Market View on US Employment Data Likely to be Revised

Market view on US employment data likely to be revised “A solid labour market backed up the Federal Reserve’s decision to halt its QE3 round of asset purchases this month” and confirmed that the economy is expanding at a rate “that may yet force the Fed to raise interest rates as early as next spring,” opined the FT. Market News International agreed that the Fed “got another green light to raise interest rates.” So why did Fed funds rate expectations collapse 9 bps in the long end, 10-year yields plunge 10 bps, and the dollar fall against every currency we track except the beleaguered RUB?

Initially, investors were unsure about whether the weaker-than-expected gain in payrolls or the unexpected drop in the unemployment rate was more significant. In the final analysis, positioning and international developments may have been more important than the outlook for US rates. In the bond market, real money investors apparently went into the report underinvested and speculative accounts were short, and after rates failed to rise, capitulation trades sent yields sharply lower.

The downward pull of falling Bund and JGB yields probably influenced investors as much as the sluggish gain in average earnings as the spreads of Treasuries against those markets has widened out considerably recently. (The Treasury-Bund spread is the widest since June 1999.) The dovish repricing of the Fed funds futures remains more of a mystery to me. The fact that average earnings growth isn’t accelerating is not the same as earnings growth slowing and hence should not warrant such large downward shift in expectations, in my view. I believe this shift is likely to be reversed in coming days and the dollar resume its uptrend.

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Catalonia held its straw vote on independence Sunday and an overwhelming 81% of the voters approved of independence. While the vote is non-binding – indeed, it’s illegal – it just adds one more bit of uncertainty to the EUR.
Today’s indicators: Overnight, China announced that its CPI rose 1.6% yoy in October, unchanged from September and in line with expectations. The PPI on the other hand fell 2.2% yoy, a faster rate of deflation than in September. Low inflation in China has implications for inflation worldwide, since it means lower import prices nearly everywhere. In Australia, home loans for September fall 0.7% mom, a slightly slower pace than in August but more than expected.

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During the European day, the ECB is expected to announce the size of settled covered-bond purchases. In Norway, CPI inflation for October is expected to slow down somewhat, adding to the recent weak data coming out from the country. That is likely to keep NOK under selling pressure, in our view. Bank of England Gov. Mark Carney speaks in Basel, apparently in his role as chairman of the Financial Stability Board, while ECB’s Mersch speaks in Germany.
In the US, we get the new labor market conditions index for October. This is a monthly index that draws on a range of data to give a better sense of the employment conditions. It aims to produce a single measure to gauge whether the labor market is on the whole improving. In September, the index came 2.5, so a reading above that should indicate an improving labor market.
Canada’s housing starts for October are also coming out.
This week: There are no major central bank meetings this week. The Bank of England will publish its quarterly Inflation Report on Wednesday (see below), while the ECB’s Survey of Professional Forecasters comes out on Thursday.
Internationally, the week’s data will center on inflation and production. CPI data came out from China and will be released from Germany, France, Italy and several other European countries. Industrial production figures are coming out from China, Japan, and the EU.
Friday’s preliminary Q3 GDP figures for the Eurozone will be the big Eurozone indicator for the week. Many of the individual countries will also release their growth figures. Eurozone’s preliminary GDP for Q3 is expected to have moderately expanded from a stagnating Q2, while figures released from Germany, Europe’s strongest economy are likely to show that the economy expanded 0.1% qoq in Q3 from a -0.2% qoq contraction in Q2. The recent disappointing German factory orders and industrial production in September, increase the possibility for a below-expectations reading. Other EU data out this week includes the Sentix index of investor confidence.
China has a considerable number of indicators coming out this week. In addition to those already mentioned, retail sales, foreign direct investment and fixed asset investment are due out. That could cause some volatility in AUD and NZD.
Britain’s labor statistics on Wednesday are likely to be one of the main events of the week. The nation’s unemployment rate for September is expected to decline to 5.9% from 6.0 and average weekly earnings are expected to rise, indicating less slack in the labor market. In addition, the BoE inflation report will have new forecasts for growth and inflation. These should give us more insights into the recent data that suggest a slowing pace of growth.
The U.S. data calendar is comparatively light. Friday’s retail sales figure for October, will perhaps be the biggest indicator. It’s expected to show a rise in sales, which could be dollar-supportive. Thursday’s Job Opening and Labor Turnover Survey (JOLTS) is expected to show a decrease in job openings.

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