U.S. DOLLAR: FED SETS UP THE NFP
The Feds decision to reaffirm its interest in keeping rates exceptionally low was received well by the currency markets. The dollar was left to face the brunt of the decision, losing out against all majors except for the Japanese yen. The greenback declined the most against the euro in about two months by 1.03 percent, even as stocks posed a late-day retreat. Furthermore, the pound was a big gainer as traders seem to be finding more promise behind the ECB and BoE rate decisions for tomorrow. Each of the commodity dollars took their share from the dollar’s fall. The end of the Fed decision has set up the Non-Farm Payroll report for later this week, which will be a critical factor in keeping the risk trade afloat.
Exceptionally Low Levels
The long anticipated Federal Reserve Meeting has finally come, but produced little in terms of new developments. The big speculation going into the meeting was that the Fed would drop the phrase that indicates that they will keep rates at an “exceptionally low level, for an extended period.” Unfortunately this was not the case, and for the most part, the statement from the November decision was pretty much the carbon copy of the September decision, except for a few subtle changes. The Fed noted that financial market conditions are roughly unchanged, which was pared back from last month when they mentioned that markets had improved further. In addition, the Fed noted that they will only be purchasing $175 billion of agency debt, less than the previously mentioned $200 billion cap. Aside from these slight changes, the Fed’s concerns remain largely the same in that even though spending is improving, it is being constrained by a myriad of factors that include “ongoing job losses, sluggish income growth, lower housing wealth, and tight credit”. In addition, businesses continue to reduce fixed investment and inflation remains subdued due to “substantial resource slack.” The one outstanding factor that was not addressed is what they plan to do now that they have stopped purchasing Treasury securities. Nevertheless, the inclusion of the famous “exceptionally low levels phrase” will probably be a staple of future statements, as its removal would suggest that the Fed would be moving toward a hawkish bias. This is something we will definitely not see until the employment market makes a convincing recovery.
Key Indicators for Non-Farm Payrolls
Today saw the release of three key reports that usually have implications for the health of the critical US Non-Farm Payrolls report. The first, and most important of which, was the Service sector ISM report. As a real shock to markets, the report actually declined despite expectations that the industries would expand further. Even though the figure managed to remain above the 50 expansion level for the second straight month, the real cause for concern was that the employment component slipped 3.2 points to 41.1. This figure is our most trusted leading indicator for jobs and its decline makes it hard to support expectations for employment to show a comeback this month. The Institute for supply Management noted that respondents are in ‘wait and see’ mode, which explains the hiring hesitation. ADP also released its report today which showed a decline of 203,000 private sector jobs. Even though this showed a slight improvement over last month’s dismal 254K decline, it was still below estimates and therefore takes a bite out of NFP optimism. Finally, there was the Challenger Layoffs figure which was the most promising of the bunch, indicating that firings have subsided by 50.7 percent. These indicators are met with a very upbeat Manufacturing ISM that was reported on Monday and showed that its employment index actually improved. In total our indicators were relatively mixed which supports a growing conclusion that the unexpected expansion in third quarter growth was driven by productivity enhancement, not new hiring efforts. In this light, NFP is doomed to shed at least 100K jobs in the month of October.
EUR/USD: WILL THE ECB MAKE A MOVE?
The euro is seen dominating the dollar in today’s session on hopes that the ECB starts to give markets an indication on how and when they will start unwinding unconventional monetary policy. Data from today largely confirmed the general economic improvement as shown in Monday’s Manufacturing PMI. Today’s Euro-zone services purchasing manager index indicated that the sectors activity has expanded at the fastest rate in two years. However, even though Germany’s and France’s indicators remained above the 50-line, neither beat economic estimates. Nevertheless, the picture that has been painted over the last week is indicative of the improvement that might justify the large gains in the euro over the past few months. However, Producer Prices, despite being largely ignored by euro bulls, declined for the ninth consecutive month on a yearly basis. From last month, producer prices fell to -0.4% from 0.5%. The threat of consistently low prices is just one of the issues that the ECB will be considering at tomorrow’s meeting. Even though much of the emphasis for tomorrow’s schedule has shifted to the BoE’s decision, it is important not to count the ECB out. There is a growing possibility that the bank may formally discuss their plans to make an exit from some extraordinary measures like the 12-month loans that provide an unlimited amount of cash to the regions banks. The ECB’s Weber himself pointed out last week that there was the possibility of such a move. However, even though the announcement is expected soon, it is hard to pinpoint when the ECB will actually publicize its conclusions. Despite Weber’s comments, there is still the latest ECB lending survey which pointed out that credit crisis has not yet fully reversed itself. Nevertheless, it will be one thing to keep an eye on. To compound tomorrow’s frenzy, we will also be receiving Euro-zone Retail Sales.
USD/JPY: EMERGING MARKETS LIGHTEN RISK LOAD
The yen has weakened against most of its counterparts, with USD/JPY heading higher for the third straight day. Corresponding with the yen’s recent decline has been a steady downward drift in the VIX, an index that has consistently shown a high correlation with yen fluctuations. The Bank of Japan’s Shirakawa recently made comments pointing to the recovery in certain emerging markets as reducing key risks for the Japanese economy. Even though this is a good sign, it should have little to no effect on the bank’s decisions going forward. The big release for tonight is the Minutes from the BoJ’s last meeting. Since the bank recently decided to put an end to both purchases of commercial paper and corporate bonds, it may add emphasis to whether the minutes will reveal any other plans or deliberations that the bank might consider going forward. Other than the minutes, the rest of the week should be fairly quiet of data except for Friday’s Leading Index.