Economies diverge, currencies shrug

• France headed back to recession following disastrous PMIs

•  Jobless claims suggest further US job strength

•  Aussie lower on intervention fears

The divergences between the US and Europe, and within the Eurozone itself, were in sharp focus yesterday with France the main pressure point. Poor French PMIs saw both manufacturing and services PMIs slipping back into contractionary territory in November. Couple that with a GDP reading for Q3 of -0.1% and France is now staring down the barrel of a triple-dip recession. The story on the other side of the Maginot line is a lot better however, with Germany’s PMIs hitting levels not seen since mid-2011 and hinting at a growth run rate of around 0.4%. The haves and the have-nots of Europe were laid clear in a 30 minute period.

Monetary policy is the defining factor of divergence between Europe and the US at the moment.
Yesterday’s jobless claims figures strengthened the case for a tightening of monetary policy soon from the Federal Reserve, while the ECB is attempting to fight off calls for negative interest rates.

Jobless claims in the US fell to 323k against an expected 335k; the trend of an improving jobs market has continued, with little impact from the government shutdown and debt ceiling battle seen so far. US producer prices were negative on the month as had been expected, with the majority of the fall as a result of the continued slips in oil markets seen in the past few months. The dollar impact of both measures was limited.

Earlier in the day, the euro had bounced higher following a speech from Mario Draghi. Speaking in Berlin, Draghi reiterated that the market should not “try to infer negative rates” – ECB “sources” the day before had hinted at a vote for negative rates at the December meeting. It’s clear those sources were misinformed or, cynically speaking, never existed. That being said, we believe that the euro will remain vulnerable to downside surprises from sentiment data coming up. Data flow, until a fortnight ago, has been strong and suppressed calls for action by the ECB. Now that the tide seems to have turned, we could easily see the ECB launch new plans to support the Eurozone at its December meeting.

Currency movement was fairly slim yesterday with volatility reserved for a few crosses, mainly those involving the AUD and JPY. Aussie dollar has recovered from a summer swoon well as the Reserve Bank of Australia disappointed those of us looking for more drastic rate cuts, and data suggested a new found, relative economic stability. That appreciation of the AUD was not strictly wanted however; the RBA has looked for a weaker AUD to promote its mineral and resource exports. Governor Stevens yesterday told a throng of businesses that intervention on the part of the central bank would be warranted should the currency become seriously overvalued. AUD is nowhere near those levels at the moment – it has been over 20% stronger at points in the past 2 years – but the market did some of the heavy lifting for him and took AUDUSD down 2 cents.

JPY has slipped on relatively little news with the overnight Bank of Japan meeting prompting a slight slippage and USDJPY above 101.00.

German IFO is due this morning and follows a poor ZEW earlier in the week; we look for similar disappointment today. Elsewhere the data calendar is quiet.

Have a good day and a better weekend.

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