The week ended with a boom for the US economy as the November jobs report was released on Friday. 321,000 new jobs were created in the last month, well ahead of economists’ forecasts of 230,000. This piece of news puts the US economy on track to achieve the best year of jobs growth since 1999. However, US equities reacted only mildly to the news, with the S&P 500 clocking in a gain of 0.17% for the day and of 0.38% for the week. This suggests that, at least for the main index, valuations are already stretched and reflect the good prospects for the world’s largest economy. Indeed, the NASDAQ even fell in the last five days, trending decisively lower on Monday and later failing to recover. It closed the week with a loss of 0.23%.
The effect of payrolls data on bonds was instead dramatic, and especially so in the 2 and 5-year section of the curve. Yields of both instruments went up 10 bps on Friday only, and by a larger amount during the entire week. What surprised bond markets was especially the news on average hourly earnings, which went up in November by 0.4%. The latter is the strongest figure of the year and comes after a flat reading in September and a plus 0.1% in October; it is early to tell whether last month’s number reveals a new trend, but it can be that finally the tightness of the labour market is feeding into wages growth, which could have important consequences for inflation expectations. Indeed, bond futures now price in a rate hike for the June-to-July period next year rather than for September.
Accordingly with the importance of this week’s figures, the dollar edged out gains against all its major trading partners. In particular, it ended the week 2.35% higher in Japanese yen terms, breaking the barrier of 120 JPY/USD. While it had lost ground against the euro immediately after the ECB meeting on Thursday, it more than recouped after the publication of jobs data. We can see the two shocks clearly in the chart below.
The end of next week will be again rich in news contents; on Thursday we will see the data on retail sales, while on Friday the producers’ price index will be out. The first piece of news will be very important to assess pass-through of GDP growth to consumption; preliminary statistics indicate that Black Friday spending especially was weaker than last year, so there might be room for disappointment. The second piece of news will also be important for monetary policy developments, as jointly rising wages and producers’ prices would not be ignored by the Fed in their next meeting, although declining crude prices suggest the reverse is likely to be true. Finally, the current state of political bargaining in Washington implies that failure to pass a budget or at least a temporary funding bill by Thursday will cause a government shutdown. Although this is a tail event, it adds to the balance on the S&P 500 index which we believe is already negative; with the VIX coming down under 12 from over 14 at the start of next week, put options on the index appear attractive – consider adding some to your portfolio even as a cheap hedge for the next month.
Some interesting data this week for the United Kingdom’s economy: consumer credit – the amount of money that consumers borrow – lifted up once again close to its 2 year high, reaching £1.087b last month. If one were asking whether there was a demand problem in the U.K., it really wouldn’t seem like there was. Consumers are on average more confident, asking for more credit (and receiving it), thus spending more and preparing for the holiday season. This is shown also in the previous GDP figures (see last week’s market recap) where GDP rose primarily due to an increase in private consumption.
On the business side, we had the Markit Manufacturing Index coming in at 53.5 vs 53.0 consensus, once again beating expectations and showing that the manufacturing sector is picking up again after quite a flat 2014. Market Services PMI was also higher at 58.6 vs 56.6 consensus.
The housing market, once again in line with our previous analysis, seems to be cooling down and one can see that in this week’s lower than expected mortgage approvals and Construction PMI losing pace and slowing down at 59.4 with respect to last month’s 61.4. Halifax House Prices, the UK’s longest running monthly house price series, showed how compared to last month, house prices fell from an 8.8 % to an 8.2 % increase, though a smaller figure was expected. One reason that may explain why the house market may still be hot –though cooling down- is the uncertainty that interest rate rises will come later than ever at this moment.
As expected, the Bank of England’s meeting on 4th of December led to interest rates being kept where they were, at 0.5 %. To sum it up, it certainly looks like the U.K. is entering the Christmas period with rather strong fundamentals. But, taking into account the article posted two weeks ago on U.K. labour productivity, we will have to wait for productivity to pick up consistently in order to confidently state that the U.K.’s recovery is complete.
The week opened with the release of disappointing Italian data. In the third quarter, GDP decreased by 0.5 percentage points versus an expected drop of -0.4%. The negative mood was also bolstered by German PMI contraction: PMI stayed at 49.5, below an expectation of 50. This result strengthened the expectations for an imminent European QE. In the light of that, 10yr BTP yields decreased by 21bps on Monday, reaching a low of 1.97%. Anyway, the main event of the week was the ECB conference set on Thursday the 4th. The council kept its main interest rate at its record low of 0.05% (as expected) and renewed its commitment against inflation. The ECB president underlined he intended to expand the balance sheet to €3tn. He also stated the ECB does not need unanimity in its government council to take critical decisions, as he declared the council lost unanimity. The market strongly reacted to these statements. On Thursday, the DAX lost 1.2% and the FTSE MIB decreased by 2.8 percentage points. Anyway, strong German economic results along with well above expectations US nonfarm payroll figures helped the Eurozone to rebound on Friday, erasing all the losses of the previous day.
The EUR/USD, instead, showed a significant downward trend in the week. The trend was reversed only briefly during Draghi’s speech. The downward direction was mainly due to QE expectations and, due to strong US figures on Friday, after the NFP figures, investors strengthened their belief of a coming rate hike and the Dollar consequently appreciated.
Even without any relevant data release, this week was very volatile for Japanese assets. The Nikkei 225 enjoyed a nearly constant upward trend concluding the week 2.83% higher, at 17,923 points.
Such a positive trend was mainly led by improved expectation over the parliamentary election that will bring Japanese voters to the pools on the 14th of December. The five most important newspaper published articles expecting Mr. Shynzo Abe to win the election easily and to receive a renewed mandate. In fact, Abe’s opposition is showing that it is not united and definitely it is not ready to sustain such a quick electoral campaign. Another 4 years of Abenomics would mean more expansive monetary and fiscal policies and this expectations was one of the main driver of the Nikkei 225 move.
The very same bullish mood was reflected in the Japanese Yen, that experience one of the worst week of this year. In particular, the USD/JPY reached levels last seen in 2007, starting on Monday at 118.64 and concluding on Friday at 121.43. However, much of this move was due to the dollar strength.
Looking at next week, data releases will be very soft and the club expects the parliamentary election topic to continue to dominate the markets.
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