US Jobs and European Woes Vie for Attention

The US dollar is generally doing better today, but this seems to be position squaring ahead of the US jobs data. In my work, I have empahsizeed short-term intreest rate differentials between the US and German (2-year notes) that has done a good job of tracking the euro-dollar exchange rate. Today it stands at 57 bp in Germany's favor, the smallest since Oct 19 and is at its 20-day moving average,for the first time since Sept 8. Before getting too excited, let's see how the employment data shakes out.

I suspect if the risk on the jobs data today is on the upside. It is among the most difficult numbers for economsits to forecast as there are few inputs. Both ISM reports, the ADP report, the weekly initial jobless claim (on the week of the survey), the Challenger lay-offs suggest a reasonably good number.

I think the $1.4100 support area, where the euro finished on the day of the FOMC announcement is key. And on the upside, the hourly downtrend line off yesterday's North American high and today's Asian high and European high comes in near $1.4220.

The Federal Reserve’s QEII is clearly the dominate development this week. Yet we continue to monitor events in Europe that could in the coming period rival or even supersede the US developments. Tensions continue to rise in the peripheral of Europe. The EU decision to endorse Germany’s initiative for a permanent crisis mechanism to be embedded in the Lisbon Treaty that will ensure that the private sector and not German tax payers will bear the burden addressing excessive debt situations.

Ireland is finding little reprieve after yesterday spending cuts and tax increase announcement. There have been some miscues as well regarding when the 4-year fiscal plan will be unveiled and now it looks to be after the Nov 25 by-election. While Ireland is funded through the middle of next year, Irish 10-year bonds are lower for the 9th consecutive session, with yields up 60 bp this week alone (German 10-year yield in comparison is off 15 bp).

Greece holds local elections this weekend and the risk is that opposition to more austerity grows. On Nov 15 Eurostat is to revise last year’s budget figures, likely pointing to a higher deficit. The IMF has indicated that around 5 bln euro of swaps could be shifted to the government. With its own IMF/EU program, meaning it will not be forced to the EFSF, and no need to go to the markets to raise funds, it is noteworthy that Greek bond yields have risen 50 bp this week and an incredible 244 bp since Oct 13. Portuguse bonds are faring a bit better today, but the 10-year yield is up 50 bp on the week.

Spanish bonds are under greater pressure today. The government reported industrial production was -0.8% year-over-year compared with +3.2% in Aug (not seasonally adjusted). Spain’s premium over Germany is at its highest level since July (a little over 200 bp). Italian bonds are also heavy following the IMF’s report that more austerity may be needed. These developments are taking place amid continued talk that the European central banks may have stepped up their sovereign bond purchases. Contagion risk and implications for ECB policy will likely become more important market talking points.