Trendless Monday, Consolidation Featured

The US dollar is mostly consolidating the losses seen last week.  The bears who were encouraged by last week's potential break out may be a bit wary ahead of tomorrow's release of the September jobs report due to the government shutdown.  

It is not so much that the jobs report will tell us anything we did not know already.  The ADP report, despite its variance, does a fairly good job tracking the general trend, has already estimated that 166k net private sector jobs were created. The consensus had been for a 180k increase.  The August series was revised to 159k from 176k.  

The median forecast from Bloomberg is for private sector payrolls to have increased by 180k. This would be the best showing for Q3, but will do little to change the trend.  Over the past 12-months through August, the private sector grew an average of 191k jobs.  Not bad.  The six-month average is 167k and the 3-month average is 157k.     

Admittedly, the economy creates and destroys hundreds of thousands a jobs a month and the non-farm payroll report picks up the net change,   These represent statistically small differences, but the trend is clear. 

Part of the reason economic data is important is that it provides insight to investors about the state of the economy.  Usually there is a 4-5 week gap between national labor market updates.  This time there will be about 3 weeks before the Oct report released.  

Another reason data is important is the possible reaction by policy makers.  Almost regardless of what tomorrow's jobs data show,  the FOMC is most assuredly not going to announce tapering at next week's meeting.  At this point, what policy makers and investors are most interested in is how much the government shutdown impacted the economy and the duration of that impact.  The September jobs report will shed very little light on this.  

It is not just the foreign exchange market that is consolidating, but global bond and stock markets too.  The DAX set new record highs.  Small gains are being in Spain's and Italy's bourses.  Many observers do not appreciate the dramatic rise of these two markets.  Over the past three-months, the Spanish equity market has risen by a little more than 25% and Italy's by 19%.  The DAX is up about 6.25% over the same period.  

Bond markets are little changed, but here too Italy and Spain's recent performance has been impressive.  Spain's 10-year benchmark bond yield has fallen 44 bp over the past three months. Italy's has fallen half as much.  Arguably part of this decline represents a reduction in the inflation premium.  Consider that using EU harmonized data, Spanish headline CPI as fallen from 2.2% in June to 0.5% in September.  A similar measure for Italy has fallen from 1.4% to 0.9%.  .

However, part of the out performance of Italy and Spain is a reflection of the perceived alpha available from favoring these two in the re-weighting of portfolio's toward Europe that appeared to begin taking place in the May-June period.  Initially this year, flows out of emerging markets appeared to focus on the US and Japanese equity markets.  However, since mid-Q2 or so, Europe seemed to be the bigger beneficiary of such flows.  

More recently, flows appeared to have begun returning to emerging markets, even if more discriminant.   And indeed over the past month, the Spanish bond market is essentially flat and, although the  the Italian bond market is firmer, it appears to have a specific trigger.  It is picking up the relief that the Letta government survived Berlusconi's attempt to topple it.   There may be some caution now ahead of the ECB's announcement about the Asset Quality Review. 

Recall that different national regulators allow for a variety of practices and some of these differences will come to light in the AQR.    The use of tax deferred credits as part of core capital, for example, be questioned.   Some banks apparently have rolled over and/or restructured some corporate bonds to avoid reporting a default and do not want to consider those impaired assets.  

The dollar has recouped some grounds against the yen, but the JPY98.50 is likely to cap it.   Earlier today Japan did report a September trade deficit in line with expectations, but imports were stronger and exporters weaker than expected.  Exports to China, other Asian countries, the US and Europe all slowed from August on a year-over-year basis.  It is still the early days Abenomics; hardly even six months old.  

There are two concrete results.  First, the yen is weaker and, since May, has been moving in a lower trading range.  Second the stock market is dramatically higher.  

Other results are a bit less clear.  As Friday's data is likely to show, the increase in CPI that has been recorded is largely a function of the rise in fresh food and energy.  Capital investment has been disappointing. Worker earnings are not keeping pace in the new inflationary environment and starting in April, the retail sales will be taxed more.    There is some talk linking a corporate tax cut for raising wages, but under such conditions, the tax cut becomes a stealth wage subsidy.  

While many expect the BOJ to step up its purchases to increase the likelihood of reaching its inflation target, Kuroda seems content with current developments.  Earlier today the BOJ raised its economic assessment for all nine regions.   It may have a re-think but not, we suspect, until there is an assessment of the impact of next year's tax increases (capital gain tax doubles to 20% on Jan 1, while the retail sales tax increases from 5% to 8% on April 1).     

 (While on three week business trip to Asia, the postings here may become more irregular).