US markets had a rather more mixed day yesterday, with the Dow finishing modestly lower, while the S&P 500 closed at another record high, as US investors took comfort from the Federal Reserve’s slow and steady approach when announcing the timeline for its taper programme
European markets also saw a decent session with the German DAX making a new record high, while the FTSE 100 also closed higher after what can only be described as a train wreck of a monetary policy decision in comparison, by the Bank of England.
A lot of column inches have gone into yesterday’s decision by the Bank of England, with very few of them complimentary, nonetheless if you were a student looking to write a paper on the dos and don’ts of monetary policy, then this week’s events will have offered a rich seam of content. That’s not to say the bank erred in holding rates as they did, but it was more about the messaging leading up to it. MPC member Dave Ramsden who voted to raise rates as well as calling for an end to the QE programme yesterday is due to speak later today will be giving his take on yesterday’s decision, as will chief economist Huw Pill.
It looks set to be another strong week for European markets with a record high for the DAX this week, as well as a 20-month high for the FTSE 100, although as we get set for today’s open, we look set for a subdued start, as we look towards today’s US non-farm payrolls report.
The last two payrolls’ reports have been somewhat of a letdown to those who thought that the impending roll off in stimulus measures on 6 September would herald a strong rebound in the US labour market. That this hasn’t happened has prompted quite a bit of head-scratching, even as weekly jobless claims have continued to decline, not only on a weekly basis but also in terms of continuing claims, which are now at 2.1m, over 600,000 below the levels we were seeing in August. More to the point, continuing claims are only 400,000 above where they were pre-pandemic, when they were trending at 1.7m.
It would appear to be this trend that has convinced the Federal Reserve that it is time to start the process of slowing down its bond buying programme, which will start this month and was announced on Wednesday this week. In a lesson to other central banks, this week’s move by the Federal Reserve was well telegraphed, and delivered without fanfare and with barely a ripple on the markets.
While the September payrolls number came in at 194,000, the lowest number this year, we did get to see an upward revision to the August numbers to 366,000, although it is hard to escape the feeling that the recovery in the US labour market has been running out of steam in recent months.
Unemployment has fallen back from 5.2% to 4.8%, however this has also coincided with a participation rate that has barely moved in the last 6 months, currently at 61.6%. There still appears to be an expectation that October will see a catch up in hiring trends, and that the various problems in September have merely delayed a return to work in key sectors like education and the care industries.
This week the ADP payrolls report posted its second successive month of jobs gains in excess of 500,000. September came in at 523,000, while October saw 571,000, which suggests that the slowdown in a return to work appears to be driven by factors that are sector specific.
Expectations for today’s October report are still fairly subdued, however if the narrative of the last few weeks is accurate, then we should see the evidence of a big return to work, with not only a decent uplift, but an upward adjustment to the September numbers as well, in the same way August was upgraded. Expectations are for 450,000 jobs to be added, a number that has been nudged higher in the last few days, however this week’s ISM surveys have given a rather mixed picture on the employment front, with manufacturing jobs pushing higher, while services jobs slipped back, although both were still over 50.
With tapering now set in motion, today’s payrolls report should confirm that the US labour market is still improving, and with that you would also expect to see an uptick in the participation rate, as people gradually return to the workforce. Looking further out we should also expect to see hiring trends pick up heading towards Thanksgiving, as well as the Christmas holiday period, while average hourly wages could also fall back modestly as well.
EUR/USD – while below the 1.1620 area, the risk remains for a move back the 1.1520 area and October lows. A break below 1.1500 targets the 1.1400 level. A move through 1.1630 retargets the 50-day MA at 1.1680.
GBP/USD – fell through the lows this week at 1.3600, as well as the 1.3570 level, which now opens up a move towards the September lows at 1.3410. We need to recover back above the 1.3610 area to stabilise, and return to the 1.3720 area.
EUR/GBP – pushed up through the 0.8520 area, and heading towards the 0.8580 level, as well as 0.8620. Support now comes in at 0.8520, and below that at 0.8470. Still range trading.
USD/JPY – appears to be range trading for now with resistance at the November 2017 peaks at 114.75, a break of which opens the 116.00 area. The 113.20 area remains key support, followed by the 112.40 area.