The ramifications of the government shutdown continued to affect the US market conditions this week. Starting with warnings about the US credit rating, to the expectation of a Fed refraining from removing QE well into 2014, the dollar was heavily sold across the board.
Although the week was quiet in terms of economic data, some Fed officials reiterated their concerns over the need of better labour market figures to support economic growth in the country amid the government’s partial shutdown, comments which added further pressure on the greenback.
Then the delayed US payroll number came out, and it had the effect of the straw that broke the camel’s back. Indeed, despite higher revisions on employment numbers, the key market focus was the disappointing nonfarm payrolls, and as the US newspapers argued, “The job market isn’t making it any easier for the Federal Reserve to make decisions about its $85 billion monthly bond-buying programs.”
In summary, the weaker US payrolls number forced markets back into carry and risky trades this week on the view that the Fed’s taper had to be delayed well into the middle of 2014; and for now, risk assets are comfortable grinding higher on prospects of unlimited continuous QE. Of course, the major winners tend to be the usual suspects; the euro, the Pound and the Swiss franc.
In summary, the euro continues to be the best performing currency as investors continue to perceive the European crisis as an old nightmare, hence giving it back its safe haven status. The Euro reached a high of 1.3832 on Friday, to end the week at 1.3802.
Although the Bank of England stated in its release of the MPC committee minutes that policy makers were unanimous in rejecting higher interest rates, the Pound continued to gain reaching a high of 1.6257 on Thursday to end the week at 1.6165
In Asia, Japan’s trade deficit continued widening after the number released in the beginning of the week posted a seasonally adjusted trade deficit of ¥1,091.3bn in September, climbing from Augusts’ ¥820.8bn deficit, thus showing a continued weakening in the momentum of the trade balance recovery.
Investors’ disappointment translated into a poor price action in the dollar yen, doubting the effectiveness of the Bank of Japan policy actions. The Yen strengthened to reach a high of 96.94 against the Dollar, however closed the week at 97.47.
In the commodity complex, Precious metals had a strong recovery after the US economic data. Indeed, the weak September US non-farm payroll pushed gold and silver prices two percent and 2.3 percent higher on the day and up 2.5 percent and four percent for the week, respectively. Another supportive factor for the gold market appears to be a strong physical demand out of China perceived to be the world’s largest consumer and importer of gold jewellery this year.
Looking ahead, the next event risk will be the October US ISM report, which is to be released next week. A miss on that front could see Gold prices move sharply higher
September payrolls rose +148k, with net +9k revisions to the prior 2 months. The three and 6-month moving averages stand now at +143k and +163k, respectively. At the sector level, construction jobs rose +20k—the largest increase since last February (+48k). Manufacturing increased +2k compared to a gain of +13k in the prior month.
On the other hand, the unemployment rate fell one-tenth to 7.2 percent. The decline in the unemployment was a “good decline” in the sense that it was not due to individuals leaving the labor force. The household survey showed an employment increase of +133k, while unemployment fell -61k. At the same time, the labour force participation rate remained unchanged at 63.2 percent. The employment-population ratio was also steady at 58.6 percnet. This suggests that the participation rate may be in the process of stabilizing and could ultimately turn higher.
The Bank of Canada reiterated this week that it continued to expect the global economy to expand modestly (2.8 percent) on 2013 although it considered that the composition of global growth was now slightly less favourable for Canada. BoC dropped its global growth forecast slightly lower from 3.5 percent to 3.4 percent for 2014 and from 3.7 percent to 3.6 percent for 2015. The bank indicated that this slower pattern of growth was primarily due to a softer economic outlook for the US where it now sees growth of 2.5 percent in 2014, down from its previous projection of 3.1 percent. Despite the slight improvement in US growth, the bank now expects Canada to grow by 2.6 percent in 2015 compared to its previous estimate of 2.7 percent. They also removed any reference to a potential normalisation of interest rates over the next twenty-four months.
Another boost to the euro came after the ECB executive board member Joerg Asmussen mentioned this week he had no specific worries about the Euro’s exchange rate, even as the single currency’s strengthening against the US dollar could potentially undercut the bloc’s nascent economic recovery. “In nominal terms and in real effective terms, which is more important, it is within the band we have seen for the last ten years. I don’t have any specific worry on the exchange rate,” he said in an interview with Italian newspaper. He also reiterated that the ECB did not have an explicit exchange rate target. He said that the exchange rate is factored into the ECB’s forecasts for inflation and growth,.
German business optimism dropped in October more than expectations, in a sign that Europe’s fledgling economic recovery is less than robust. The Ifo index slipped to 107.4 points in October from 107.7 the month before. Market expectations were for a modest rise to 108.0. It was the first decline after five months of increases and follows a dip in surveys of activity in the services and manufacturing sectors.
The Peninsula
