Dollar Softer Ahead of Employment Report

The US dollar is slightly softer amid last minute position adjustments ahead of the US jobs data.  After the outsized 321k increase in nonfarm payrolls in November, a more trend-like report is expected today. The three-month average of 278k was skewed by the November report.  The consensus calls for a 240k increase, which is near the pre-November averages.  The details of the report, especially average hourly earnings, are important as well, in light of the FOMC minutes. Provided that the labor market continues to improve, a rate hike could still be delivered near mid-year, even if inflation was no closer to the Fed's 2% target.  

If the consensus is wrong, we suspect it would be that the report is weaker than expected.  The December report has disappointed more often than not.  The seasonal adjustment is a larger hurdle.  The ADP estimate also has a rougher time in anticipating the national figure in December.   Average hourly earnings rose 0.4% in November, and it will be tough to match that.   The average work week is expected to be unchanged at 34.6 hours.  

A disappointing report could prompt some profit-taking on long dollar positions as it plays into the hands of those who think that the Fed will not raise rates.  This could lift the euro toward $1.1875-$1.1900 and sterling toward $1.5150-$1.5200. 

Even though we read the FOMC minutes to support our narrative, many have given the recent comments by the dovish wing, like Evans and Kocherlakota greater weight.   However, ahead of the ECB meeting on January 22, we expect bounces in the euro will be sold.  At the same time, although our sources tell us it is controversial within the BOJ, many investors expect another increase in QQE as the Japan's inflation target remains elusive.  The UK reports CPI next week, and a decline to 0.7% from 1.0% is expected.  It will likely encourage investors to push further out the first BOE hike.  

Sterling is edging out the yen today as the stronger currency.  It was helped by news of a smaller than expected trade deficit and a larger than expected increase in manufacturing output.  The November trade deficit came in at GBP1.4 bln against a consensus of GBP2.0 bln.  Manufacturing output rose by 0.7%, the strongest in seven months, and twice what the market expected.  Overall industrial output slipped by 0.1% (vs. consensus of +0.2%).   The main culprit was a 5.5% decline in oil and gas extraction, owing to reported maintenance in some North Sea fields.   At this point, we are unsure it such maintenance was related or encouraged by the sharp decline in prices.  

German and French industrial output figures disappointed.  German industrial output was expected to rise 0.2%.  Instead in fell 0.1%.  The French disappointment was greater.  It was expected to rise 0.3% after the 0.7% decline in October, but instead it fell by 0.3%.   This warns of downside risk to next week regional figure, which the consensus expected a 0.3% increase. 

While Asian shares followed the US equity advance (MSCI Asia Pacific was up 0.7%), Europe has not been able to match suit.  The Dow Jones Stoxx 600 is off about 0.2% and is weighed down by financials.  There are two considerations here.  First, the ECB is reportedly introducing new minimum capital ratios for individual banks.  Details are sketchy, and there has been not official confirmation, but Italian banks in particular are thought to be required to boost capital.  The second story is Santander’s 7.5 bln euro share sale, diluting existing shareholders and sending the share broadly lower. 

Australia’s string of favorable news ended today.  Recall earlier this week it reported a smaller than expected trade deficit and an unexpectedly strong increase in building approvals. Today’s report on November retail sales disappointed, rising 0.1% instead of 0.2%.  The corrective pressure on the US dollar has seen the Aussie continue to flirt with its 20-day moving average.  A break above $0.8150 could spur a move to $0.8200. 

China reported its inflation figures earlier today.  The drop in commodity prices accelerated the decline in China’s producer prices, which have been falling for nearly three years.  Today’s December report showed a 3.3% year-over-year decline, after a-2.7% pace in November.  Consumer prices ticked higher to 1.5% from 1.4% in November.  This was the result of higher food prices (2.9% year-over-year form 2.3%).  Disinflation in non-food prices continues to be felt.  They rose 0.8%, down from 1.0% in November.  Officials announced intentions to expedite some infrastructure spending, but many continue to look for more monetary action by the PBOC.