Payrolls heightens tapering expectations briefly

• 205,000 jobs added in November, unemployment rate falls to 7.0%
• Euro continues run following Draghi dismissal of further policy cuts
• Japanese GDP revised lower, further stimulus needed in 2014

Friday’s jobs report was one of the most eagerly awaited reports in a long time. The decision to reduce the amount of assets the Fed purchases on a monthly basis will still likely take place in 2014 in our view, but Friday’s strong number has made a decision at December’s meeting to start cutting QE slightly more likely.

205,000 jobs were added in November, beating October’s 204,000 and bringing the unemployment rate down to 7% for the first time in 5 years. Gains were broad across all jobs sectors whilst average weekly hour and wage data also remained supportive for further gains in coming months.

These jobs gains are strong, of this there is no doubt, but we believe are not strong enough to move the needle of Fed opinion just yet. At the beginning of summer we said that bad jobs numbers would “reset the time line” of Fed easing – good numbers will not do that based on the Fed’s very real fears of jumping the gun on the recovery.

Those of you who joined in on last week’s Bank of England and European Central Bank webinar will know that while jobs are making meaningful improvement, the inflation picture remains desperately weak, while growth – buoyed by inventory restocking and little else in Q3 – can still be described as “modest and moderate” by regional Federal Reserves. Fold in the potential for another political powder keg when Congress decide to debate the Budget again in Jan/Feb and you can see why we are reticent. This is not a tapering environment just yet.

Dollar initially strengthened on the number before sinking dramatically an hour later. The reversal has been put down to a lot of things but I believe the simplest to be the best; the market liked the figure but simply doesn’t believe that tapering is coming yet. I think there’s a 40% chance of it happening next Wednesday.

EUR remained strong also following the ECB’s open handed reticence to commit to further easing, alongside no further mentions of negative rates – a by-product of poor but positive inflation expectations.

Japanese news overnight has been poor following a downgrade to 3rd quarter growth. GDP fell to 1.1% annualised at the second estimate from 1.9% at the initial reading. The bright burst of output that the Abenomics plan originally gave the Japanese economy has all but vanished, just over a year from its inception. We are of the belief that monetary policy tightening in the US will prompt further action by the Bank of Japan through 2014 – we expect the authorities to maintain and increase stimulus in the face of this, slowing growth and the hit to spending that the planned increase in spending taxes next year will bring.

Chinese inflation was also reported lower than expected in November, opening the door for further stimulus if the PBoC believes that growth cannot be counted upon to beat the 7% target. Producer prices remained in deflation however; falling by 1.4% year on year following further falls in commodities. Supply chain disinflation will remain for a while, one would think.

The data calendar is quiet today.

Have a great day.