U.S. Employment Rises Much Less Than Expected
Employment in the U.S. increased by much less than expected in the month of December, according to a report released by the Labor Department on Friday. The report said non-farm payroll employment edged up by 74,000 jobs in December following an upwardly revised increase of 241,000 jobs in November.
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Dollar Moves Muted Ahead Of NFP
The main event of the week is here: the release of U.S. employment data. Will today’s nonfarm payrolls (NFP) report prove to be the game changer that many are secretly hoping for? Foreign exchange (forex) investors are eager to see if the NFP data will show a dramatic jump in new jobs growth and quite possibly the biggest gain since the Great Recession ended. Many market watchers appear to have reserved their opinions ahead of the release – an unusual turn of events – while quietly expecting the best of outcomes. There seems to be a conviction for strong data, especially after this week's ADP high print. With the Federal Reserve declaring last month that it would begin to taper its asset purchases in January, investors are keen to see how a strong NFP report will impact the aggressiveness of the Fed’s bond-buying drawback.
This market is short the 18-member single currency both outright and on the crosses, and to be fair, probably a tad concerned after European Central Bank (ECB) President Mario Draghi’s press conference yesterday. Consensus expects the ECB to remain dovish, act dovish, but the timing of having to do anything dovish may have been pushed further out. Hence, there is no real need to rush out and dispense with one’s EUR on a yield basis just yet. However, these shorts are at risk from an NFP surprise. Market vulnerability rests with a weaker print.
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Consensus is looking for a December NFP gain of +190k to 215k, and an unemployment rate at or close to last month’s +7% print. Investors seem to be buoyed by the recent activity indicators — retail sales, industrial production, and construction spending — they have all firmed. If we throw in small business hiring plans improving in recent months, and this week’s ADP figures, it is difficult not to be optimistic.
However, the naysayers will be expecting outside factors to play a part this morning. The biggie is the weather; it can often play a larger role at this time of year. So, if there is a large departure from expectations, everyone will need to look a bit deeper and figure out the number of workers who could not work or who had their hours reduced due to extreme weather before offloading those short-EUR positions again.
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FOMC Minutes Confirm Expectations
Overall, this market remains bullish on the USD and it expects price action to continue mirroring U.S. Treasurys – higher yields equal higher prices. Recent U.S. data trumps the emerging markets and has favored the gravitational pullback toward American assets. Rate divergence will do that for you. For the dollar to garner much stronger traction, an NFP print north of +250k will probably take us out of this week’s contained trading range, favoring higher yields (U.S. 10′s +3%) and a stronger dollar. However, if closer to consensus, and depending on the details, we are back to apathy trading again. Obviously, a dismal number and those EUR shorts will be scrambling to cover.
It has not all been about jobs. The main playmakers got to reveal their own monetary hands this week, some understandably with mixed reactions. But more importantly, the market seems to have taken whatever new information was forthcoming in stride, likely due to the lack of market interest so early in the 2014 campaign.
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Midweek, the Federal Open Market Committee (FOMC) minutes were fairly benign and did not spring any new surprises. Committee members believe that the benefits from the Fed’s quantitative easing (QE) program are probably diminishing, with most believing that paring back the Fed’s asset purchases is prudent. Consensus favors measured steps with a few members even calling for a larger reduction than the token $5-billion Treasurys and $5-billion mortgage-backed securities.
With respect to forward guidance (a buzz phrase that policymakers will be leaning on more throughout this year), many on the FOMC are inclined to stand pat with the current thresholds. What is clear is that the FOMC’s members are reluctant to link any future rate hike solely to the unemployment rate (Governor Mark Carney at the Bank of England could take a leaf out of the Fed’s book on this). Some of the team even believes that the +6.5% unemployment threshold could be lowered. Other topics discussed included inflation and how it was to be monitored carefully, and the possibility of placing more weight on potential asset bubbles in order to maintain financial stability. None of it came as a surprise to the market; resulting in a benign market reaction.
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Carney, Draghi Play it Safe
Governor Carney did not stray from the Bank of England’s (BoE) well-beaten path either. As expected, the Monetary Policy Committee kept both rates and QE unchanged at +0.5% and +£375-billion, respectively. Some members of the market had tentatively expected the governor to provide an accompanying statement, perhaps to provide more clarity on the unemployment forward-guidance portion. U.K. policymakers have called it wrong, underestimating the strength of the British economy, especially now that the unemployment rate is approaching the +7% level.
The market literally held its breath for the ECB’s statement yesterday, with a small percentage of dealers bracing themselves for a surprise ease announcement. However, Draghi and the governing council were to disappoint, as they decided to keep the refi- and depo-rates on hold at +0.25% and +0.0%, respectively. In the regular press conference that follows the central bank’s release, Draghi managed to insert a completely new sentence that immediately weighed on the euro: he vowed “decisive action if necessary.” The market concluded these words reinforce expectations that the ECB will act this year. Obviously, both timing and what tool the ECB will use is anyone’s guess. The ECB will be called to arms if an unwarranted tightening appears in money markets or if there is any further deterioration in the inflation outlook.
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10 Wednesday Reading - Collapse of oil and gas prices, Good Way to Miss S&P 500 Gains, Fiscal Armageddon, and more
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- Obsessing Over Profit Margins Is Good Way to Miss S&P 500 Gains (Bloomberg)
- Energy Industry Is Gassing Down: Collapse of oil and gas prices has producers rethinking output (WSJ)
- Amazon Vs. Uber In the Delivery Wars (Climateer)
- With Eye on Fiscal Armageddon, Texas Set to ‘Repatriate’ Its Gold To New Texas Fort Knox (Talking Points Memo) see also Texas wants its gold back! Wait, what? (WonkBlog)
- What Happens to Stolen Art After a Heist? (Bloomberg)
- Apple and Google Battle over Personalization and Privacy (New Yorker)
- Cassidy: R.I.P., Free-Trade Treaties? (New Yorker)
- Confirmation Bias: How Intelligent People Develop Totally Incorrect Beliefs (Psy Blog)
- Falling Global Inequality Defies Piketty’s Dark Vision (Bloomberg View)
- A Thirsty Colorado Is Battling Over Who Owns Raindrops (NY Times) see also Pope Francis calls for an end to the ‘tyrannical’ exploitation of nature by mankind (The Guardian)
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