Market Primed for Upside NFP Risk?

Big picture, the markets are torn between the recent run of better than expected US data which has raised expectations for the payrolls number this morning, and worries about the euro-zone debt and health of European banks (UniCredit and Deutche etc).

So far this week the dollar has been the big winner. Yesterday, it managed to get a boost from both sets of US employment data and push the EUR down-1% intraday. Until recently, signs of economic growth would be dollar negative; however, Euro at 16-month lows on refinancing concerns has the currency better bid. Glum headlines from the Euro-zone include Italy's stubbornly high 10-year bond yield (+7%), weak German data and mixed debt auctions results from France and Europe's bailout fund. Investors are growing nervous over the sheer amount of debt that needs to be refinanced in the first quarter (+262b). It's not just the sovereign debt, but bank debt, corporate debt and various derivatives that are coming due. Where is the money going to come from?

No analyst seems to have changed their forecast for today's payroll number. Yesterday's outsized ADP print (+325k) historically has technical issues and in the past has overshot the government number by a large margin. The median guess remains close to +155k. If anything, the market is primed for upside risk. Analysts note that other labor market indicators, most notably the sub-50 reading on the non-manufacturing ISM employment component, are not consistent with the very strong ADP result. This time last year ADP recorded a +184k forecast miss regarding the first-reported payroll release. Risk sentiment again seems numb over the past two sessions, unable to capitalize on the strong data yesterday. The market is afraid of Europe's debilitating reach. I guess if we miss NFP consensus those growth proxy currencies will feel the brunt of this markets ‘pain.'

The lethargic nature of this market is evident when the euro-zone releases ‘not such good' data and the currency has no interest. All the bets are on North America, at least for the first hour after the payroll print. The not so hot data saw euro-zone retail sales fall -0.8% on the month and -2.5% on the year in November, well below the -0.2%, m/m, and -0.8%, y/y, expectations. Unemployment in the zone held steady at +10.3%. Perhaps its time to admit that the EUR is more attractive as a funding currency, while the dollar is being viewed as an investment currency?

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