Expert Analysis of Today's Market

• The dollar rose against most key currencies Thursday despite downbeat data on the US labor market and services sector. US employment declined for a sixth consecutive month and the US labor market showed continued deterioration. The US services PMI unexpectedly contracted in June on falling orders and employment, but it was counterbalanced by services contraction in the euro-area and UK. The market had priced in a worse US employment report, so the dollar’s gain was a classical sell-the-rumor-buy-the-fact situation. The yen fell as US equities closed mostly higher ahead of the long 4th of July weekend.


• The EUR/USD fell the most in over three weeks after European Central Bank President Jean-Claude Trichet raised the ECB’s benchmark interest rate by a 25-basis point to 4.25% but implied he will not raise rates next month. The pair was also pressured by the weaker-than-expected EMU services PMI indicating slowing EMU growth. The lax US monetary policy and slow US economic growth support the EUR/USD. Slowing EMU economic growth may reduce Europe’s growth advantage and the ECB’s dovish stance may lower the euro’s increasing yield advantage.

Financial and Economic News and Comments

US & Canada

• US non-farm payrolls fell for a sixth straight month by 62,000 in June, while revisions to April and May subtracted 52,000, data from the Labor Department showed. Private payrolls declined 91,000 in June and accounted for all the downward revisions to April/May. The weakest sectors were employment services (down 59,000), construction (down 43,000), and manufacturing (down 33,000). The strongest sectors were education/health (up 29,000) and leisure/hospitality (up 24,000). The unemployment rate held steady at 5.5% in June after rising the most in two decades in May. Average hourly earnings rose 0.3% m/m to $18.01 in June, up 3.4% y/y. Overall, the June employment report indicates the US labor market is significantly weakening.

• US initial jobless claims rose 16,000 to 404,000 in the week ended June 28, the Labor Department said. The 4-week average of new claims increased 11,250 to 390,500. Continuing claims fell 19,000 to 3,116,000 in the week ended June 21. The 4-week average of the continuing claims rose 8,750 to 3,110,750. The overall figures show continued downbeat conditions in the US labor market reflecting weakness in the overall economy.

• The ISM non-manufacturing composite index fell more than expected to 48.2 in June, the lowest since January, from 51.7 in May, indicating contraction in the US services sector, data from the Institute for Supply Management showed. The indexes for business activity, new orders, employment, and new export orders all declined in June. The new orders index dropped to 48.6. At 43.8, the employment index was the lowest on record. The prices paid index surged to 84.5, the highest on record.

• US Treasury Secretary Henry Paulson joined with UK Finance Minister Alistair Darling to warn that the nearterm economic outlook remains difficult and the global inflation threat is serious. High oil prices represent a “strong headwind” for the US economy and are likely to prolong its slowdown, Paulson said. His comments came as oil breached $145 a barrel. The US economy is facing a “tough” period, with the credit crunch and the housing market’s woes also weighing, he said.

Europe

• The eurozone services purchasing managers index (PMI) fell to 49.1 In June from 50.6 in May, below an initial reading of 49.5, indicating contraction in Europe’s service industries for the first time in five years, Royal Bank of Scotland Group Plc reported.

• European retail sales unexpectedly rose 0.2% y/y in May, rebounding from a 3% y/y fall in April and a 2.3% y/y decline in March, Eurostat said. Retail sales increased 1.2% m/m in May after declining 0.6% m/m in April.


• Germany’s final services PMI was revised lower to 52.1 in June, down from 53.8 in May.


• The UK services PMI fell to 47.1 in June from 49.8 in May, showing the most contraction since October 2001, the Chartered Institute of Purchasing and Supply said.

• The European Central Bank raised its benchmark interest rate by a quarter-percentage point to 4.25%, as forecast, to tame accelerating inflation despite signs of euro-area economic slowdown.


• Following the ECB’s rate hike decision, ECB President Jean-Claude Trichet said the ECB has no bias on future policy moves. “The monetary policy after today's decision will contribute to achieving our objective of price stability,” Trichet told a press conference. “Starting from here I have no bias. You know of course our constant position which is part of our monetary policy handling -- we have no pre-commitment on the medium term.” Trichet did not use his old code words like “strong vigilance” or “heightened alertness” for follow-up rate hikes, though he cautioned against drawing conclusions from this. “The fact that we have not mentioned heightened alertness nor strong vigilance doesn’t mean anything,” he said. The ECB’s rate-hike decision today shows the ECB is serious about its anti-inflation mandate, perhaps more serious than the Fed or the Bank of England in combating inflation.

Asia-Pacific

• Australian’s trade deficit was A$965 million in May, in line with expectations. Exports increased 1% to A$21.9 billion and imports rose 6% on rising gas prices to A$22.8 in May, the statistics bureau said.

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