U.S Markets Crash on Jobs Data; Quantitative Easing Back in Focus

There was little to inspire investors on Friday with sentiment barometers suffering deep losses across the board with the latest jobs U.S report front row and centre. U.S non-farm payrolls rose by 69,000 in May against economist's estimates of 150,000 new positions led by a significant short-fall in private payrolls. To add insult to injury April's originally reported figure of 115,000 was revised down to 77,000 and the official unemployment rate edged up from 8.1 to 8.2 percent. The underemployment rate edged higher from 14.5 to 14.8 percent, suggesting more American citizens are employed, but not to their desired capacity with casual or part-time workers unable to find permanent or full-time positions. The DOW Jones and S&P500 fell 2.22 and 2.46 percent respectively. The Institute of Supply Management manufacturing index also fell short of estimates with the gauge falling to an index level of 53.5 from a previous 54.8. Analysts had anticipated a fall to 53.8.

Volatility was the key theme across currencies on Friday with significant U.S dollar strength noted against major counterparts in the ensuing period of the jobs data; however gains were unwound throughout the session as market participants began to recalibrate quantitative easing expectations.

Testament to the decidedly risk-off environment, U.S 10-year treasury yields dropped to an all time low of 1.437 percent while across the Atlantic the safety of German debt saw milestone lows with 2-year yields dropping below zero with similar activity noted across the channel. Quite simply, investors are willing to forgo return on capital investment in exchange for a safe place to park funds.

Friday saw a series of disappointment all round with the release of official Chinese Manufacturing data once again raising doubts over the growth sustainability in world's second largest economy. Manufacturing PMI fell to an index level of 50.4 in May from 53.3 April. Economist's consensus estimates showed a more moderate fall to 52 expected.  The HSBC equivalent released later on Friday which is sampled on smaller to mid-tier companies also reflected slower manufacturing output.

The Euro slumped to a fresh 23-month low of $US1.2285 before regaining composure over the course of trade to finish the week at $US1.2432 representing a 0.6 percent loss for the week. Sterling recorded an impressive drop against the greenback to near 5-month lows of $US1.5267. The Australian dollar fell to new 8-month lows of 95.81 US cents to break previously robust support at 96.6/7 US cents. The local unit managed to claw back losses closing at 96.95 US cents - finishing the week 0.52 percent lower. Japan's Yen remained the safe haven of choice with the USDJPY pair breaking ¥77 handle to near 4-month lows of ¥77.65.

RBA in Focus; Calls Grow for a 50bps Cut

It's a huge week in terms of local event risk with the RBA, GDP and jobs numbers taking centre stage. Early in the week the focus will undoubtedly be on the RBA policy meeting on Tuesday which is widely anticipated to see Stevens and Co cut another 25bps to the official cash rate amid growing calls for a second consecutive 50bps cut. Since the last meeting economic turmoil from the Euro-region has gained momentum, while more recently negativity from the United States has resurfaced with Friday's jobs report taking the sheen off what has generally thought signs of momentum. Adding to the RBA's conundrum, local factor continue to plague markets with non-mining related industry under pressure, while even the Chinese-driven resources boom is in doubt amid signs China is slowing. It's clear the RBA have a lot to mull over and Tuesday's policy decision at the very least promises to induce significant volatility from the local unit. With inflationary pressures subdued, the RBA are afforded ample breathing space to ease monetary policy which is likely to see a 25bps reduction, but the question remains does the board consider deterioration so great a 50bps cut is required to step ahead of the curve?

Also in focus this week  is Gross Domestic Product which is expected to see growth of 0.5 percent in the first quarter from a previous 0.4 percent - representing annual growth of 3.2 percent. Unemployment will probably see no change in May according to economist's consensus estimates with the official unemployment rate expected to rise from 4.9 to 5.1 percent. Mid-tier events on the docket this week include TD securities inflation date, Current Account Balance, AIG Construction/Services Indices, Home Loan and Trade balance data.

While one could argue a period of consolidation is in order after a notable descent, significant event and headline risk both locally and abroad puts the Aussie dollar in a vulnerable position with the balance of risk likely to remain on the side of caution. Pockets of support between 93.8 / 94-figure is a logical target from a technical perspective.