News and views
US equities and DXY negotiated the woeful US employment report without particular damage, perhaps a function of just how low expectations were. The headline -240K reading was indeed not quite as bad as some numbers being bandied around, but given the very large, negative revisions, this was truly an awful set of numbers. Perhaps the DJIA’s stronger open an hour after the data and its full session in positive territory is a reminder that hard data are still not yet pivotal. The Dow closed +248pts/+2.9%. DXY chopped around then ticked higher in thin NY afternoon trade but ranges were relatively tight. The improvement continued in USD 3mth LIBOR, its yield slipping another >9bp to 2.29%. NZD/USD traded 0.5855 - 0.5930, finishing at the upper end as the DJIA closed positively. The kiwi shouldn’t be noticeably impacted by the expected formation of a National Party-led coalition after New Zealand’s elections on Saturday.
AUD/USD gained about 80 pips from the London open to NY close (0.6740) in fairly muted trade. AUD brushed off sharp losses for most metals on the LME including lead (-6.7%), aluminium (-3.9%) and copper (-1.3%).
EUR/USD tested up to 1.2851 in the European morning but ran out of steam amid a flurry of “sell euro” recommendations (many unimpressed by the seemingly slowmoving ECB), fading to 1.2720 at the end of the week.
USD/JPY traded sedately in the low 97s for some hours before the resilient US equity market encouraged some buying on crosses, helping USD/JPY up to 98.25 at the close.
US non-farm payrolls fall 240k in Oct. The big surprise was the steep 179k downward revision to jobs in Aug and Sep, which means the average job loss over the latest 3 months is now 217k, compared to just 100k when the Sep report was published. The household survey, normally volatile, delivered its sixth consecutive monthly decline, down 297k in Oct, for a three month average loss of 287k, so it is still painting a weaker picture than payrolls but the gap has narrowed thanks to those big (payrolls) revisions. The jobless rate jump from 6.1% to 6.5% corrected for the steady job rate in Sep which was due to some job losers leaving the labour force altogether that month. In Oct the labour force grew and added directly to unemployment. With the unemployment rate now higher than at any point during the 2001 recession, there can be no doubt that is the current status of the US economy once again.
US pending home sales fell 4.6% in Sep, continuing to see-saw, this time to the downside, though the decline was not as steep as August’s rise, continuing the pattern of the last six months where a gain has been followed by a smaller drop. So we cannot yet conclude that the latest banking system troubles are the main driver of the fall; it may just be that the bargain-hunters snapping up cheap foreclosed homes took a break (but not in the West where sales were up 4.1%!). A further fall in October would however be significant.
German industrial production down 3.6% in Sep. Factory orders plunged 8% in September following August’s gain which was the only monthly rise for orders this year so far. This weakness is now showing through in production which fell in September. In annual terms IP is contracting at the fastest pace since the slowdown in 2003. Emerging weakness in business investment prospects both in the Western world and emerging markets poses a big risk to the German growth outlook, given the economy’s leading role as a producer of capital equipment.
Canada posted a further 10k jobs gain in Oct on top of the biggest monthly gain since the 1970s in September. However the detail reveals that public administration jobs rose 40k, related to last month’s federal elections. Without that contribution, jobs would have fallen; indeed we expect November employment to post a decline.
Outlook
We are neutral NZD/USD short term, being inclined to sell into NZD/USD in the 0.60/0.62 area but not before. We see AUD/NZD higher, with scope for 1.18 multiday, as a somewhat improved risk environment encourages unwinding of some of the excessive AUD shorts.
