- Friday's strong US payrolls lift sentiment and USD.
- Strong Chinese November data but weak exports weigh.
- Speculation on ECB rate cuts continues.
- Focus today on who will succeed Monti as Italy's prime minister, Scandi releases. Markets Overnight
China and the US are back from the lull but so is speculation on ECB rate cuts. Friday’s November US employment report was solid, showing private employment up by 147K (consensus: 85K), albeit with some negative revisions but these were centred in the government sector. The unemployment rate dropped to 7.7% but this was due to a decline in the labour force.
Although the Fed is likely to welcome the improvement in overall job growth, unemployment is still far from its comfort zone. As a result, we expect the Fed to replace the expiring Operation Twist with outright Treasury purchases likely to be announced at the FOMC meeting later in the week.
Adding to upbeat sentiment was the batch of Chinese November data released on Sunday: industrial production rose 10.1% y/y (consensus: 9.8%) and retail sales rose more than expected whereas inflation came in lower than forecast. However, trade data overnight revealed a much-below-forecast trade balance, underlining that Chinese exporters are suffering from the downturn elsewhere. Overall however, the November data underline that the rebound in China is gaining footing and, with inflationary pressure still restrained, this should allow the People’s Bank of China some leeway in supporting activity going forward.
Notably the November data highlight the need to move towards more consumer-driven growth. Elsewhere in the Asian region, Japanese data confirmed previous Q3 GDP estimates with little market impact.
Separately, speculation on ECB looking to cut rates continues: on Friday an anonymous source was quoted saying that the governing council is split on whether the ECB should resort to rate cuts. It now appears that unless the economic outlook improves markedly the majority of the council could be ready to trump Draghi, Weidman and others and move towards negative rates territory.
Equity markets were mixed in both the US on Friday and in Asia overnight despite the overall positive data surprises out of both regions. US Treasuries saw short-end yields drop a little, whereas the 5-year and beyond segment was up a few bp, leaving the curve slightly steeper. FX markets saw the dollar gain against most G10 currencies except JPY and CAD; EUR/USD extending last week’s losses as lower German GDP estimates and Italy’s Monti resigning weighed alongside the ECB rate-cut speculations. Brent crude oil still below the USD 108 per barrel mark but base metals have been lifted by China.
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