Euro And DAX Highs Come Under Pressure From German Employment

German Unemployment Change (APR) (07:55 GMT)
German Unemployment Rate (APR) (07:55 GMT)
Expected: -40K
Expected: 9.1%
Previous: -65K
Previous: 9.2%

How Will The Markets React?
The European markets have been largely overlooked by international investors this week as market participants concern themselves with big event risk from the US. However, with the US economic calendar absent a top market-moving indicator until Thursday’s ISM services survey, global markets will be able to focus on German unemployment figures. Price action surrounding this report will be interesting since capital markets will have just reopened after the Labor Day holiday. According to economists’ estimates, unemployment in Euro Zone’s largest economy dropped 40,000. While this would be the smallest improvement in overall employment in seven months, it would also mark the fifteenth consecutive month that the gauge has reported at worst no change - a considerable trend for a country that has long struggled with joblessness. What’s more, the change in unemployment is expected to help trim the unemployment rate to new multi-year lows. Currently reading 9.2 percent, the market is expecting the jobless rate to drop back to 9.1 percent to match the lowest level since June of 1993. Taken into context, this indicator would certainly brighten an already luminous economy. Germany is already enjoying its fastest pace of expansion in six years with considerable support from both export and domestic channels. On the other hand, consumer spending is not completely out of the woods just yet. Retail sales and other related consumption indicators have not confirmed whether or not the VAT tax hike at the beginning of the year is stifling German’s. Should labor trends continue to improve in the months ahead, it would certainly be a boon for consumers who have to deal with the burdensome duty. Alternatively, should employment start to give way, it would remove a key pillar for the consumer sector and could in turn upset the economy’s steadfast pace. Certainly, the ECB will monitor the data for its policy meeting on May 10th.
Bonds - 10-Year Euro Bund Futures
Forming a pattern similar to EURUSD, Bund futures have fallen into a rather tight range between 113.36 and 114.45 over the past few weeks. The benchmark futures contract has struggled in this band of congestion while investors look for a piece of solid economic data to resolutely decide direction of the economy or interest rates. While the market may very well wait until next week’s central bank decision to finally move the Bund beyond its defining technical levels, tomorrow’s German unemployment number could also have its way with price action. The gauge has reported unchanged or improving employment trends for well over a year now, so traders will handicap yet another dip in the jobless gauge. At the same time, this opens the market to downside surprises and a break higher.

Like we said yesterday, EUR/USD continues to hold a tight range between 1.3590 - 1.3680 ahead of Friday’s NFP report, and today was no different. The pair dove from 1.3666 down to 1.3595 on the release of stronger-than-expected US ISM Manufacturing, however, EUR/USD quickly returned above 1.3600 as dismal pending home sales cooled some of the optimistic dollar sentiment. The release of German labor market data will likely add to Euro pressures, especially as the market-moving indicator is anticipated to improve once again this month. Nevertheless, with employment conditions in Germany remarkably tight, EURUSD could see some lift towards the 1.3680 as expansion in the country should be able to maintain pace throughout the year. On the other hand, the Euro is still hugging the 1.3600 level, and an extremely disappointing release could push the pair down to trendline support.

Equities - DAX 100 Index
European equity markets were closed for the Labor Day holiday, but a rise in US markets today could add some buying pressure to Germany’s DAX 100 index tomorrow. The release of German labor market data could tip the scales either way, though, as indicators have consistently shown major tightening. In fact, employment readings are estimated to improve once again, with the unemployment change forecasted to fall -40K while the employment rate is expected to fall back to 9.1 percent - the best level since 1993. Should the figures prove optimistic, equity traders could buy shares up as high employment levels keep consumption and domestic demand on track. On the other hand, if the labor market reports show a surprising deviation from the norm, the DAX could ease back from recent highs as growth prospects would quickly diminish.