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By Gaurav Kashyap, Head of DGCX desk at Alpari ME DMCC
US Data continues to impress
Friday's Non-Farm payroll report showed the US economy added 120K new jobs during November (expectations were for 125K new jobs), with the September and October readings also revised higher.
The overall unemployment rate dipped from 9.0% to 8.6% (the lowest since March 2009) and 140K new jobs were created in the private sector (slightly lower than expectations of 150K new jobs). Following the improved report, risk appetite surged and investors exited out of US Dollars and poured into higher yielding assets - stocks moved higher, commodities remained well bought and currencies such as the Euro and British Pound trended higher against the Greenback.
On face value, the latest job numbers paint a good picture for the US economy - an improving labour market is at the very base of a solid recovery for the US and therefore for the global economy. However, a closer look at the numbers suggest that all isn't necessarily well in the US labour market. Seasonally, the fourth quarter tends to see a bump in hiring due to the heavy retail turnout as a result of the Thanksgiving and Christmas holidays.
Such hiring is seasonal and therefore a lot of the new jobs being added are seen as temporary. Moreover, Friday's data showed that the number of people who are no longer part of the labour force increased by 487K to 86.5 million, dragging the participation rate down to 64.0% from 64.2%. In order to kick-start a recovery, the participation rate should be increasing as opposed to what we are seeing now.
The other key headline number out of the US, the ISM factory index, showed that US manufacturing increased in November to 52.7 (up from 50.8 in October). Along with Friday's strong job report, the ISM release will add weight to the argument that the US economy is recovering and can give the Federal Reserve more breathing room when it comes to QE3. With the data points improving, the need for additional easing measures continues to diminish.
Global Central Banks extend their plans
In a surprise announcement on Wednesday, the Federal Reserve along with five central banks - the Bank of Canada, the European Central Bank, the Bank of England, Swiss National Bank & Bank of Japan - announced that they would be lowering the interest rates they charge on US Dollar loans to banks in their jurisdiction (outside the US).
With the Fed reducing the interest charged by 50 basis points, this would improve Dollar swap lines and help ease the liquidity issues plaguing the global economy. The move follows similar action seen in June 29, 2011 when the same banks announced they were extending the plan to 2012. With Wednesday's latest extension until 2013, the US Dollar sold off rather aggressively as reduced interest rates on US dollar loans would see an increase in the demand for such loans and the resulting currency.
And with the prospects of a large supply of US Dollars being made available, the Greenback sold off across the board and equities spiked. Equities were doing well from earlier in the day after the People's Bank of China announced that they would be reducing the reserve ratio requirement by 50 basis points. The latest easing measures from China were well received by the markets as it weakens the prospects for their economy to suffer a hard landing following some suspect growth numbers of late.
European Bond auctions see strong turnout
Across the pond, a strong turnout in several key European bond auctions contributed to the improving risk scenario in financial markets this week.
Staff
