Just quickly ......

Friday 2nd December 2016

Just quickly ......

1. Here's a line we haven't heard for a while: "It's the US employment data today, and nobody's too bothered."  Now no self-respecting investor is going to admit to not caring too much about today's releases. In recent times, markets have hung on this monthly report and the pointers it gives for the course of inflation and interest rates. It's just that this time the atmosphere is a bit ..... well, ho-hum . That's because the market views a rate hike  on Dec 14th as just about guaranteed, and we certainly wouldn't argue with that. It's hard to imagine what could put the Fed off now, just as it's hard to imagine the extent of the opprobrium they would attract if they postponed things again.

With a 25bp rise considered a done deal, attention is now focused on the pace of future hikes  --  especially in the light of incoming President Trump's inflationary fiscal plans. Futures markets are suggesting that another rise at the June 2017 meeting is now more likely than not, and the numbers from here on (including today's) will be scrutinised with that in mind. Anyway, expectations are:

Nov Non-Farm Payrolls: +180,000 (last +161,000)

Nov Unemployment Rate: 4.9% (4.9%)

Nov Average Hourly Earnings (YoY): +2.8% (+2.8%)

2. Don't forget Italy's constitutional referendum this weekend (as if you could). One possible scenario has it that a "NO" vote might provoke political paralysis and a growth in the belief that Italy is incapable of reform. That would be bad news for a banking sector that will need investor confidence to raise the capital required to deal with its bad loan crisis. Against that kind of background, the FT pointed out a slightly disturbing fact yesterday (Capital Markets, "November by Numbers"): Banca Monte dei Paschi di Sienna, the world's oldest bank and the one in deepest trouble, now has a market capitalisation of about 611m euros (it's moving about a bit !). It will need to raise about NINE times that amount to address its issues, and failure to do so could open the door to a resolution that threatens another seven financial institutions that are looking more and more like dominos in a line.

Yup, the referendum's important and not just for Italy.

  

3. UK Sterling, November's top performer amongst the major currencies, continues to go well. Yesterday it got close to 1.27 against the dollar after Brexit Secretary David Davis let it be known that Britain would consider paying the EU for retaining access to the single market (a bit like Norway and Switzerland ?). Ardent Brexiteers may have got into a bit of a lather at this apparent softening of position, especially form someone they consider to be one of their own, but markets like the idea of a soft Brexit and sterling's strength (comparatively speaking) is being put down to the increased chances of it happening. Frankly, people are reading too much into this. Only a fool would categorically rule anything out, and whether you agree with Mr Davis' views or not, he ain't one of those.

At the risk of repeating ourselves (don't say it!) ...... of course developments such as this have a momentary effect, but ultimately sterling is stronger because it was so oversold. There are a lot of short sterling positions being squared, particularly now that the previously rampant dollar is taking a breather. In that light, it's not at all surprising that the UK currency is higher but it means next to nothing with regard to future movements. This move is much more about market positioning than it is about a reassessment of fundamentals. There'll be plenty of time for that as the Brexit process goes on .... and on ..... and on.

Have a good weekend, and keep an eye on Austria too.