US jobs outpace estimates; unemployment rate at four-year low
The US economy added 146,000 jobs in November according to the latest employment statistics released Friday. Economist's called for slower jobs growth of 85,000 from 138,000 in October. Private payrolls surged by 147,000 last month, negating a small drop of 7,000 manufacturing related jobs, while the official unemployment rate fell to a four-year low of 7.7 percent. The release has been considered a show of resilience from the US economy in spite of the significant headwinds resulting from hurricane Sandy which devastated much of the US east coast. The underemployment rate, referring to citizens who are not employed to their desired capacity - either in total hours worked or desired position - dropped to 14.4 percent, from 14.6 percent in October.
The ensuing minutes saw a brief period of US dollar strength before the trajectory turn in favor of risk currencies. The Euro dropped just over 3 tenths of a cent to lows of $US1.2878, before bidders returned over the course of US trade. Initially capped at short term resistance just below 1.2920, the euro received a second leg-up in the latter part of US trade before a rally to highs of $US1.2953 but eased lower before the close. The Aussie dollar followed a similar path, with an initial period of weakness met with support over the course of US trade. The local unit closed at 104.88 US cents, up 0.58 percent over the week.
Friday's data output wasn't all positive with a preliminary print from the University of Michigan consumer confidence dropping to an index level of 74.5 in December, against expectations of 82. Meanwhile, consumer credit increased to $US14-billion in October from a previous $US12.2-billion indicating a moderate improvement in consumer spending.
FOMC to headline busy US week ahead
It's another fairly busy week from a US perspective with the FOMC policy decision, retail sales and consumer price data the key releases on the agenda. Other mid-tier themes including trade balance (Tuesday), monthly budget statement (Wednesday). The Markit manufacturing PMI, industrial and manufacturing production will wrap up the week on Friday. While there won't be any changes to benchmark interest rates, market participants will be watching closely for news relating to the expiration of operation twist.
With the Fed running low of short-term securities needed to maintain operation twist, markets will be watching for any new asset purchase plans and many believe a case is strong for the Fed to establish new out-right easing initiatives in the form of quantitative easing, in addition to the current US$40 billion in purchases conducted per month. "A number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity-extension program," according to November meeting minutes.
Also in focus are possible changes to the Fed's official policy guidelines, with some members advocating a desire to define what financial conditions would likely warrant a removal of existing stimulus measures. Currently, the Fed's official line is "exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015," however the Fed discussed adopting a new guidance approach by placing explicit targets on employment and inflation before policy changes occur. Chicago Fed governor Charles Evans has in the past been the most vocal advocate of further transparency in the decision making process. Dubbed the 'Evans Rule' he believes monetary policy should remain accommodative until the unemployment rate is below 7 percent and/or inflation is above 3 percent.
On balance we see the Fed remaining dovish which implies further asset purchases may be on the agenda; this in conjunction with stronger economic feedback should continue to place pressure on the greenback. In the last few weeks have adopted more of a bullish case for the greenback given we expected a larger degree of concern surrounding the fiscal cliff - these concerns have had less impact on market performance than anticipated, which indicates Investors believe a cliff scenario will be avoided or at the very least a stop gap solution put in place.
Aussie battler ekes out weekly gains
Well maybe not much of a "battler," but the local unit managed to squeeze out moderate gains last week in defiance of the RBA's quarter-point rate cut. Well-priced expectations of a rate cut found the Aussie in a positive position after Stevens and Co sliced another 25bps off the official cash rate, but the upside was - for the most part - contained around technical/physiological resistance of 105 US cents. The week ahead for the Aussie dollar will be comparatively light in terms of top-tier domestic themes with home loan data, NAB and Westpac confidence numbers and consumer inflation expectations the leading data releases on the docket. Risk trends abroad will however remain a primary barometer for the local unit with key releases from China also critical piece of the puzzle.
China's economic fortunes look a tad brighter with data released over the weekend showing stronger than expected factory output and retail activity, amid only a slight pick-up in overall inflation growth. The National Bureau of Statistics data showed consumer prices rose to a yearly pace of 2-percent in November from a previous 33-month low of 1.7 percent. Retail sales increased 14.9 percent on year, from 14.5 percent rise in October while industrial production grew 10.1 percent in November from a previous 9.6 percent. Moderate inflation growth amid stronger retail and factory activity is considered an optimum scenario for overall growth in the region, suggesting Beijing is striking the delicate balance between inflation and economic growth.
Investors will be hoping the good news continues for China with trade data and new yuan loan activity on today's docket. Today's trade data will be particular valuable as an indicator of both international and domestic demand.