The least we can say is that business gets worse in Germany.
The third quarter has been rough for the German economy, two thirds of companies in the DAX already reported results and the overall earnings missed the estimates by a decent 16.56%; the outstanding underperformance in the financial sector earnings (-62.72%) add to worries that the banks have not sufficiently recovered to fully cooperate or indeed benefit optimally alongside the ECB’s attempts at growth-boosting measures.
Sales in basic material and industrials tumbled worryingly also, the figures remains 3-4% short of market expectations in the last quarter.
Apparently the slowdown in China, which stands for 10% of German exports, has not been anodyne; the industrial production retracted by an extra 1.1% in month of September, following the 1.2% drop in August. Naturally, the DAX opened downbeat in Frankfurt and seems unable to step above the 11000 mark, even with the cheapening euro.
Euro made an attempt to regain the 1.09 mark against the US dollar. Traders are apparently sellers on any rallies before the US nonfarm payrolls. The US dollar appetite is clearly strong on hawkish comments from the FOMC member especially in light of the rhetoric that only as print sub 120,000 in the nonfarm payrolls would put any near term monetary tightening off course. More resistances are seen at 1.0960 (minor 23.6% on Dec’14 – Mar’15 decline) and 1.0975 (200hma). Decent vanilla calls trail below 1.0850 for today’s expiry.
US nonfarm payrolls will not damage December rate hike expectations.
The US nonfarm payrolls and jobs data are the main macro events of the day. It’s all about the US dollar. The US 2-year yields hit a 4-year high yesterday on hawkish Fed expectations for a December rate hike. The consensus for the NFP in October is 182K vs 142k last month; unemployment rate is expected to have improved to 5% with 0.2%m/m rise in average earnings.
As the Fed officials downplay the slowdown in US labour market recovery, soft figures from the US today could not suffice to damage the hawkish sentiment regarding the Fed. It appears that a read above 100K is legitimately sufficient to keep the possibility for a December rate hike warm and safe.
Yellen said on Wednesday ‘At this point, I see the US economy as performing well […] Domestic spending has been growing at a solid pace and if the data continue to point to growth and firmer prices, a December rate hike would be a live possibility.’ According to St Louis Fed slowing in the labour market is ‘natural at this point in recovery, 100-250k job growth adequate’ for keeping the December rate hike on the table.
The market gives 56% probability for a December Fed rate hike.
The SNB reserves expand to record
The Swiss National Bank’s official reserves increased to a record high of 550.9bn francs in October from 541.5bn. Attempts to stabilise the Swiss franc against the US dollar and the euro in Q by the SNB may well be reaching an impasse. The ECB is by all accounts moving toward a more unorthodox monetary policy by December and the SNB can do nothing but adjust its own monetary policy and its budget via riskier investment portfolio and lower rates.
The negative rates have proven to be efficient in diminishing demand in franc. However the renewed weakness in euro will increasingly weigh on SNB’s budget. The euroswiss rate futures hint that the expectation for more negative Swiss rates are now being priced in.
The SNB will need to spend more to keep the EUR/CHF within 1.08/1.10 range. The SNB will almost certainly succeed in keeping the cross within the 1.05/1.10 target band to the end of the year, yet at an increasingly higher expense.