Risk assets rally as US employment data provides a pleasant surprise

Tom Tong08/Oct/2012Currency Updates

Equities and most other risk assets rallied back to cycle highs, buoyed by decent employment numbers out of the US as well as the absence of dramatically negative news from Europe. Last weeks data gives some reassurance that the world economy is not about to follow Europe back into recession. Therefore we have no quarrel with current asset valuations, particularly given the increasingly aggressive monetary policy easing we are seeing from just about every central bank. FX markets were relatively uneventful; the Euro followed equities higher to end the week just above the 1.30 mark, while Sterling traded almost in lockstep with the dollar.


The PMI sentiment indices provided further evidence that the British economy is flat lining. Services and manufacturing shrank slightly, while construction rose. This is not consistent with GDP growth that is hugging the zero line, after stripping out the Olympics and calendar effects, and therefore we think that the labour market is more likely to surprise negatively in the next few weeks. More worrisome was the BCC survey of capacity utilisation, which rose lightly, indicating that the productive capacity of the British economy is being damaged by austerity policy and the chronic demand shortage. Meanwhile, Sterling traded oblivious to macroeconomic indicators. It appears that FX traders are only paying close attention to Bank of England policy news, of which there ere none last week.


The ECB sound a hawkish note last week. It did not cut further the repo rate from its current level of 0.75%. Further, it repeated that it will not buy peripheral Government bonds in the open market until the respective Governments request a bailout and abide by the resulting conditions, in a pointed reference to Spain. It therefore put the onus squarely back on politicians. We are somewhat mystified by the Spanish Government attitude. Micawber-like, it keeps delaying the formal request for a bailout, perhaps hoping that somehow something will turn up. We strongly doubt it, and expect that formal request to happen well before year end. Outside of politics,one of the most important, yet least followed indicators, Spanish payrolls, posted another dismal number; the three-month monthly average is -40,000, showing that the Spanish economy is nowhere near stabilisation. However, in the absence of dramatic news, the Euro followed equities higher against both the dollar and the pound.


Us macroeconomic news generally surprised to the upside last week. The rather negative news from durable goods and factory orders were offset primarily by the solid employment numbers. The US economy created 117000 jobs in September, a relatively unexciting number that was however accompanied by strong upward revisions to August and July. The household survey, however, painted an altogether more upbeat picture, as the unemployment rate dropped to 7.8%. For once, this drop was not due to labour force withdrawal. It looks like the steady loss of Government jobs since 2008 is coming to an end, and we expect construction and housing to continue to provide a modest uptick to job creation. At the very least, last week numbers relieve us from the need to revise downwards our expectation for US growth, which we are penicillin at between 1.5 and 2.5% for the full year of 2012.


Written by Tom Tong

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