The Global Markets Weekly – 12/5/16

Posted December 5, 2016 by rvillareal

U.S. Jobs Recap, ECB Look-Ahead

The November U.S. jobs report was among the least consequential in recent memory. Mixed results across key dimensions were still solid for this point in the business cycle, and in light of underlying demographics. A 178,000 gain in nonfarm payroll jobs was just above expectations, buoyed by services and government hiring. A superficially-strong drop to 4.6% on the unemployment rate was helped by a drop in the labor force, albeit after strong early-2016 gains proved “good” reasons for stubborn stability in the jobless rate around 5%. Wage growth, clearly accelerating since 2014, dipped 0.1%, but after strong gains averaging 0.3% over the prior four months, and 2.5% y/y still represents improvement over time.

Taken together, the results leave well intact DE’s upbeat baseline prospect for the U.S. economy, one where growth continues to overshoot potential, and unemployment undershoots the level Fed policymakers expect to prevail over the longer term. The introduction of “Trumponomics,” particularly if enacted sooner-than-expected in 2017 and 2018, will provide a key impulse from tax and spending dimensions, along with deregulation and infrastructure plans. Policies are not without boom-bust-risks, particularly in an environment near full employment, but DE believes risks are more likely to the upside of our above-Consensus 2-3/4%-to-3% real GDP growth expectation for 2017.

Fiscal and regulatory detail shifts that loosen actually-binding restraints to faster growth—some infrastructure projects not all—should be seen as more beneficial. Delayed reforms that tinker at the margins, or big ones that introduce unintended consequences would be less beneficial for long-term growth, particularly if education and re-training are left unaddressed, weighing on potential growth.

Across the pond, the Eurozone economy is growing above trend, and the ECB will this week grapple with whether to do more once the current bond program ends next March. Current PMI readings are more historically consistent with the ECB hiking than easing policy, but markets are convinced an extension is in the cards.

The ECB is very clearly wary that political events (e.g. the Italian referendum this Sunday) could cause a return of financial market turmoil in some Eurozone countries. By focusing on the modest underlying inflation pick-up over the next six months (a contrast to the base-effect induced rise in the headline rate), the ECB can then argue for an extension at a smaller scale than the current plan (e.g. €60 bln a month), possibly then tapering at a later stage. The ECB may also be keen to signal to markets that bond purchases will have to end in the foreseeable future. It’s worth noting the rise in core bond yields started in October, prior to the recent spike in U.S. Treasuries.

• S.: November ISM Non-Manufacturing (Mo) is of less importance than usual, while we also get December consumer sentiment (Fr) and key Fed speakers ahead of the FOMC blackout period, including Dudley, Evans, and Bullard (all Mo).
• Eurozone: The ECB Council Meeting decision (Th), may see the central bank argue that currently low inflation means it should extend the bond purchase program but at a smaller scale than the current plan (eg € 60 bln a month) with the possibility of it then being tapered at a later stage.
• UK: Surveys (both consumer and business) are showing ever-clearer concern about the economy, this probably related to the unfolding pick-up in inflation that will damage real spending power. Such thinking may be evident in the further correction that Monday’s Services PMI may show.
• Japan: Revised Q3 real GDP (Th) is expected to show a mild up-revision with investment solid, but consumer spending still slow.
• China: Services PMIs (Mo) and November CPI (Fri) will in focus.
• Other Central Banks: Officials in Poland (We) and India (We) meet to set policy. India’s central bank is dealing with the less-than-smooth rollout of the government’s surprise decision to remove about 85% of currency from circulation. Ripple effects from crackdown on black market assets are weighing on day-to-day activity. Slowing inflation may allow monetary ease to counteract measures that are acting as the reverse of “helicopter money”. A cut is likely.

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