On the face of it the US December jobs report was a positive one, bringing to a close the best ever year for US jobs growth since 1999, with 2.95m new jobs added, and the unemployment rate falling to 5.6%, the lowest rate since July 2008.
With numbers like that what’s not to like, but the market reaction was anything but positive as European markets and US markets slid back sharply, to finish a turbulent week in negative territory, albeit well off their lows, and this uncertainty looks set to weigh on the markets this morning as we start a new week with further softness in the oil price.
It has been argued that Friday’s sell off can be largely attributed to profit taking at the end of a strong two day rebound
from the lows at the beginning of last week, as investors made some last minute adjustments to their portfolios ahead of the beginning of US earnings season this week.
While there may be some truth in that, the internals in Friday’s number don’t speak to a particular convincing economic recovery,
given the sharp fall in hourly earnings from 2.1% to 1.7%. Furthermore the drop in the unemployment rate came about as a result of the participation rate falling to its lowest level since December 1977 at 62.7%, meaning that a record 92.9m Americans are still out of work.
The weakness in the wage growth numbers is particularly worrying at a time when US valuations are significantly higher than here in Europe
, while the recent fall in the crude oil price will undoubtedly act as a significant boost to US incomes, the fact that wages are rising so slowly when the US economy is apparently booming, must be a concern.
This in turn raises the question as to whether current valuations accurately reflect the current strength of the US economy at this time,
at a time when the Federal Reserve could be on the verge of raising interest rates. Friday’s data on wages would seem to suggest that an imminent move in that regard is unlikely at this point, or in the next few months, but stock markets appear to be stuck in a no-man’s land of a retreating Federal Reserve and an unconvincing economic recovery.
While Friday’s jobs report was still the right side of positive,
investors were still digesting the reports out of Frankfurt that ECB officials had presented governing council members with models for an asset buying program up to €500bn of investment grade sovereign bond purchases, for consideration ahead of next week’s rate meeting.
Given the number of hints dropped in recent days by ECB President Mario Draghi that the ECB was getting ready to do significantly more to offset weak prices
, markets had been getting somewhat ahead of themselves as they sought to get ahead of the curve in anticipation of a significantly large stimulus program. News that a program of €500bn was being discussed, while not insignificant is far short of what is needed at this time, and more importantly what markets appear to have been expecting, or hoping for.
The fact remains significant obstacles remain with respect to any significant action next week
starting with this week’s preliminary assessment by the European Court of Justice
on the legality of the conditional OMT program which the German Constitutional Court declared illegal last year, which would suggest that we get some form of political fudge, which clears the way for some form of limited program in the coming weeks.
Also in focus this week we have the latest UK and US inflation numbers
which are both expected to slip sharply below the 1% level on a year on year basis to 0.7%, in the process pushing back the prospects of a rise in interest rates towards the back end of 2014 at the earliest.
– Friday’s rebound in the euro could precipitate a short squeeze after the failure to push below 1.1750. The bullish candle could well see a move back towards 1.1975 initially and a move back towards the 1.2000 level. The main resistance sits at the 200 month MA at 1.2240. A move below 1.1750 targets 1.1600.
– Friday’s pull back and the failure to sustain a move below 1.5100 could well see a rebound towards 1.5320. We do need to overcome initial intraday resistance at 1.5180 first. The daily candle formation of the last two days suggests the potential for a short squeeze. Intraday support remains at last week’s low at 1.5035 and the 1.4980 level.
– currently range trading between 0.7800 and resistance at 0.7870 with the key reversal day last week suggesting the possibility of a move towards 0.7930. Below 0.7800 retargets the six year low at 0.7744 last week.
– continues to find resistance near the 120 area with further resistance at the 120.80 level. The US dollar appears to be stuck in a range and could well drift back towards the 115.60 level. A move back below 117.80 argues for just such a move.
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