Markets await US Employment Figures

Focus today falls firmly on the already strong US Dollar as it is expected that the US employment probably picked up in December which will raise the odds that we will see significant strength in the world’s largest economy throughout 2011, as the Non-Farm Payrolls is announced later today.

This follows much better than expected ADP private sector report on Wednesday which showed a big boost in employment and is a good indicator of today’s announcement.

According to a Bloomberg survey a projected 150’000 gain in payrolls would follow the 39’000 increase that we saw in November, bringing the total advance for last year to 1.1 million, a proactive signal that the economy is recovering and will continue to do so as the year progresses.

High unemployment explains why Fed policy makers said they need to follow through on their plan to purchase an additional $600 billion in Treasury securities by June this year. Could the run of positive employment figures now change the sentiment of the Fed to start looking at not only cancelling the additional $600 billion but possibly looking at an increase in interest rates, satisfying investors and testing the resolve of the beleaguered housing market.

The data will be released one hour before the Fed Chairman Ben Bernanke is scheduled to testify before the Senate Budget Committee on monetary and fiscal policy and the economic outlook.

Indications that the economy has started to improve and rising corporate earnings helped fuel gains in the stock market last year. The Standard & Poor’s 500 Index rose 13% in 2010 after a 23 & jump in 2009, making it the biggest two-year advance since the Internet-bubble rally of 1998/99.

We will have more on the 13.30PM figure later today.

In the UK, we had confusing data yesterday morning with data that should have weakened sterling. It showed that the CIPS services PMI in the UK fell sharply in December to 49.7 which was attributed to the bad weather and weak new orders. The business expectations balance however did rise and we would expect to see a bounce back in the overall index in January as the weather impacts fades.

Construction PMI also fell back below the key 50 level in December, again weather conditions played their part in the move.

Overall the average lies well above 50 at 53.3 due to a strong rebound in the manufacturing index in Q4. This headline index is being boosted by sharp gains in the output, new orders and job creation components of the survey, with the rise in exports orders suggesting that manufacturers are benefiting from a renewed pick-up in global demand.

The CBI export orders balance also bounced higher in November and December, suggesting further that the traded sector could lend its support to Q4 GDP, possibly being one factor which could assist the continued, albeit slow, economic recovery in the UK.

Figures did little to dampen Sterling’s positive movement yesterday and the pound gained against most major currencies other than the consistently strong US Dollar, gaining most against the euro peaking above 1.19 from a low point of this week at 1.1520.

The euro sovereign debt crisis has been the focus of much of this week, with the single currency suffering against a host of nations with euro-zone unemployment and final Q4 GDP set to be released today, things may get slightly worse.

The region has received some welcome support however as China’s Central Bank Deputy Governor Yi Gang stating:

“The euro and the European financial market are an important part of the global financial system and were, are and will be one of the most important areas for China’s foreign-exchange reserves”

China’s support didn’t stop there however as Vice Premier Li Keqiang this week expressed confidence in Spain’s financial markets and pledging more purchases of that nation’s debt.

It’s worth noting that Australia’s economy has seemingly avoided recession and continues to grow during these difficult times with some analysts attributing it’s success to the fact that Australia are firmly under the wing of the Chinese and an important trading partner. If China gets in to bed with Europe, could the same situation develop?

Market wise, the single currency touched a three-month low against the US Dollar before Italy, Portugal and Spain sell bonds next week. It also fell to 0.8403 against GB Pounds.

Borrowing costs for Portugal surged at a six-month bill sale this week, the first of Europe’s high-deficit nations to test investor demand in 2011 after the threat of default forced Greece and Ireland to seek bailouts last year. Spain and Italy together need to raise 317 billion euros this year, according to BNP Paribas SA.

Portugal, which intends to sell as much as 20 billion euros in bonds to finance its budget and redemptions this year, sold 500 million euros of bills with a yield of 3.686 percent on Jan. 5, up from 2.045 percent at a sale of similar-maturity securities in September.

The yen fell to a two-week low against the dollar before a US report today that is expected to show an increase in jobs for a third month supporting demand for assets in the world’s largest economy.

This apparent swelling of the US economy has boosted Japanese stocks boosting index to its best first week in 15 years, as carmakers rose on speculation U.S demand will expand and employment will improve in the world’s largest economy.

The Topix and Nikkei 225 yesterday both closed at their highest levels since May, with gains of about 15% in a rally that began November 1st. Stocks in the Topix were valued at 15.9 times estimated earnings on average at yesterday’s close, compared with 13.5 times for the Standard & Poor’s 500 Index and 11.1 times for the Stoxx Europe 600 Index.

Data Released Friday 7th January:

EU 10.00 Unemployment
EU 10.00 Final GDP (Q3)
GER 11.00 Industrial Production
US 13.30 Non-Farm Payrolls
US 20.00 Consumer Credit