The week that saw six G10 central banks meet concludes with U.S. and Canadian jobs data and the policy announcement from the central bank of Mexico. Although there is some talk of a rate cut given the string of much weaker than expected data, we think given the larger context, and uncertainty surrounding Fed tapering, that Banixo is likely to be content with a dovish statement.
Investors have not waited for today's jobs report to continue to discount, and some may argue, over discount, tapering by the Federal Reserve at the mid-month meeting. The U.S. 10-year yield increased 20 bp this week to knock at the 3.0% level. Yesterday the weekly initial jobless claims slipped to new cyclical lows, and although it is for a period not covered by the non-farm payroll survey, investors understood it as an indication of momentum in the labor market.
More important than the ADP estimate, which essentially showed the same pace as July, the U.S. service ISM was near an 8-year high and the employment component was at the best level since February. This all points to the risk that a higher number than the surveys suggest has been discount (surveys shows about 180k net increase in private sector hiring).
Canada is expected to have grown about 20k new jobs after losing 39.4k in July. Almost half the jobs lost in July were full-time. Any disappointment may be mitigated by a recovery in the IVEY PMI back above the 50-level.
The dollar's performance has been mixed this week. The dollar bloc is the strongest on the day and week. The Aussie was helped by the RBA statement and the market has swung from pricing in a small chance of a cut to a modest chance of a hike over the next 12-months (OIS). News that construction continues to contract in Australia has been shrugged off today, perhaps with an eye toward the weekend election whose outcome is likely to fan expectations that the mining and carbon tax can be cut or even abolished. Meanwhile the RBNZ meets next week and is likely to keep its modest tightening bias in place, while the recent decline of the New Zealand dollar seems to have largely, even if not completely, satisfied the government.
After reporting a robust string of PMI reports this week, the U.K. has disappointed a bit with the flat industrial production report today. The 0.2% rise in manufacturing output was also a tad below expectations. Nevertheless, given the sharp increases in June ( mfg + 2.0% in June), today's report must be seen favorably. The real disappointment lies with the trade report. There was a sharp deterioration in the balance to a GBP9.6 bln deficit form GBP8.2 bln in June. The market expected a little changed report. The deterioration came from the non-EU component. It showed a GBP4.5 bln shortfall compared with GBP2.8 bln in June. The silver lining in the report is that it shows a small improvement in trade with the EU itself.
Another story that emerged this week was better data from Spain. Unemployment appears to have slipped and both PMI readings were above 50 and today Spain reported July industrial output was down 1.4% on a workday adjusted basis in July after a 2.2% decline in June. The Spanish stock market is one of the few European bourses up today and on the week its 3.6% gain makes it among the strongest performers. The 10-year benchmark yield is up 12 bp this week compared with 17 bp in Italy.
German data disappointed today. The trade surplus in July was 16.1 bln euros, a bit off the June pace (17 bln), but still strong. However, the disappointment was with the details. Exports had been expected to be up 0.7%, but instead fell 1.1%. Following yesterday's disappointing industrial orders data, a soft industrial production report may have an been anticipated, but in the event the 1.7% decline, coupled with a downward revision in the June series (2.0% from 2.4%) adds to the sense that after recovering in Q2, the German economy has moderated in Q3. Separately, we note that Moody's has revised its outlook for German banking system to stable from negative.
Note that after a 16 year hiatus, a bond futures market re-opened in China. It is an important step that will allow better risk management and is seen as a necessary step toward greater financial deregulation. This will also increase the attractiveness for foreign investors. The initial futures contract is based on a 3% 5-year note with quarterly contracts, as is the international practice.