US NONFARM PAYROLLS DATA FOLLOWED BY FIREWORKS
On Friday the US produced stellar Nonfarm Payroll data, much stronger than expected. Payrolls increased by 271K, the highest monthly growth this year.The unemployment rate dropped to 5% and wage growth (2.5% Year on Year) accelerated. This greatly boosts the case for a December interest rate hike by the Federal Reserve (Fed), where policymakers have begun to worry the economy might eventually overheat without higher borrowing costs.
With Fed officials already saying they don’t want or expect the jobless rate to fall much further, it would take a devastating blow in the November hiring data or mayhem in financial markets for the majority of policymakers to give up on their expectation of a hike in December. Since Mark Carney spoke on Thursday the Dollar has climbed 2% versus Sterling, from 1.5385 to the current 1.5083, highlighting the different outlooks of the Monetary Policy Committees.
Sterling will look to regain some of the ground it lost last week following a very dovish outlook by Mark Carney, dashing the possibility of a UK hike by end of/early next year. It will be interesting to see how the Pound trades against the Dollar this week as Carney has now hinted at a slight difference in direction to the Fed, who seem poised to hike rates by the end of the year. We have to wait until Wednesday, however, for any economic data out of the UK – unemployment and earnings data will be out. Previously, employment and wage growth seemed to be one of the main factors the Bank of England were looking at before acting on a rate rise, but now Carney seems increasingly more wary of global implications.
We didn’t have a great deal to look for from the Eurozone (EZ) as last week closed out. We will have to be patient this week too as top tier data is not due until Wednesday. Taking a broader view of the economic situation in the EZ – and considering the price action recorded on Friday – it’s wise to consider the rumours that are circulating as to what the European Central Bank (ECB) are likely to do come December.
It is widely expected that ECB President, Mario Draghi will announce an adjustment to the degree of monetary policy in the December meeting in an attempt to stave off the downside risks to the bloc economy and to stimulate some level of positive movement in inflation – which is in negative territory and well short of the Central Bank’s target. This could mean an extension of the current quantitative easing (QE) programme, which had an original maturity date of September 2016. There are also rumours that the President will cut the current deposit rate from an already negative -0.2% to -0.3%. Analysts are calling for further Euro weakness and an extension to QE, along with a cut in the interest rate. As the month progresses these could well be gradually “priced in”; where traders act as if it’s already happened.
Data to watch: Tuesday – UK Inflation Report Hearing, US Wholesale Inventories. Wednesday – UK Unemployment Rate, Average Earnings, Claimant Count Change and Speeches from Mark Carney & Mario Draghi. Thursday – US Initial Jobless Claims, Budget deficit $130.0 bn; Friday – Euro GDP, US Retail Sales, Retail Sales ex autos up, Producer Price Index, PPI excluding Food & Energy, Business Inventories, Reuters/Michigan Consumer Sentiment Index.