Pre Non Farm Payrolls Post UK IP amp Indices Technicals

UK industrial production soared by 2.9% in July, its highest increase in over 25 years, while manufacturing output jumped 3.2%, the strongest level in 10 years, following a 2.9% decline in May.  On a year-to-year basis, industrial production fell 0.8% after a revised 3.8% decline in June. Year-on-year industrial production has been in negative territory for 16 consecutive months. Statistical factors contributed to the strong figures as the increase was boosted by a weaker than usual June resulting from the extra Jubilee holiday.

The Bank of England anticipated the exaggerated weakness from the jubilee holiday, but that did not prevent it from revising downward its growth outlook for the rest of the year to zero from the +0.8% predicted in May.  Yesterday, the OECD lowered its 2012 UK growth outlook to -0.7% from the previously issued +0.5%. But UK equities and the UK currency continue to push higher as the BoE is expected to maintain rates unchanged without adding any more QE for at least two months.

A potential medium positive for the FTSE 100 is that it has yet to hit new highs for the year, unlike the Dax 30, S&P500 and NASDAQ. In fact, the FTSE 100 is only +4% year-to-date (in GBP terms), compared to the Dax 30, S&P500, Dow 30 and NASDAQ, which are +23%, 14%, 9% and 20% YTD in local currency terms respectively.

EURUSD accumulates further ground in its fourth consecutive weekly gain (longest winning streak since October 2010), nearing the June high of 1.2745 mentioned in yesterday’s chart. Propelled by confidence that Draghi has overcome the Bundesbank barrier with the blessing of Chancellor Merkel, the ball is sent into the court of national governments, implying that Madrid has no choice but to make an official request for a sovereign bailout.

Onto US Payrolls
The onus for an upside surprise in today’s US jobs report is provided by yesterday’s blow-out figures in August ADP coming out at 201K versus the expected 140K, from a upward revised 173K, and the 53.7 in services ISM (versus expected 52.5 and prior 52.6).

The markets are expecting +130K in August from July’s +163K , with the unemployment rate unchanged at 8.3%.

The bar for an upside surprise may have been raised to as much as 160-170K following yesterday’s ADP and services ISM. This suggests that an excuse for profit-taking may ensue in the four-year highs on the S&P500 if we see a figure between 100K and 150K. But as long as the unemployment rate does not increase from 8.3% and payrolls stay above 100K, then this obliterates all remaining ‘slim’ chances for a September QE3.

Yen Crosses Cheering up
As USD/JPY ventures above 79, finally breaking above its 55-DMA, this paves the way for further gains in EUR/JPY, USD/JPY and AUD/JPY, with CAD/JPY and USD/CAD in focus ahead of Canada’s jobs figures, which are expected at +10K from -30K and the unemployment rate unchanged at 7.3%. Thus, as long as we avoid any negative surprise in the US jobs report and Canada figures show at least +7 to +10K with no rise in unemployment, then a retest of 80.80 in CAD/JPY is in the works before a retest of the 200-WMA of 81.80. Meanwhile, 78.80-90 remains a key confluence support for the pair, backed up by a rare triple confluence of the 55, 100 and 200 day moving averages. EUR/JPY 101.30 remains in the works.