UK industrial production data are in focus

Market Movers

• The October employment report will be released today. Job growth slowed to just below 140,000 on average in September and August, which in our view is below the pace (>150,000) needed for the Fed to initiate the hiking cycle. We estimate that job growth increased to 170,000 in October and that the unemployment rate was steady.

• The hourly earnings measure will be important as well. Wage inflation has been relatively subdued despite the impressive decline in the unemployment rate. This has raised doubt whether the unemployment rate is a good measure of the ‘real’ amount of slack in the labour market. If wage inflation starts to accelerate, it would be an important sign that the labour market has indeed become tight and would strengthen the case for a near-term Fed funds rate hike.

• In the UK industrial production data are in focus but after the dovish message from the BoE yesterday the impact should be relatively small.

• Budget balance figures in Sweden and manufacturing production in Norway, see Scandi Markets.

Selected Market News

Even though yesterday’s weekly jobless claims data are from November and do not affect the all-important October labour marker report out today they were monitored closely. The data showed that initial claims rose by 16k, which brings the 4-week average to 263k. Furthermore, the challenger survey showed that 50.4k job cuts were announced in October which is 1.3% lower than a year ago. All in all, these preliminary data point to healthy job growth also in November.

The market is now pricing a close to 65% probability of a hike in December, and if our forecast (+170k) is correct for today’s non-farm payrolls that probability could go up further. Also remember that the Fed likes to prepare the market and does not like to surprise. Hence, a higher probability of a December rate hike could in fact be selfreinforcing pushing the probability even higher.

Two-year US Treasury yields are now at the highest level this year at 0.82% but note that US swap yields are still below the level at the beginning of the year. Hence, the swap spread has tightened strongly. In the 10Y segment swap yields are now more than 11bp below the Treasury yield, which is quite extraordinary. This collapse and inversion in swaps spreads probably reflect some fundamental factors like bond selling from EM central banks and hedging of a heavy corporate issuance calendar (receiving swaps). However, it might also reflect that the liquidity of US treasuries has weakened and that trading operations have less appetite or power to go against this ‘extraordinary’ move in swap spreads.

This morning we had more encouraging news out of China after the PMI data early this week pointed to a stabilisation in the economy. Car sales rose 11.3% in October, the highest monthly rise in seven months. The higher car sales comes after the government in October slashed taxes on car purchases to support demand.

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