US Jobs and More

The US dollar is narrowly mixed as the market awaits for North American jobs data to close out the week.  It has been another good week for the greenback.  It has appreciated against all the major and emerging market currencies.  

The US 10-year yield has edged higher this week.  The 5 bp increase puts the yield just below 2.40%, its highest since October 7.  With the notable exception of Spanish bonos, European bond yields were unchanged to lower.  Australian benchmark yield had been lower until today when yields rose almost 11 bp, despite the somber monetary policy statement.  The continued fall in the Australian dollar, now at its lowest level in more than four years may be souring the appetite for the AAA-issuer.  

The RBA warned that Japan’s monetary policy may spur flows into Australia, keeping the Australian dollar stronger than justified by economic fundamentals.  Economists have traditionally understood that currencies should move to bring some macro-economic variable into balance, like prices, money supply, external accounts, or interest rates.  The problem is that a “clearing price” for one is not necessarily the “clearing price” for another variable. 

 

The fact of the matter is that the Australian dollar has been the second worst performing currency this week, just behind the Japanese yen.  The yen has fallen 2.45% this week while the Aussie is off 2.25%, and that includes today’s 0.5% advance.   While many observers have cried that the BOJ’s actions are another strike in the currency war, we are less sanguine.  It takes two to tango.  The response by other countries, including the US, the euro area, and China, have been noticeably absent.  

Japanese stocks shine, with the Nikkei gaining 7.8% this week, helped by the BOJ/GPIF action at the end of last week.  The latest MOF data shows that foreign investors stepped up their purchases of Japanese bonds (JPY640 bln or ~$6.6 bln) and Japanese stocks (JPY905 bln  or ~$9.3 bln).   Japanese investors also increased their foreign asset purchases.  The JPY807 bln of foreign bonds is the most in three months.  They also bought JPY326 bln of foreign stocks.  Note that this report covers the sessions before the BOJ/GPIF announcement.  Next week's MOF report will be even more telling. 

The main focus today is on the US jobs report.  The trend lower in weekly initial jobless claims (four-week average stands at new cyclical lows), the ADP report (230k) and the various surveys, including the service ISM that showed near record strength, all point to another robust report.  As we have noted before, job growth in the US has been amazingly steady.  The three-month average is 224k.  The six-month average is 245k.  The 12-month average stands at 221k.    Other details of the report may be more mixed.  Hourly earnings were flat in September and might have ticked up in October.  The work week that ticked up in September might have slipped back in October.  

However,  given sentiment, even a mildly disappointing report will likely be shrugged off.  The BOJ is ramping up its QQE, and the GPIF will lead a large scale portfolio re-allocation.  Yesterday Draghi reaffirmed the ECB's commitment to increase its balance sheet considerably, and set the wheels more formally into motion to explore additional measures (assets?) as the risks remain decidedly on the downside.  

Many pundits have seized Draghi's comments to claim that sovereign bond purchases are imminent.   We remain less convinced, given the daunting legal, political and technical hurdles.   References to textbook QE seems downright silly as no such thing exists.  As we have noted, the Federal Reserve does not call its long-term asset purchases QE, but CE as in credit easing.  The bottom line is that the ECB is increasing its balance sheet.  There are other assets it can buy shy of sovereign bonds.  These include supra-nationals, uncovered bank bonds and corporate bonds. 

In Europe today, German industrial production was a bit softer than expected (1.4% rather than 2.0%), but France was a bit better  (flat instead of -0.2%), and Spain was stronger than both.  It's 1.0% increase year-over-year contrasts with Germany's decline of 0.1% and France's 0.3% decline. 

There is an interesting discussion taking place in the EU today.  The revisions to the national income accounts have translated into new funds that the UK and the Netherlands have to pay the EU.  The money is due at the end of the month.   Dutch Fin Min Dijsselbloem does not want to pay a lump sum, but rather set up a payment schedule over the next year.  The UK’s Cameron is seeking a reduction in its payment, and also some kind of payment scheme.   

Reportedly Cameron warned that sentiment in the UK was hardening against the EU (as if it has nothing to do with signals from his government and was all the EU’s fault).  Merkel has made clear, over a different issue (immigration) that while Germany (unlike France) wants the UK to stay in the EU, it is not willing to ensure this at any cost.  Moreover, other countries who are on the receiving end want their funds.  Poland, for example, says that the 317 mln euros its is to receive would put the 2015 deficit below the EC’s 3% target.