US jobs report wraps up busy end to the week

Today’s UK opening call provides an update on:

  • Chinese trade surplus rises in October;
  • RBA considers rate cut in response to strong Aussie dollar;
  • S&P cuts France’s credit rating to AA from AA+;
  • US jobs report heavily distorted this month.

European indices are expected to open lower this morning, despite some positive data from China and a dovish monetary policy statement from the Reserve Bank of Australia.

China’s trade balance surplus improved significantly in October, rising to $31.1 billion, up from $15.2 billion last month. The improvement was largely due to a pickup in exports, which rose by 5.6% following last month’s surprise drop. Imports were also up from last month, but still fell slightly shy of expectations.

In Australia, the RBA monthly statement once again highlighted the banks concerns over the strong Aussie dollar, which could provide an incentive for another rate cut in the coming months. Central banks are not allowed to loosen monetary policy in order to weaken their currencies, which is why the RBA also added that they wouldn’t rule out another rate cut if it’s necessary to reach the inflation target. In other words, they’re attempting to talk down to currency with a threat of a rate cut if the markets don’t respond. The problem is, the markets have become almost numb to this kind of verbal intervention, as seen by relatively muted response. In fact, the currency is now higher than it was when the statement was released.

S&P surprised the markets this morning by cutting France’s credit rating from AA+ to AA, a move that appears to have come about six months too late. It’s not unusual for ratings agencies to be late to the party but this is confusing to say the least. France climbed out of recession in the second quarter and since then, the data has been improving. The country’s outlook was also changed from negative to stable.

Today’s US jobs report will wrap up an extremely busy end to the week. Yesterday was one of the busiest days in a long time, with the Bank of England releasing its rate and asset purchases decision, the ECB cutting interest rates, the US releasing some very important pieces of data just as the ECBs press conference got underway and finally, Twitter making its debut on the NYSE. Twitters shares eventually closed more than 70% higher on its first day of trading, at $44.90, after the company settled on an opening price of $26 the day before.

Today won’t be quite as manic as yesterday, but we’re still likely to see plenty of volatility in the markets, especially around the release of the jobs report, which is going to be even harder to predict than normal. The reason for this is that the impact of last month’s government shutdown is very difficult to calculate.

Even if you factor in the impact of the furloughed workers on the unemployment rate (this will have no impact on the non-farm payrolls figure as they’re not technically unemployed by that measure), as well as those who rely on government contracts which were put on hold, it’s very difficult to accurately predict how the shutdown impacted the hiring decisions of companies. Not to mention the impact of the debt ceiling battle which almost forced the US to default on its debt. Businesses will have taken this seriously and could have therefore opted against hiring until it was fully resolved, which is still hasn’t been.

With this in mind, today’s non-farm payrolls figure and unemployment rate are going to be a bit of a lottery. In all likeliness, the number of jobs added in October will probably have plummeted, even from last week’s measly 148,000 figure. As it stands, we’re expecting a figure around 125,000, but I wouldn’t be surprised to see it fall well below this. As for the unemployment rate, this is expected to spike higher to reflect the number of people who were unable to work during the shutdown, although again, I think forecasts of a small rise to 7.3% is a little optimistic.

Regardless, I’m not sure a big miss on either is going to have much of a lasting impact on the markets, as most people are wise to the fact that these numbers are a one-off. We’ll have to wait a couple of months for some data that offers a true reflection of how the US economy has coped with the shutdown, and whether there is any longer term impact.

While many don’t see this jobs report impacting the Fed’s decision to taper in December, due to its one-off nature, it will be interesting to see how the different officials react to the numbers. Shortly after the report, we’ll hear from a few members of the Fed, including non-voting member Dennis Lockhart, who’s views are generally seen as being in line with the consensus at the Fed, John Williams, previously an advisor to the likely incoming Chairwoman Janet Yellen, and most importantly, the current Chairman Ben Bernanke. It will be interesting to see their views on these figures and whether they believe the numbers will have any impact on next months decision.

Following the jobs report we have the preliminary reading of the UoM consumer sentiment figure for November. This figure is likely to provide some insight into how consumers have responded to the turmoil on capitol hill. Consumer spending is very important to the US economy, so any further falls in this figure may point to further negativity in other data in the coming months. This isn’t expected though, with the figure seen rising slightly to 74.5, from 73.2 in October.

Ahead of the open we expect to see the FTSE down 31 points, the CAC down 24 points and the DAX down 48 points.

About Craig Erlam

Craig Erlam is Market Analyst at Alpari (UK). He joined Alpari (UK) at the beginning of 2012 after four years in the financial services industry, including working at Goldman Sachs. Craig writes market commentary that regularly appears on websites including The Financial Times, Reuters, BBC, The Telegraph and FOX Business. He also provides insight and analysis for clients which he posts daily on Twitter and the Alpari (UK) website. You can also find Craig on YouTube where he gives short market updates, including charting analysis.

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