FxPro Daily Forex Brief - Surprising US jobs
Friday, 03 February 2012 | 09:47
Having been the main disappointment for most of the US recovery, the US jobs numbers have mostly surprised to the upside in recent months, with five of the past six releases coming out stronger than expected on the headline number. This is certainly a positive development that has helped to underpin some of the recent optimism regarding the US economy. But, as always, it’s a complex picture, more so than the headline numbers suggest. Whilst the unemployment rate has fallen, the participation rate (proportion of the population in the labour force) remains at multi-year lows of 64% and this is something that will have to change in the longer run if the US is to remain competitive and also broaden the tax base. Furthermore, even on the stronger trend, we are still looking at four years or so before employment reaches its pre-recession peak. Recall that the latest GDP data showed the overall economy just surpassing the pre-recession peak in the final quarter of last year. So, even on stronger numbers today, the US labour market still has a long haul ahead.
US consumers flock to the showrooms. One of the most encouraging aspects of the US recovery is the increasing preparedness of American consumers to pop down to their local showroom and buy a shiny new car. This ought to put a grin on the faces of Fed policy-makers who are still agonising over whether to give the economy another injection of QE. Last month US domestic auto sales soared to 11.05m, the highest for almost four years. At one point back in the depths of despair in early 2009, sales collapsed to just 6.4m. It is also worth noting that the major automakers have achieved these very creditable sales figures without resorting to aggressive discounting or reliance on the previously successful Cash-for-Clunkers scheme. The good news is that there is plenty of potential for this good cheer to continue. With the average age of cars in America now almost 11 years there is a great deal of pent-up demand which could underpin sales for a while. The jobs’ market has strengthened, the economy is looking a little healthier and real incomes are growing. Although sales are not yet back to where they were pre-GFC (12-13m), the industry is now more firmly on its feet.
Lofty levels for the Aussie. For the aussie bulls, the past few weeks have delivered some terrific returns. Just yesterday morning the AUD managed (by only a few pips) to briefly breach the high set late in October, although it failed (again by only a few pips) to break the early-September high. As is so often the case when risk appetite returns, it is the Aussie that is among the major beneficiaries. As well as the positive news on manufacturing emanating from Europe and the US, the currency also received a boost Wednesday night from a report which showed that the trade surplus last year reached a record, aided by booming iron ore and coal shipments. In addition, some of the recent indicators out of China have been more reassuring. China accounts for roughly a quarter of Australia’s exports. It is entirely possible that Aussie bulls are becoming somewhat blinkered. Traders are as long as they have been since August. In addition, many are still carrying huge euro short positions. In the near term, were the euro to climb further then they could be squeezed out of both Aussie longs and euro shorts. EUR/AUD may be turning after a precipitous decline over the past couple of months.
Why the ECB will have to yield on Greece. We don’t know for sure, but the ECB is probably sitting on around EUR 40bln of Greek bonds. The pressure on the ECB to take a haircut alongside private bond-holders is therefore understandable from a pure numbers viewpoint. The bank’s defence is two-fold. Firstly, its purchases were made primarily for monetary policy purposes and as such should not be seen in the same light as private sector purchases based on credit considerations. Secondly, and more crucially, the ECB views taking a loss on its holdings as breaking the constraint under which it operates regarding the monetary financing of deficits. But should the ECB stick to its guns the eventual outcome would be a transfer from the ECB to its shareholders of the gains, assuming that such gains are not used to offset losses elsewhere from its ever-expanding balance sheet. For Germany (specifically the Bundesbank), this could amount to EUR 3.0 – 3.5bln on the above bond purchase assumption, also assuming that the ECB ploughs the maximum amount allowable into its own reserves before distributing to shareholders. Herein lies a major issue with the ECB’s bond buying program; it has the potential to slowly but surely benefit the larger eurozone nations. The offset, of course, would be the impact on yields of peripheral nations. But should the ECB resolutely stick with its assumed preferred creditor status, private bond-holders will demand an ever-greater discount for taking on the risk, even though politicians have assured them that the Greek private sector bond deal will be the last. The larger the ECB’s holdings become, the flakier the pledge will look.
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