Good morning, Markets vastly underestimated just how productive the US labour market had been in November, when payrolls data beat expectations by almost 50%. The reading showed a net 321,000 jobs created in the month of November, well past the break even for population growth and makes a difficult case for those wishing to argue against the state of the US economy. The numbers boosted the Dollar and also added some strength to European equity markets, as well as those in the US. The moves meant the week closed higher for all concerned and, in most instances, stock markets hit fresh new highs. From a monetary policy point of view, the news of such health in the US economy pushes policy divergence even further. Even though the ECB are unlikely to act to stimulate growth until the early part of next year, they are effectively years behind the US, and the UK to a similar extent, in terms of being ready for a rate rise. A study by the Bank of England due for release today will show that the Bank believe that the UK could comfortably handle gradual rate rises with limited material impact. The main cause for concern for the Bank would be those that are deemed to be particularly vulnerable to rate rises. Currently about 1% (360,000) of UK households have debts that cost more than 40% of monthly income to service. This would rise to 480,000 if the benchmark interest rate rose by 150 basis points to 2%. The ECB seem to still be at loggerheads aver delivering a programme of stimulus, but the majority of commentators believe that Mario Draghi will have his way and QE is still a matter of when, not if. The FT makes an interesting point this morning, saying that if the ECB were to act on the same scale the Bank of England did back in 2009, they would need to buy more than €2trn in government debt - an eye watering number, even for the all-powerful Super Mario. Italy were dealt a bit of a blow on Friday afternoon when their sovereign rating was cut to BBB-. The move takes them to just above junk bond status, though this is far from reflected in their yields, as the market is betting on ECB action. S&P say their outlook is now stable at this lower level, with Rome likely to enact growth enhancing reforms. The market didnt seem too concerned as the Milan exchange was the best performer in Europe on Friday, rallying almost 3.5%. From Ukraine; Kiev expects gas supplies to be restored today, as Russian firm Gazprom confirmed that they have received nearly $400m as an advanced payment for gas going into the winter. The conflict is still ongoing in the east of the country though, despite Putins hopes for a ceasefire there soon. In Russian local press, the propaganda war continues, with papers saying that sanctions on Russia cut both ways and it is only a matter of time before they hit both Europe and the US hard. Overnight weve heard from the Bank of international settlements who say that a prolonged rally in the Dollar could pose a threat to financial stability. Their argument being that in emerging markets where people borrow heavily in Dollars, servicing those debts becomes increasingly expensive unless companies have a sufficient income stream in the currency. In the week ahead we look at retail sales from the UK and US to get a grip on how the consumer led recovery is faring in the busy run up to Christmas. From Europe we see German industrial output today and on Thursday we see what the take up is going to be from the ECBs next wave of cheap bank funding. Stock futures are showing a positive start to the day, which would follow on from a fairly robust Asian session that has traded in the green despite a small miss from Japan on their final Q3 GDP numbers. Have a great week.
Posted on: Tue, 09 Dec 2014 08:55:49 +0000
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