US Jobs Data Hold Recession Fears at Bay

The pessimists were dealt a blow with a US employment report that blew away expectations.  The US private sector created 301k jobs, and average hourly pay rose 0.4% for a 3.2% year-over-year pace.  Manufacturing added 32k jobs despite the poor ISM.  The unemployment rate rose to 3.9% from 3.7%, but even this bad news was offset by a rise in the participation rate (63.1% from 62.9%).  

Canadian employment data was largely in line with expectations.  It created 9.3k new jobs, all part-time.  Full-time posts fell by almost 19k after a 90k increase in November.  The unemployment rate was unchanged at 5.6%.  

The news comes on the heels of mixed news earlier in the session.  China's Caixin reported an unexpected increase in the service PMI to 53.9 from 53.8 in November and 50.8 in October.  Separately, the PBOC announced a cut in its reserve requirements, which frees up liquidity ($116 bln) and shifts the focus from the MLF (medium-term lending facility), where loans maturing in Q1 will not be replaced.  It is the first general cut in the required reserve ratio since March 2016.  

News from Europe wasn't so good.  The flash service PMI and composite readings for December were revised lower.  The service PMI stands at 51.2 from 51.4 of the flash and 53.4 in November.  The composite PMI fell to 51.1 from the flash reading of 51.3 and the November report of 52.7.  To put the numbers in perspective, consider that the composite averaged 52.3 in Q4 18, and 54.6 in all of 2018 after 56.4 in 2017.  

Meanwhile, the US House of Representatives, now with a Democrat majority, approved new spending plans to re-open the government.  However, with a Trump threatened, the Senate, with a Republican majority does not appear inclined to take up the measure.  The government shutdown is understood to a gradual headwind on growth, but the longer it is in place, the greater the disruption becomes.  

On the trade front, a mid-level US team is headed to Beijing for talks early next week.  China continues to make modest concessions and appears to be placing more orders for soy.  However, some press reports indicate that Lighthizer continues to threaten more action to get more concessions from China.   One of Trump's top economic advisers warned that companies (besides Apple and FedEx) feel the impact of the slowdown in China.  

The market appeared to have begun pricing in Fed rate cut this year.  Today's US jobs data gives credence to our sense that this is premature.  Of course, the Fed will pause.  After last month's hike, it would not be expected to move until March in any event.  By the spring the data will be clearer.  The fact the private sector created the most jobs in 10 months and average hourly earnings growth is at cyclical highs (and four of past five months at 3.0% or more), provides fuel for continued consumption growth.   

The dollar is firmer against the euro, yen, and sterling, but the dollar-bloc currencies and emerging market currencies are advancing in the new risk-on mode.  The price action reinforces the range-trade in the euro and sterling.  The greenback continues to recover from the flash crash against the yen, and the JPY109 is an important level to re-take.  The US dollar staged an outside down day against the Canadian dollar on Wednesday and has seen follow-through selling.  However, support has been found ahead of CAD1.34.  The Australian dollar had fallen to 10-year in the flash crash  (~$0.6740) and is testing a band of resistance that extends from $0.7050 to $0.7070. 

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