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Payroll Miss Sees Market Optimism Persist

In a rocky week for payroll data with ADP employment missing sharply to the downside and nonfarm payrolls coming in at just below estimates, the unemployment surprising managed to fall with equities managing to outperform as weakness in the dollar prevailed.

Last Week

The major event driving the dollar in the prior week was US employment data which barely missed expectations of 224,000 jobs added, printing at 223,000. The unemployment rate fell to 5.40% just as labor force participation hit a new multi-decade low. Aside from the employment data, comments from Janet Yellen sent stocks lower as her remarks on valuation dented optimism in the recent bull market. However, other speeches from FOMC members have underlined the possibility of a September rate hike. Greece continued to await a consensus from creditors who were squabbling over possible haircuts and terms of releasing further bailout funds. The Tuesday IMF repayment looms large if the groups cannot reach a compromise today. However, in positive momentum for the monetary union, the European Commission upgraded regional growth forecasts after seeing a broad improvement in services and manufacturing data. In Asia, the broadening slowdown in China continues to spread with the HSBC manufacturing PMI steady below the expansionary threshold as both imports and exports tumble. Neighboring Australia moved to cut rates by 0.25% to 2.00% in order to combat disinflation and persistent weakness in the commodity sector.

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Week Ahead

The key focus in the coming week centers on Europe and UK as a Euro Area GDP reading and UK interest rate decision top the list of important upcoming events. The Bank of England is widely expected to leave the key interest rates on hold at 0.50%, in-line with expectations as the Central Bank holds off on adjusting policy. A strengthening in the Euro Area economy might help the Central Bank raise rates especially when coupled with the economic policies of the Conservative party. Euro Area gross domestic product due on Wednesday is likely to show an upgraded view of the outlook with quarterly GDP expected to rise by 0.40% while annualized GDP is forecast to move from 0.90% to 1.10%. Other important indicators due to be released include Chinese Industrial Production numbers which are estimated to accelerate year over year while fixed asset investment stays relatively constant. The US will see retail sales figures with disappointments likely considering sliding consumer sentiment. Also relevant is industrial and manufacturing production data due from the UK, EU, and US over the course of the week.

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