Tories' Victory Stuns Polls, but Jobs Data to Determine Dollar's Fate

The polls proved wide of the mark. While we had detected a break toward the Tories over the past week, the results were stunning. The Tories appear to have won half the 650 seats.  Most of the contested seats swung to the Conservatives. They picked up seats from the Lib-Dems and Labour.  

UKIP garnered about 13% of the vote (~3.5 mln), but those votes were widely spread out, and the anti-EU party appears to have won but one seat in the House of Commons.  The SNP received 5% of the national vote (~1.5 mln) but swept Scotland itself t  secure about 56 seats in the parliament.   SNP leaders have indicated no intention to push for another independent referendum.  UK Prime Minister Cameron's electoral success means that the UK will have a referendum on its EU membership in two years.   

Sterling was bid up on the exit polls that pointed to the Tories' victory.  The initial response was worth two cents to $1.5450 and then in late-Asia made another push toward almost $1.5525. The next technical target is in the $1.5550-80 area.  With the political risk subsiding and a minority government avoided, UK assets have powered ahead.   Amid a European stock and bond market rally, the UK is leading with 10-year gilt yields off six bp to 1.86% and the FTSE up about 1.5% near midday in London.  

There have been four other developments to note before turning to the US (and Canadian) employment data.    The Reserve Bank of Australia's monetary policy statement offered a somber economic assessment, with below trend growth persisting longer.  Growth and inflation forecasts were shaved.    The Australian dollar initial weakened but recouped the losses to return to little changed levels just above $0.7900 ahead of the North American open.  

The Australian dollar shrugged off the second notable development:  China's trade figures.  China reported an unexpected drop in both exports and imports.  The net result was a larger trade surplus of $34.1 bln in April up from $3.1 bln in March.  The consensus had expected a $39 bln surplus.  Exports fell 6.4%.  The consensus called for a 1.6% increase.  Imports slumped 16.2%, which was about third larger than expected.  This suggests Q2 growth is off to a slow start.  Many observers will look for more stimulus as a result. 

Over the weekend, China is expected to report its latest inflation readings (CPI and PPI) and financing figures (yuan loans and aggregate financing).  Retail sales, industrial production, and fixed asset investment figures will be released next week.  

Third, Switzerland’s deflation forces intensified in April to -1.1% from 0.9% in March.  This matches the cyclical low from June 2012.  Using the EU harmonized methodology, inflation stood at -0.8% from -0.5% in March.  Separately, note that US Monsanto made an initial unsolicited bid of $45 bln for Switizerland’s Syngenta.  The bid was rejected, but the company seems open to a higher bid. 

Fourth, German industrial production disappointed.  Instead of rising 0.4% in March, it fell 0.5%.  Despite the recovery in the PMI, manufacturing fell 0.8% in March.  First quarter GDP figures will be released next week.  In Q1, industrial output rose 0.5%, flattered by a 2.3% increase in construction.  Separately, Germany reported a larger than expected trade surplus (23 bln euros in March from 19.5 bln in February).  The mix, however, may be more supportive of German trade partners.  Exports rose 1.2%, a touch slower from the 1.4% gain in February.  Imports increased 2.4%, almost double the previous month’s increase.

The North American session will be dominated by the US jobs data.  There are three key components.  Non-farm payrolls are expected to have risen by 228k.  While this is less than the 6- and 12-month averages (~260k), it would suggest that disappointing March figure (subject to revisions) was a bit of a fluke.  In addition, the consensus expects a downtick in the unemployment rate to 5.4%.  Moreover, average hourly earnings are expected to rise 0.2% for a 2.3% year-over-year increase.  This would match the August 2012 high, which itself was the largest year-over-year increase since October 2009. 

Such a report would support ideas that the economic weakness in Q1, in which the economy now appears to have contracted, is not representative of the underlying strength of the world’s largest economy.  On the other hand, a disappointing report may solidify the swing in expectations, pushing lift-off further out. 

Canada also reports its April jobs data.  The consensus looks for a loss of 5k jobs and for the unemployment rate to tick up to 6.9% from 6.8%.  Although Canada grew 63.1k jobs in Q1, it actually lost 6k full-time positions.  In March, Canada reported overall jobs increased by 28.7k.  However, there was a net loss of 28.2k full-time jobs.   Canada’s report will be overshadowed by the reaction to the US report.  We note that the US dollar has pushed through the CAD1.20 level twice in the past two weeks but has not closed below there.  Disappointing US data may do the trick today.  That said, a move above CAD1.22 would lift the greenback’s tone. 

Lastly, we note that the sell-off in European bonds, and especially the bunds appears to have ended.  The 10-year bund yield neared 80 bp yesterday before reversing.  Follow through buying pushed the yield to 52 bp today before stabilizing.  A decline in the yield below 40 bp would likely be seen as evidence that the rout is over.