It’s time for the monthly US nonfarm payroll report but it’s safe to say no-one will be on the edge of their seat in anticipation.
Of course the labour numbers are significant but looked at in a more holistic fashion, they will not influence the Fed’s now-inevitable tightening of monetary policy and they will have very little influence on the dynamics driving price action in risk asset markets. The real thing, and one which few focused on sufficiently in light of the Vienna convocation, was the Q3 GDP figure that was released on Tuesday. During the third quarter the US economy grew at a rate of 3.2%. By all measures that is at or even slightly ahead of both desirable and sustainable trend growth and with interest rates at 0.5% or even 0.75%, there remains a horrible imbalance between the two. In a single word, the US interest rate structure is plain wrong.
The Opec outcome, whether credible or not, has driven oil higher and with it stock markets have piled on more gains. The Dow made yet another all-time high yesterday, closing up 68.35 points at 19,191.93. Four weeks ago it closed at 17,888.28. Things are moving fast. On the same day, November 4, the 10-year note, which last night closed at 2.449%, was at 1.777%. Perhaps more dramatically, the two-year note rose to 1.149% from 0.785% over the same period while the dollar went from ¥103.12 to ¥114.10 as of last night.
These are big, big moves and ones which ought to be treated with a little more respect than I think they are. On the morning of June 24 after the initial shock had begun to wear off, investors in the know took the dump in sterling and bought the living daylights out of any UK company that generated a significant part of its earnings overseas. The likes of Unilever and GlaxoSmithKline were off to the Super Bowl. As an example, GSK closed on June 23 at £14.29. By July 7 it was at £16.58 and it peaked on October 10 at £17.225. Then the wheels began to fall of the foreign earnings trade and as at last night the stock was back down at £14.685, having given back most of the gains in what seemed like a one-way bet. This is just an example of what has occurred in UK markets which explains why, despite the dollar rising and rising, the steam has gone out of the index. Having peaked at 7,079.50 points, the FTSE is now stuck in the 6,700s.
Although oil was still the talk of the day yesterday, the two big oil names in the Dow added little to its rise with Chevron up by 1.5% but ExxonMobil down by 0.06%. The biggest driver in the record close was, drum-roll please, none other than Goldman Sachs, which rose by 3.35% translating into a 50.26-point impact on the index. This stock market is no doubt momentum-driven and although there are lots of explanations filled with enthusiasm for the Trump era growth prospects, these have shifted from ante-factum to post-factum and to me some of the valuations are beginning to look a tad spurious.
Curve ball
At 3.2% GDP growth and with unemployment below 5%, the Fed has no excuse to postpone a normalisation of the yield curve. In my humble opinion money markets should seriously begin to price in four and not two further rate increases in 2017. In the US at least, the time of touchy-feely, huggy-kissy monetary policy is over and if it isn’t, it bloody well should be. Janet Yellen is an instinctive dove but her number two, Stan Fischer, is less so. His influence on the boss should never be underestimated and, in all probability, it will rise further in the coming two years.
Consensus for today’s payroll number is 180,000 jobs created. My guess is that the figure is more likely to err on the higher rather than the lower end. But as I said, the FOMC’s die is cast. The speed with which the curve has steepened indicates fear of rising rates with much of the action in the belly of the curve, the great underperformer of the past month having been the seven-year note, which has put on 65bp as opposed to the 10-year which has “only” gone up by 62bp. That speaks volumes to an old bond dog like me.
All that said, politics continues to be a key driver. I remain staggered by how little the chattering classes seem prepared to not only bemoan the rise in populism but to question themselves and their own attitudes as to how come they missed its rise. They will, in the UK at least, all be very excited that the Liberal Democrats have wrested Richmond from the Tories where Zac Goldsmith resigned as a Tory over the issue of Heathrow’s third runway only to stand again as an independent. The Liberal victor, Sarah Olney, is a dedicated anti-Brexiteer. Richmond is for all intents and purposes a rich suburb of London, packed with bankers and lawyers, the hard core of the self-satisfied rich south that the working class north clearly and vocally voted against in the referendum. The LibDems will be popping champagne and declaring Brexit dead while at the same time completely missing the point why the nation voted to leave in the first place. Until the elite begins to understand why it has lost the lower classes, not only the UK but the rest of the post-industrial West will be struggling. In the same vein, even if Norbert Hofer loses the rerun of the Austrian presidential elections this weekend to Alexander Van der Bellen, the tightness of the outcome must not be declared by the latter as a ringing rejection of populism.
And then there is Italy, but more of that on Monday.
Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. The sadness of the Columbian air crash will be felt by all sports fans and I suspect that the rugby community will duly pay its respects too. Tomorrow England, having won its last thirteen international games, meets Australia, the side this revitalised England team white-washed down-under earlier this year. Tickets to Twickenham are like gold dust and I have the privilege of owning one of them. They say that every man has his price but I’m afraid my seat is not for sale, irrespective. Those unlucky enough to either have no ticket or not to care whether they do or not are welcome to practice their scrummaging technique in the shopping frenzy on Oxford Street or in Harrods.