The extreme low volatility of late last year has yielded in the first hours of the New Year to a roller coaster ride in volatility on the fiscal cliff “deal” and FOMC minutes. Cue the December US employment report…
The FOMC minutes released late yesterday have the market in a tizzy, as any perceived threat to the guarantee of the Fed money printing gravy train will have risk appetite on the defensive in a hurry. As this is feeding into a bond rout (buy the rumour and sell the fact of Fed QE3.5 purchases?), USDJPY can't seem to find a ceiling for the moment.
On the fiscal cliff “deal”, besides our own Steen Jakobsen’s take on this “non-deal”, the worthy Mr. Rosenberg of Gluskin-Sheff has also weighed in and makes several key points in his analysis of both the deal itself and what is still in the pipeline. Key takeaways from his commentary:
- The “sequester”, or spending, side of things has yet to be decided and Mr. Obama and a new Congress will have to strike a deal.
- The budget ceiling circus has pitched its tent and is ready to entertain us with circus acts of political brinksmanship
- What was actually agreed still takes a chunk out of growth potential (perhaps 1.5%) as the payroll tax cut has expired and high earners will need to pay considerably more in taxes.
We have seen a critical development in EURUSD, as the sell-off back below the old 1.3170 high has been the most significant threat to the up-trend that set in since last summer. Round numbers like 1.3000 are often psychologically critical, but the next really interesting area lies lower at the old 1.2880 pivot area and then the 200-day moving average, which is currently around 1.2780. Note the big trendline that is also in play not far below the 1.3000 area at present.
NFP – to complete the “hawkish Fed” hysteria?
After yesterday’s FOMC minutes gave the markets fits of doubt about the longer term intentions of the Fed (somewhat unjustly in my opinion – the controlling Bernanke/Yellen/Dudley trio is very clear on its intent to maintain easy policy. Still, we do have the beginnings of a Bernanke reappointment/replacement process just several months away and the variety of opinions among FOMC members is striking.), we have the December US employment report on tap.
The most interesting scenario today, therefore, is one in which we get an upside surprise to the payrolls (anything well over +180k) and a move lower to a 7.6% unemployment rate. This could cement the perceived threat of less Fed balance sheet expansion in the pipeline and see a follow up of the moves from late yesterday and overnight. Look especially for a climactic push higher in USDJPY if the bottom continues to drop out of the bond market. The moves elsewhere will depend on whether risk appetite responds negatively to the threat of less Fed easing rather than to the positive of more strength in employment.
Meanwhile...
Meanwhile, keep in mind the risks that Mr. Rosenberg outlines above and the fact that employment is the most lagging of indicators, so any bond market rout and JPY blow-out sell-off on the heels of today’s report might mark a high water mark for some time to come in JPY crosses. At some point, barring a systemic panic in JGB’s, we will need to see a consolidation in the JPY move and it still sits poorly in my befuddled head to have, for example, a weak NZD and a weak JPY at the same time – which we’re seeing at present ahead of the US employment report. But we’ll need to see bonds shoring up their losses and some real risk aversion to see the JPY consolidating.
We’ve also got the ISM non-manufacturing survey hot on the heels of the employment report at 1500 GMT – and it is a far more important indicator of the actual health of the dominant US services sector, though it will be the surveys for this month and onward that take on more importance now that we are “post cliff” in terms of wage earners now understanding what their take home pay will be from this month on.
Look out today for the Canadian employment report as well – the 0.9925 area in USDCAD looks important for rejecting the latest sell-off, though it is clearly parity that is the big range resistance. Also, we have a passel of Fed speakers out jawboning in San Diego much later today.
Postscript on FOMC minutes
One overall takeaway from the FOMC minutes is the degree to which the entire attempt at Fed transparency and the announcement of “policy thresholds” does absolutely nothing to improve the market’s understanding or anticipation of what will happen next, and really introduces more danger than it prevents (maximum danger is always created by excessive complacency and leverage because the market thinks it has things all figured out, only to discover that it doesn’t, rather than in periods of more healthy volatility and uncertainty). Look at the section of the minutes in which “a few participants” are already beginning to second guess the idea of thresholds because they are not “qualitative” enough as quantitative thresholds might give the market a mistaken impression of the Fed’s intentions, etc... As I stated after the FOMC meeting, it will be very easy for the US unemployment rate to reach 6.5% even with relatively flat hiring trends due to the huge demographic shift in the US (baby boom generation retiring starting especially in 2012 and ranks of retirees growing rapidly over next ten years) and because of the declining participation rate.
Economic Data Highlights
- Australia Dec. AiG Performance of Services Index out at 43.2 vs. 47.1 in Nov.
- China Dec. HSBC Services PMI out at 51.7 vs. 52.1 in Nov.
- Germany Nov. Retail Sales out at -0.9% YoY vs. -1.6% expected and +0.2% in Oct.
- Sweden Dec. Services PMI out at 49.1 vs. 47.2 expected and 46.3 in Nov.
- Spain Dec. Services PMI out at 44.3 vs. 42.6 exp. and 42.4 in Nov.
- UK Dec. Services PMI (0930)
- UK Nov. Mortgage Approvals (0930)
- Euro Zone Dec. CPI Estimate (1000)
- US Dec. Change in Nonfarm Payrolls (1330)
- US Dec. Unemployment Rate (1330)
- US Dec. Average Weekly Hours and Average Hourly Earnings (1330)
- Canada Dec. Unemployment Rate and Employment Change (1330)
- US Nov. Factory Orders (1500)
- US Dec. ISM Non-manufacturing (1500)
- US Weekly DoE Crude Oil and Product Inventories (1600)
- US Fed’s Plosser to Speak (1815)
- US Fed’s Lacker to Speak (1830)
- US Fed’s Yellen to Speak (2030)
- US Fed’s Bullard to Speak (2230)