Scoreboard: Labour the point

All eyes will be on US payrolls this week, with another round of Fed comments heightening the market's sensitivity.

The main take out from Friday’s session is that the US manufacturing sector accelerated in October, defying expectations for a slowdown. Specifically, the ISM index rose to 56.4 from 56.2 and an expectation of 55.

I should note here that the ISM not only suggests that manufacturing picked up in October – if only just – it also shows manufacturing in a strong position. At 56.4 the index is well above the average of 51. This is great news and it follows other indicators – such as the Chinese PMI also out Friday, suggesting a pick-up in economic activity.  

Despite this, commodity prices actually weakened again and while moves were small in some cases – copper off 0.1 per cent, the fact is commodity prices fell when the manufacturing indicators for the US and China picked up. Crude was off a sizeable 1.8 per cent ($94.6) and gold fell about $10. The US dollar was stronger admittedly, with euro down 75 pips to 1.3486, yen at 98.8 from 97.9 and the Australian dollar at 0.9436 from 0.9477.

In my opinion, commodities have completely detached from fundamentals. Stocks for their part were mixed around the globe – up a bit in the US (S&P500 up 0.3 per cent, Dow up 0.5 per cent and Nasdaq 0.1 per cent higher), and off in Europe – Dax down 0.3 per cent, CaC 0.6 per cent lower.

Now as for what this week holds, I’m sure that the payrolls numbers will be key – but there is plenty of data outside of that (US GDP, factory orders the non-manufacturing ISM). Ahead of the employment figures, the St Louis Fed president was out on Friday night assuring markets that if the labour market data improves then a taper will probably come. We have heard this many times before and as yet no taper.

The truth is the labour market has improved ‘substantially’ already, jobs growth momentum is strong – and despite this there hasn’t been even the smallest of tapers. There is also the small question of what difference a taper would make, as the Fed has been at pains to explain to everyone, that a taper is not a tightening in monetary policy. So if it’s not a tightening, what’s the hold up?

Whatever the case, his comments will probably make the market a little more sensitive to payrolls on Friday. They come at a time when expectations for a taper have been pushed out, and when forecasts are that payrolls growth will be ‘weak’ at 125,000. That skews the risks the way I see it to an upside surprise (private demand data has been solid) and maybe growing questions as to whether the taper timing has been pushed out too far.

Looking elsewhere abroad there is no shortage of data either – both the ECB and BoE meet on Thursday night and we see Chinese inflation and industrial production figures on Friday. For Australia we see our own employment numbers on Thursday. The expectation is that the economy put on 10,000 jobs, while the unemployment rate is forecast to rise to 5.7 per cent from 5.6 per cent.

With confidence the key problem domestically, the risks to this print are evenly balanced. Anything could happen! While we’re on the subject of randomness, it’s probably not too far from the truth for the RBA as well (decision on Tuesday at 1430 AEDT). For this meeting no one looks for a rate cut and that’s probably the right way to think - although that view has changed materially over the months.

Looking beyond that it comes down to what policy makers are more concerned about – financial stability or the exchange rate and here the messages are mixed. For their part, most market economists expect the Bank to remain on hold for most of the next year. Eight look for a cut by the end of the March quarter.

In my opinion, rates should be higher – it’s as simple as that. It’s quite clear that policy makers are very keen to get the Australian dollar down – which leans against the idea of a rate hike. I think a hike is very unlikely, especially as the Bank has proved that it is willing to pay a very high price to do so. Destroying confidence and exacerbating the risks to financial stability and inflation.

Outside of that we get retail sales today and everyone looks for another soft result of 0.4 per cent for the month and 0.2 per cent for the quarter, while the ABS house price series is also out, but we already know house price growth is picking up.

It promises to be a busy week. Enjoy!

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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