After a pretty quiet day in terms of economic data, sideways chop left North American equities stumbling into the close, with the S&P off by 0.32% as traders and investors tried to gauge the probability of a taper from the FOMC next week. Job openings in the US for October climbed to their highest level since May of 2008, increasing to 3.93M as employers looked to ratchet up hiring despite the government shut-down earlier in the month. The number was slightly lower than economists had forecast, but still telegraphs confidence in the labour sector as employers look to add new workers on optimistic demand projections. The elevated number of openings also underscores the challenges the economy is having with consumer prices, as it appears a glut of jobs could absorb some of the weakness in the labour market, but may act as a headwind to inflation with an absence of upward pressure on incomes due to strong supply.
The Loonie managed to post another day in the black, spreading its wings for a little bit of a reprieve after an all-around solid day for commodities. Last week’s speculative position report from the CFTC shows that the short CAD position is back to levels not seen since the first half of the year, with the net short position standing just shy of $4.0bn. A sustained break of 1.0600 to the downside in USDCAD could exacerbate some of the profit taking as the weaker Loonie bears capitulate, although corporate demand for USD is likely to step in in the mid-1.05s should this occur. USDCAD managed to stop its slide pivoting around the 1.0600 mark during yesterday’s session, with little wind taken out of the CAD’s sails on the Bank of Canada’s semi-annual Financial System Review. The Bank of Canada noted that while the high level of household debt and imbalances in the housing sector are the most significant vulnerabilities to address, they did lower their overall rating of risk to Canada’s financial system from “high” to “elevated.” The central bank also illustrated the risks to the financial system from the housing sector have not changed from the last report, reaffirming our view that these imbalances have not subsided to a point where the Bank of Canada would entertain cutting interest rates; while they might have room to get a little more dovish on their interest rate guidance, there are not at the point yet where they can afford to risk cutting rates without reigniting concerns of excess borrowing.
The overnight Asian session was a rocky one, with equity indices dragged lower in response to the jitters seen earlier on Wall Street. The Nikkei was pressured lower and shed 0.62% as the yen continued to gain against the USD, while the Shanghai Comp closed down by 1.49%, prior to loan data in China hitting the wires. The pace of credit expansion refused to slow over the month of November, with new loans hitting 624.6bn yuan and beating the median analyst estimate of 580bn yuan. The data should have people questioning how serious the government is about reining in credit growth and working towards a more balanced approach moving forward. While the economic data hasn’t been dreadful recently, the mixed picture does suggest that policymakers might be more hesitant to choke off the liquidity spigot in order to support the economy in the short term.
As we approach the midway point of the European session, sentiment has picked up and we are seeing the major bourses well situated in the black despite any meaningful data crossing the wires. French payrolls in Q3 and German CPI in November both came in as expected at -0.1% (q/o/q) and 0.2% respectively, with the lack of surprise catalysts doing little to deter the run in equities. The Stoxx is up by 0.53% while the EUR remains buoyed continuing to hang in the mid-1.37s against the USD.
Heading into the North American open, the big news from yesterday was that Washington manage to reach a stop-gap bipartisan budget deal, and if passed by the House and Senate, will result in the avoidance of a January 15th government shut-down. The deal reached by Patty Murray and Paul Ryan is set to cut roughly $20bn of the $17tn in outstanding debt and will restore about $65bn in automatic sequestration, but fails to deal with any tax or entitlement reform. In addition, the Democrats were unable to secure an extension of benefits for workers unemployed longer than 26 weeks, which will expire at the end of the year and amounts to benefits being cut for 1.3M people. The deal is well short of representing a grand bargain, and is likely to kick up opposition from both sides of the aisle, yet still expected to pass in both Houses because of the support for the lawmakers which brokered the deal. The knock-on effect for financial markets is that navigating another government shut-down in the new year increases the chance of a December taper from the Fed due to decreased political uncertainty, although the debt ceiling debate in February is still an area of concern moving forward. Another interesting consideration is the ramifications from the inability of the Democrats to extend unemployment benefits, and what the effects on the labour market will be. In the extreme case that all 1.3M people exit the labour force after benefits expire in Q1, unemployment could drop by 0.8% according the JP Morgan, materially effecting the Fed’s forward guidance and policymaking decisions in 2014.
S&P futures have risen from their lows earlier in the European session to now pivot around the UNCH mark into the opening bell, while the Loonie is having trouble sustaining the earlier strength it witnessed on the back of the Chinese loan data and is back to chopping around the 1.0600 handle. Commodities are seeing some slight profit taking on yesterday’s strong session, with WTI off 0.29% finding offers south of $98.50/barrel and Gold edges down 0.32% to $1,258/ounce.
The rest of the day has little in the way of market moving economic events; however, tomorrow will bring Retail Sales in the US for the month of November. Consumer demand has been tepid at best for the latter half of the year, but corresponds well with the thesis of a gradual recovery in the US. Discretionary spending was revised lower as a percentage of GDP growth throughout Q3 but things look to be on slightly better ground for the last quarter, with an upward revision to a flat print for October. The median analyst estimate stands at 0.6% growth on the headline reading over the month of November, and a meet or beat of expectations will most likely warrant a knee-jerk reaction in the USD as expectations for a small taper from the FOMC at the December meeting increases.
Further reading:
Perfect storm for QE Tapering?
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