Tuesday 12 December 2017

Daily Market Update: Robust US jobs figures offer much encouragement but play second fiddle to China concerns


Simon Barry

Friday brought the latest instalment of very positive news on the US jobs market.

Nonfarm payrolls rose in December by 292,000 (private payrolls were up 275,000), both well above expectations. In addition, there were net upward revisions of 50,000 over the previous two months. The unemployment rate was steady at 5.0%, but the underlying household survey data were strong, showing hefty increases in both employment and the labor force. Meanwhile, hourly earnings were flat and rose from 2.3% to 2.5% on a year/year basis (albeit that this was a little weaker than expected).

Overall, this was a very solid report which provides important evidence of ongoing resilience of the US economy in the face of global headwinds. In fact, the December report indicates that the final quarter of last year was the third‐best quarter for US jobs growth in over five years of recovery, with payroll gains averaging 292k per month. More generally, the solid employment trends should help allay concerns that the economy is losing too much momentum despite what is shaping up to be a sluggish Q4 for headline GDP growth (now tracking at ca. 0.5‐1% following recent weakness in some other data points).

But as encouraging as the US jobs data were, global financial markets remain under major pressure in early week trading as investors continue to grapple with the unfolding situation in China. Asian stocks tanked again overnight, with the Shanghai composite down over 5% by the close, bringing its year‐to‐date losses to almost 15% following the latest policy (mis?)step taken by the Chinese central bank. The PBOC last night guided the yuan’s midpoint rate higher on the currency markets rather than lower as had been expected given ongoing market pressures to the downside.

While the move might have been intended to calm fears about a large devaluation, in fact it has served to raise more questions about fx policy, in the process generating additional confusion and uncertainty about policy formulation and implementation in Bejing. While European and US stocks have moved off their overnight lows, our sense is that a sustained stabilisation of global markets will likely require efforts by the Chinese authorities to improve the credibility of their policy actions and associated communications which have come in for some sharp criticism of late. That’s a problem that is not quickly or easily solved, however, so we need to brace ourselves for more volatility in the days and weeks ahead.

On the currency markets, sterling weakness remains a notable theme reflecting both interest rate spread changes and growing concerns about Brexit. Eur/Stg opens near the top of its recent range, trading at 74.8p having traded as high as 75.5p overnight, while GBP/USD is also at important levels of around $1.4550, having traded sub $1.45 briefly overnight. Sterling looks to be trading poorly, and the risk is of further losses for the UK unit in the short term. Rate spreads are also helping the euro higher against the dollar (as market expectations for Fed tightening get pulled back in the face of the heightened market volatility and despite the strong US jobs figures), leaving Eur/USD opening at $1.0885, up about 0.3% from Friday morning.

Turning to the week ahead, the NFIB small business confidence is announced tomorrow. The indicator is expected to increase from 94.8 to 95.0 in December. The JOLTS job openings are also printed tomorrow, with expectations for an advance from 5,383 to 5,425 in November. On Wednesday, the Fed Beige book should provide some useful anecdotal information on the economy as a whole. Control group retail sales (the most important measure – it strips out the most volatile elements) surged ahead at 0.6% m/m in November and expectations are for another solid month to be reported on Tuesday, with 0.3% m/m expected in December.

The manufacturing ISM signalled a decline in the manufacturing sector in December, so investors will be watching whether this translates to deterioration in industrial production on Friday. Expectations are for a fall of 0.1% m/m in December following a 0.6% decline in November. December (and more generally, 2015) brought some positive news on the labour market, with almost all major indicators painting a rosy picture, so there will be some interest as to whether this translates to an improvement in consumer confidence with Friday’s announcement of the preliminary University of Michigan consumer sentiment survey. The index is expected to remain at 92.6 in January. The survey’s medium term inflation expectation component will also be of interest after printing at 2.6% in November.

UK industrial production expanded at a solid 1.7% y/y clip in October and expectations are for another reading of 1.7% y/y to be announced tomorrow for November. The Bank of England make a policy announcement on Thursday, with no expectations for an interest rate change. However, given the recent slippage in wage growth and the current heightened investor focus on the two major risks (negative spillover from emerging markets/China and Brexit) to the British economy, there may be particular sensitivity to the views of the MPC on the short to medium term outlook for interest rates at Thursday’s meeting.

On Wednesday, industrial production is published in the Eurozone and expectations are for an increase of 1.8% y/y in November following 1.9% in October. The last ECB meeting was notable in that it featured an apparent clash between the heavy hitters (Dragh & Praet) and noted hawks (Lautenschläeger, Weidmann, etc.) on the council. The resulting policy decision was a loosening of monetary policy that was far less aggressive than market participants had priced in (although a portion of this was due to unrealistic market expectations) and was met with one of the most volatile European market reactions in recent history. Analysts will be curious about the details surrounding the dynamics between governing council members that led to this decision.

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