When the dynamic changes

​​​​​Today's news headlines:

  • ‘China handling requests for tariff waivers on US soy, pork’. China’s finance ministry announced on Friday that it’s processing applications to waive retaliatory tariffs imposed on the US. The limited waivers have allowed buyers of US soybeans to avoid the 30% tariff that was initially imposed, but buyers have almost used up all waivers that were available to them. (Bloomberg)
  • ‘German industrial slump deepens with worst output drop in decade’. German industrial output fell 5.3% on the year to October in the worst reading since 2009. The reading has dampened hopes of a recovery from the decline in German supply chains and points to a drag of 0.6% on German GDP growth. (Bloomberg)

Worrying about marginal employment

In what is the fifth straight day of Dollar depreciation, we’re eagerly awaiting the most classically significant economic indicator of the US economy, Non-Farm Payrolls data. On Wednesday, the ADP Non-Farm Employment Change figure came out with the second-worst reading since 2011 and presages a poor reading from today’s employment report. Ironically, under the surface, we doubt the report will tell us anything terribly meaningful about the US economy because the trend of the Non-Farm releases has proved to be enduring—despite the various geopolitical factors affecting business sentiment—and it takes a trend to signal a change. 

It’s worth bearing in mind that the pace of growth will inevitably slow when the unemployment level is historically low. At this point in the economic cycle, employment gains are usually marginal; the person with a part-time job gets a full-time position; persons who have left-off seeking employment re-enter the workforce. That said, the expansion of Trump tariff rhetoric to the EU raises a level of concern about business conditions and results in a permanent vigilance of consumer spending. Hence the reflexive focus on today’s high-impact, closely-scrutinised payroll number that tells us quite little but can still significantly move the market. Did you get all that…

Bottom line: At least one cause for the recent US sell-off has been the pullback in US equities which have recently hit all-time highs. We’ve highlighted the logical inconsistency between high asset prices and faltering fundamentals on numerous occasions, but as the most solidly growing economy at present, the US is drawing a disproportionately large pool of investment. It’s not clear whether high price-to-earnings multiples are causing some to take a fresh look, or the market is finally repricing assets for a perpetual trade dispute, but the dynamic has changed heading into year-end. 

GBP/USD

Cable traded lower in the London open this morning after reaching highs of 1.3166 yesterday afternoon. Markets remain hopeful of a Conservative majority as we get closer to next week’s election, and are likely to be sensitive to poll data. The 1.32 figure could be a significant resistance level for the pair that’s up almost 2.0% in December.

GBP/EUR

Yesterday, the currency cross reached highs of 1.1862—the highest since May 2017—as Sterling drives the pair on election speculation. Pound selling pressure led the pair lower in the London open this morning but is supported at the 1.18 handle as we end the week almost two cents higher.

EUR/USD

EUR/USD broke through the 1.11 level for the second time this week, closing above the key barrier in yesterday’s session. US employment data out this afternoon could cause the pair to test Wednesday’s high of 1.1116—the strongest level in four weeks—before reaching the 200-daily moving average of 1.1159.