US jobs surprise keeps December tapering thoughts alive

  • 204,000 jobs added despite government shutdown
  • Eurozone growth due on Thursday, should further justify last week’s rate cut
  • Bank of England QIR key for GBP on Wednesday

With holidays in the US, Canada and France today, data flow and trading are expected to be very light; probably a good thing given the goings on that we saw towards the end of last week. Today’s lull may provide a very welcome pause for thought and opportunity for reflection.

The surprises began with the decision of the ECB to cut rates on Thursday, continued with the much stronger than expected GDP for Q3 in the States with the cherry on the surprise filled cake being Friday’s payrolls announcement that blew expectations out of the water.

The US economy managed to create a whopping 204,000 jobs in October, much more than the 120,000 that economists had forecast, with a significant hit expected from the shutdown and debt ceiling battle. This was not forthcoming and those looking for the Federal Reserve to reduce its stimulus at December’s meeting were subsequently emboldened. The unemployment rate climbed to 7.3% from 7.2%. An increase in the unemployment rate had been expected as some government workers who were temporarily laid off because of the shutdown were classified as unemployed with the participation rate once again falling to a 30yr low.

This sets the battle up for December’s Fed meeting nicely; jobs are trending at around 175,000 a month, growth has remained resilient, inflation remains poor – I still believe that the economy, especially from an inflation perspective, is not strong enough to withstand a reduction in stimulus and we continue to look for a tapering in March 2014.

Thoughts on the progression within the Eurozone are going to have to stay on hold until we receive Thursday’s GDP reports from members and the currency bloc as a whole. As we stated last week, we think that the ECB’s decision to cut rates on Thursday will be vindicated by a miniscule slither of growth, with particular weakness in France and Italy expected. The rate cut will do very little in the Eurozone in the short-term however, maybe apart from antagonising the Germans.

We hear from the Bundesbank President, Jens Weidmann, at 5pm GMT today in a speech that is certain to see him come out against the ECB’s decision to cut rates. He is also expected to lay out his continuing support for tighter fiscal rules throughout the Eurozone and the fact that there is no need for additional LTRO functionality. I was taught that if monetary policy is exhausted – as it clearly is in the Eurozone – then fiscal policy must be used to stimulate the economy. Weidmann is advocating the opposite.

News from the UK is light as well this week, although Wednesday’s Quarterly Inflation Report could easily see a Bank of England newly imbued by the recent improvement in the signs from the UK’s recovery. CPI data tomorrow should show decreasing inflation as well, although we are a long way from getting to the levels that the Eurozone and US are experiencing at this moment.

Have a great day.



Sectors: Financial & Professional Services and Foreign Exchange
Topics: Finance
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