Beyond Jobs

The US jobs report is the main economic release today.  In recent months, better than expected employment reports have spurred risk on trading and this has been dollar negative.  Given the ADP report, despite the December skew in that time series, market expectations appear to have crept higher and it will take a stronger than expected number of give the dollar much of a lift.  However, with Spanish and Italian bond auctions next week, the extent of a relief rally in the euro may be constrained. 

The employment report will prompt economists to harden their Q4 GDP forecasts and the risk is on the upside of the consensus of around 2.5% especially in light of yesterday's data from Boeing.  In New Zealand, the milk consortium accounts for about 14% of GDP (and milk prices have incidentally been falling sharply for the past two months).  The US is a larger and more diversified economy, yet Boeing, with its big ticket items can single handily impact various time series for the world's largest economy. 

Yesterday's Boeing data, mostly overlooked by market participants, ensures the US economy ended the year on a strong note.  Boeing reported orders for an impressive 287 planes after a Nov report, which was also relatively stronger orders just less than 100.  That alone is going to lead to a strong durable and factory orders reports.  Boeing also reported 51 planes were delivered, of which 39 went to foreign based customers.  This followed a strong 26 foreign shipments in November.  These shipments will boost US export figures and this will feed through to US Q4 GDP. 

That said, Q4 US GDP is likely to be the best for 2011 , just as Europe's Q4 GDP is likely to be the worst of the year.  However, over the past couple of years, relatively good Q4 US GDP has not carried into Q1 and the risk is that this pattern continues. 

Meanwhile in Europe, the change of tone in the Hungarian government has seen the beleaguered forint recover somewhat.  Yet there is good reason to be suspicious.  As noted previously here, the Orban government is using its majority to move in an illiberal direction, challenging the independence of not just the central bank, which has gotten the IMF and EU's attention, but also passed laws that erode the Independence of the judiciary and media.    Yes, it wants (and I would argue) needs international assistance, but is it really ready to accept the terms, which means reversing its positions ?  Color me skeptical. 

Since around half of Hungary's debt is in foreign currencies, the forint's depreciation increases the debt burden.  The central bank holds about 2.5 bln euros in cash reserves and has a 4.3 bln maturity here in Q1, mostly owed to the EU and IMF.  Hungary has an additional 5.5 bln euros worth of local debt coming due. 

Perhaps the most important and likely generally overlooked development today is in terms of what I have called the scaffolding for fiscal union in Europe.   That scaffolding, I have suggested requires pre-budget approval, a mechanism for monitoring implementation and than some sort of enforcement mechanism for not meeting the targets.  Today an important step was taken in this direction. 

It was not in the periphery, but in Belgium.  The European Commission has rejected  Belgium's 2012 budget that the new government submitted.  It assumes 0.8% GDP and says that turns into a 2.8% (of GDP) budget deficit.  The EU says its calculations show a 3.25% deficit with 0.8% GDP.    There will be some diplomatic discussion, but don't be surprised if Belgium comes up with additional savings plan.