's 6th WC final and France's second.

Italy's coach Lippi may be a genius and France's coach Domenech may pale in comparison, but the French veterans won't even require a coach.

French star Zidane will face his old coach Lippi, who helped him hone his tactical skills in Juventus.

Zidane has already led his team win the WC in 1998. Thanks to the 34 yr old star, the team is back in the final, hoping to give Zidane his farewell present.

Do you want to see one of the greatest matchups in soccer of the 21st century?

The odds (mine) are in favor of Italy, but Zidane's France has a habit of beating the odds!


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