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US payrolls could reinforce calls for taper acceleration

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In a rollercoaster week for equity markets sentiment has ebbed and flowed, as investors continue to grapple with what the new omicron variant will mean for markets going forward. It is slowly becoming apparent that this strain has been around for a while, spreading unseen when the focus has been on the spread of Delta. The only difference now is authorities are looking for it.

After dropping like a stone on Wednesday, US markets rebounded strongly yesterday to finish the day higher, after weekly jobless claims pointed to continued resilience in the US labour market and teeing us up nicely for today’s November jobs report. The rebound in US markets also helps set us up for a positive European open as we look towards the latest services PMIs which have been a key area uniquely exposed to the vagaries of the virus and lockdown restrictions across the globe.

Recent PMI numbers in Europe have been on the weaker side since the summer with weaker numbers being seen particularly in the German and Italy numbers. Last week’s flash PMIs suggest that this trend of weakness paused a little with an uptick in economic activity in November. Given the recent surge in coronavirus infections, and renewed restrictions across Europe this may well prove to be temporary, as we head into December. Expectations are for modest improvements in Italy, France, and Germany PMIs to 54.5, 58.2 and 53.4 respectively.  

As far as the US and UK numbers are concerned, they are also expected to be much more resilient. This resilience could well be because the US and UK reopened earlier and as such the higher summer infection rate has meant that as the winter months approach the immunity levels are much better in the general population, with UK services expected to come in at 58.6, and US services at 57.

Today’s main event is the November non-farm payrolls report, particularly given Powell’s surprise hawkish tilt earlier this week, which places a much greater expectation of an acceleration to the tapering programme when the Fed meets in less than two weeks’ time. The October payrolls report helped to reaffirm the Federal Reserve’s decision a few days before to set the ball rolling on tapering its $120bn a month asset purchase programme. 531,000 new jobs were added to the US labour market in October, while we also saw a decent upgrade to September from 194,000 to 312,000.

The unemployment rate fell to 4.6%, from 4.8% while the participation rate remained unchanged at 61.6%. By any measure the numbers were positive and with wages also rising, jobs growth is expected to accelerate as we head into year end, especially around the holiday period when hiring trends tend to pick up. This is already being borne out in the continuing claims numbers which are now only 200k above where they were pre-pandemic.

With recent US economic data showing decent levels of resilience, the conversation around tapering has moved on to the speed and level of the withdrawal of stimulus. On current measures the Fed is reducing the level of bond buying by $10bn in treasuries and $5bn a month in mortgage-backed securities.

We also have several policymakers arguing the central bank needs to go faster, which means that today’s November payrolls report has the potential to move this discussion fast forward to when the Fed meets later this month, if we see a similarly strong jobs report today. With the ADP report also showing a strong number on Wednesday, of 534,000, expectations are for a similar 550,000 jobs to be added on top of the decent numbers seen in the past two months.

The unemployment rate is also expected to fall further to 4.5% with a particular focus on wages, while the participation rate is expected to tick up to 61.7%. We’ve heard anecdotal evidence from retailers, and other big US employers that they are having to pay up for staff, and you’d expect this to manifest itself in both the headline number, as well as the participation rate.

If the average earnings numbers jump back above 5%, then not only could we see expectations of an accelerated taper this month, but we could also see markets ramp up bets on possible rate rises next year.   

EUR/USD – continues to slip lower, after the failure at the 1.1385 level, with larger resistance at the 1.1420 area. The key support remains around last week’s lows at 1.1185, as well as the 1.1160 level. A move through 1.1420 argues for a move back to the 1.1520 level.  

GBP/USD – still has support at the bottom of the channel below 1.3200 near to the 1.3160 area, which should act as a floor. We need to recover back above the 1.3400 level to stabilise and move towards the 1.3500 level.

EUR/GBP – the 0.8540 level continues to act as resistance, which is trend line resistance from the September 2020 highs. Support remains at the 0.8480 level and needs to break below this level to diminish the risk of further gains.

USD/JPY – currently has support at the 112.50 level, however its currently struggling below the 114.00 area, keeping the risk of further losses on the table towards the 111.80 area.


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