SCOREBOARD: Jobless joy

Spain gets another bond downgrade but signs on US jobs show its economy is turning around.

A slump in US jobless claims to 339,000, the lowest point in over four years, certainly helped aid a risk bid, but fact is, the turn in sentiment began in Europe and well before those figures. Markets are feeling decidedly more optimistic on Europe (for last night at least), despite the best efforts of S&P.

That decision to downgrade Spain to BBB- from BBB doesn’t appear to make much sense.

Consider that the ESM and ECB effectively rule out any liquidity crisis developing and Spain is not insolvent. Theoretically the decision does add to the pressure for them to request a bailout though, as it may prevent some funds who rely on the ratings agencies, purchasing Spanish debt.

Although that said, markets appear to have brushed off S&P’s decision, reflecting instead on the fact that measures to date make their debt a safer investment. The Spanish 10yr for instance fell 15bp to 5.74 per cent while Italy’s 10yr yield fell 16bp to 4.89 per cent. A very strange decision indeed. So in spite of that decision, the euro shot higher – 50 pips to 1.2927 and European stocks were bid – the Dax rose 1.1 per cent, the CaC was up 1.4 per cent and the FTSE rose 0.9 per cent.

Across the Atlantic, Wall St initially followed the European lead and got a boost from those jobless claims figures. Although at the high, the S&P500 was only about 0.5 a per cent higher.

Even those modest gains weren’t held as the offer came on. As to what drove that selling pressure I’m not sure. There is plenty of scepticism concerning those jobless claim figures, many argue the fall is overstated due to incomplete reporting from some – or one – state.

That may be true but it’s beside the point. Claims aren’t rising, they are falling, that’s the point, and the US economy is accelerating. Indeed it is one of a series of global data points highlighting that the global economy, far from slowing as widely believed, is in fact accelerating, sharply in some cases.

Whatever the case, into the close the major US indices were flat virtually – with the S&P500 only 0.02 per cent higher (1432), the Dow down 10 pts to 13334, while the Nasdaq was 0.2 per cent higher (3057).

Commodities had a better session of it and crude in particular bounced back, rising 1.3 per cent to $92.4. Gold was then up a few bucks to $1768, while copper rose 0.8 per cent.

Stronger growth data and a weaker US dollar were the key supports here and most of the major currencies were stronger against the USD. Australian dollar is little changed at 1.0263 following a 50 pips spike after the employment figures, GBP rose 30 pips to 1.6045 while Yen is at 78.32.

Important to note here that the Japanese are talking about taking further action on the Yen, without US consent. I find the last bit interesting as discussion about what rates are acceptable do appear to be taking place privately. Not so privately now I guess. If that’s the case, the odds of some new accord at some point would seem to be a strong possibility.

Anyway, elsewhere for the price action, US Treasuries initially sold off and the 10-year hit a high yield of about 1.73 per cent. They went bid as stocks sold off and in end were little changed (at 1.675 per cent)from 1630 yesterday. The two year is then at 0.26 per cent and the 5-year at 0.65 per cent.

Bits and pieces otherwise – US import prices rose 1.1 per cent in September while the trade deficit rose to $44.2 billion from $42.5 billion. This was on the back of a 0.1 per cent fall in imports and a 1 per cent fall in exports.

As to those Aussie jobs numbers yesterday, I know everyone is excited about the rise in the unemployment rate to 5.4 per cent and hopefully we’re one step closer to the recession we still haven’t had, but everyone seems to want. The thing is, the figures weren’t all that important and I hate to say it, were actually quite good. That the unemployment rate shot up to 5.4 per cent doesn’t actually mean anything at this point. To see this consider that same thing happened last year (although to 5.3 per cent) and the unemployment rate came back down the very next month.

This data is very volatile in other words. The rise in the unemployment rate itself was due to a spike in participation (from 65 per cent to 65.2 per cent), specifically from NSW, so that we now have participation rates that existed prior to the GFC (three year pre-GFC average was 65 per cent). It’s not like participation is low or anything then – participation is still elevated although it is down from its GFC peaks – it seems to be normalising after that post GFC spike we saw.

On the positive side we saw a strong rise in full-time jobs and a lift in hours. That lift in hours is another reason why the unemployment rate rose. The bottom line is that the figures still show a very healthy labour market – that’s why the Australian dollar rose – one that is inconsistent with a cash rate just off its pre-GFC low. Especially with elevated hours and an actual lift in employment. The idea it supports further rate cuts is simply laughable although we know that economic data isn’t the primary guide for the RBA. As I have argued consistently the news flow, rumour and persistently incorrect forecasts seem to be more important.

On their recent performance, another cut is highly likely. As for the data today there is nothing of note for Australia and so we cast our gaze abroad. There are three key pieces of data worth looking at then. European industrial production, US producer prices and the Michigan Uni’s measure of consumer confidence.

That’s about the lot, have a great day and a great weekend…


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