Does the Jobs Report make it a "Slam-Dunk" for the hawks ?

Monday 9th November 2015

Does the Jobs Report make it a "Slam-Dunk" for the hawks ?

Ref : General

Wow .... nobody saw that coming. Friday's October Employment data revealed a rise in Non-Farm Payrolls of 271,000, against a consensus estimate of 180,000 and a range of forecasts of 130,000 - 220,000. Headline Unemployment fell to 5.0%, close to what the Fed regards as the full "effective" employment rate. Average Hourly Earnings rose 0.4% (exp. 0.2%), giving an annualised rise of 2.5%. Hugely strong numbers, and they would seem to make the case for a December rate hike.

 Fair enough, but it's always sensible to list a few caveats :

**  Non-Farm payrolls is a notoriously volatile measure, and often subject to significant revisions.

**  The Fed will have to take into account another unemployment report (for November) before making its December decision.

 **  Any reoccurrence of a Chinese stock market rout say, and/or emerging market turmoil, may once again force the Fed to stay its hand.

**  Dollar strength associated with a rate hike is most unwelcome.

All of these are valid points. Nevertheless, at a purely domestic level the numbers do give the green light to the Fed Open Market Committee of which most members (though by no means all) are keen to start the process of rate "normalisation". Futures markets this morning now put the probability of a rate rise in December at around 70%, which all things considered now seems a little low but does reflect the fact that there are still some high-profile figures retaining their doveish position. So you can't really say it's a "slam-dunk", but you could reasonably argue that it's now highly likely.

Market reaction to such strong data on Friday was as you might expect : a jump in the US Dollar, US Bond yields sharply higher (and prices lower), Dollar-denominated commodities (e.g. Gold, Oil) lower. As we mentioned, the strong dollar is a problem for the Fed. Back in March and April when Euro / US$ was knocking around 1.05, US officials made big efforts to talk some weakness into the greenback (with some success). We can expect the same sort of thing this time, with the emphasis being put on how gradual and shallow any rate-raising process will be.

And talking of foreign exchange, perhaps the most interesting play on at the moment concerns UK Sterling. If Friday's numbers in the States raised the likelihood of higher rates (and stronger currency), Thursday's inflation report and remarkably doveish statement by Bank of England governor Mark Carney did exactly the opposite. For much of the year, with the US and the UK perceived as being on very similar growth paths and facing the same questions as when to start raising rates. the Dollar and the British Pound have moved in broadly similar fashion. That link now looks to have "de-coupled". It's true that the much smaller and more "open" UK economy is more closely linked to global events and is seeing even less evidence of inflationary pressures than the US, so de-coupling seems logical. Have a care, though ..... recent history has shown (too often) that the Bank of England is not beyond changing the tone of its rhetoric at the drop of a hat should they perceive a change in circumstances.

 Look out for ..... Portugal

 Ref : "Leftwing alliance poised to take power in Portugal" , The Financial Times, p.8

For some time EU officials, only too aware of what the electoral success of Syriza meant for Greece, have been nervously watching the progress of other anti-austerity parties across Europe. Almost certainly, they're about to get the chance to judge just how damaging another alliance with anti-austerity credentials might be to the Euro and to the EU as a whole. 

In Portugal , the leader of the main opposition socialist PS party Antonio Costa has put together a left-wing alliance with the radical Left Bloc party (BE) and the Communist party (PCP) and will tomorrow oust the two week old minority government of centre-right Pedro Passos Coelho.

In common with some other Eurozone nations that not long ago stood at the edge of a financial precipice, Portugal has done well in pulling itself back from the brink but has had to swallow some tough medicine in order to do so. The new coalition government will say "enough is enough".

Mr Costa has been making some of the right noises, particularly about keeping the budget deficit below 3% of GDP but with partners like the BE and PCP confidence in the new government's fiscal rectitude is not high, and there will be concern that the installation of such an alliance will provide a boost to other anti-austerity parties in the Eurozone on both the left and the right.

 How do we judge how well or badly the market believes Portugal is doing ?  Keep an eye on the premium demanded by investors for buying Portugese Government bonds over their German equivalent. Currently, Portugal 10yr bonds yield 2.72%, German 10yr Bunds 0.69% .... a premium of 203 bp and one that has already widened considerably.

Portugal may be a comparatively small player in the context of the Eurozone economies, but its fortunes will be closely scrutinised.