NFP Surprisingly Positive, But October Numbers Revised Down

Without a doubt, the big news (read: surprise) out of the US this week was the November nonfarm payroll numbers, which was released on Friday. With expectations generally curbed at around +80-90K due to Hurricane Sandy and concerns over the looming Fiscal Cliff, the read of +146K was a big surprise and almost made everyone forget that we are still in a state of struggle.

However, the high number was also accompanied by a negative revision to the October number, from +171K to +136K. The problem with the revision is dual. First, 35K fewer jobs than initially thought changes many models and shifts the trend line followed until now. Second is the origin of the revision. It turns out that most of the revision is due to an overestimation of government employment numbers. So we have fewer government employees than we thought, so what?

Well, going back a week in time to the second third quarter GDP estimation (+2.7% from Q2) we recall that the government component was a very significant one in the expansion number. With government employment weaker than initially thought, this could be a negative signal for government expenditures altogether and this could have an adverse effect on GDP for Q4 (as October is Q4). A well-informed investor should keep these in mind when speculating over the strengthening of the USD in the near future.

Other than that, data out of the US had been generally very encouraging. While manufacturing numbers are less impressive than expected, the private services and construction sectors are demonstrating real resilience and persistent growth. For the optimists, this is yet another signal that the US economy is on the right track to recovery.

And yet, nothing is certain, as the Fiscal Cliff situation is still unresolved. Although under emergency measures, the government can extend the current state by another three months, this will only make uncertainty linger. A resolution (in the form of one compromise or another) must be reached in order to remove this cloud over the American economy. As of yet, no real and meaningful progress like that has been made.

This week, the FOMC will meet. The official decision that is supposed to come out of the meeting is regarding the Fed Funds Rate, which is not expected to change. More importantly though, in this meeting, the FOMC will likely discuss its monetary policy and the active steps it is taking towards stimulating the US economy.

Currently, the Fed is engaged in both QE (3) and Operation Twist. The consensus on the street is that Operation Twist will be replaced by further debt repurchases and that unlike QE3, this will be purchases of government-issued debt, not Mortgage-Backed Securities. If that happens, there will be consequences for the USD, but that remains to be seen.

In Europe, negative interest rates were at the center of attention this week. Credit Suisse, the giant Swiss bank, informed customers this week that they will be charged interest rates on their deposits. Then on Friday, ECB President Draghi announced that the ECB interest rate will remain at 0.75% for December, but that the staff and the board have engaged in long discussions on the feasibility and consequences of negative rates. That means that further cuts are definitely on the table.

With both GDP estimates (for Q4 2012 and H1 2013) and a lower-than-expected inflation read, further easing (in the form of a rate cut) is something that ECB is certainly contemplating. One is left wondering, though, about the limited arsenal the ECB has, if it reaches the point of negative interest rate (which will exhaust the effectiveness of one of the bank’s most important monetary policy tools).

Next week, watch out for announcements coming out of the Wednesday ECOFIN Meeting, where the central supervisory mechanism will be discussed. On Thursday, the Eurogroup meeting will convene to shed more light on the situation with the Greek Debt crisis.