Payroll numbers on Friday highlight once again that the US economy has much more momentum than the Fed – and most financial market economists – think. The report showed 204,000 jobs were created in October, which was substantially above the consensus forecast of 120,000.
Recall that economists had expected a ‘weak’ number because of the government shutdown, and certainly the shutdown would have impacted the numbers. Without that, jobs growth would likely have been even higher – perhaps 250,000 or above. In addition, upward revisions saw 60,000 more jobs created and so we are looking at average jobs growth of over 200,000 for the last three months, which of course is extraordinary strong growth – not the ‘weak’ or ‘tepid’ growth that's become the consensus. Yet I’ve already read from Fed watchers that the result was ‘fluky’, or mixed, or – and this is truly unbelievable – that the Fed needs more time to determine whether jobs growth has picked up. These views are simply not credible.
Once again the Fed and its cheerleaders are simply trying to justify why they don’t need to taper, regardless of actual economic conditions, and this of course is why we saw such a strong bid on Wall Street. Bad data means no taper and good data also means no taper. The S&P500 then finished 1.3 per cent higher, the Dow was 167 points higher and the Nasdaq rose 1.6 per cent.
Of course, the reason the Fed is finding it so hard to taper can be found in the Treasury space. The US 10-year bond yield spiked 15 bps to 2.75 per cent on the payroll result. It’s obviously not the smartest investment decision to buy government bonds – a guaranteed capital loss over time and no yield to speak of.
Anyway, that jobs result kind of dominated the price action on Friday night, and in addition to the strong rally on US equities and Treasuries, the dollar index got a bid. This means of course a weaker Australian dollar, which fell almost a big figure to 0.9384. The euro was then 170 pips lower at 1.3353, while the yen sits just under target at 99.2 from 98.14.
Otherwise commodities showed no real reaction to the data, other than gold, which sold off almost $24 to $1284. But otherwise there was little boost from the US payrolls or strong Chinese growth figures, which were also out.
The fact is both China and the US economies are accelerating. So while everyone talks about a slowdown in China, we found out on Friday that investment continues to surge – up 20 per cent or so, with retail spending booming, up 13 per cent or so, and industrial production remains very strong too – rising about 10 per cent etc. Even so, WTI crude was little changed up 0.4 per cent and while Brent rose 1.5 per cent, this just offsets a 1.4 per cent fall the session prior. Copper was flat, basically (up 0.2 per cent).
So all of that is a pretty good backdrop for our market this week, and if the SPI’s any guide our stocks should be up 1 per cent today. All good. Otherwise, I’m not sure there is going to be too much view-changing data for the rest of the week, unless we see some news flow from China’s four-day plenum.
For Australia, confidence figures are out Tuesday (business) and Wednesday (consumer), and with confidence being the critical determinant of our economic fortunes, these should be watched closely. Realistically, and despite some biases to the downside, we should really be seeing a another strong pick-up in confidence – even if only because the global economy is picking up. I mean, the iron ore price is still over $130, and recall it was the slump in iron ore prices that sparked the panic among domestic policy makers over the end of the mining boom and recession. So, unless business leaders have their heads in the sand or spend all their time watching reality TV, these real-world outcomes should lift their spirits.
Otherwise, we get home loans data today. Auctions are booming and it would be highly unusual for credit to not follow. For the US, heavy-hitting data is quite sparse, so we’ll basically have to wait till Friday when we see industrial production figures. There is of course plenty of Fed speak as well, although they all seem to speak with a forked tongue – so the value of it is questionable.
Have a great week…
Adam Carr is a leading market economist.
Follow @AdamCarrEcon on Twitter.