Reaction to estimated data entirely appropriate.

It is and always has been a complete mystery to me how the market reacts to the non-farm payroll data that is released to such a fanfare on the first Friday of every month.

It takes a serious suspension of reality to believe that the Department of Labour can prepare anything other than its “best guess” on new jobs created from such a diverse number of sources in such a short period of time.

Still one shouldn’t stand in front of a freight train and the reality is that this is a major influence on most traders. It is likely that the December figure which was an “outlier” from the recent trend at 148k will be revised up. However, were any revision to be minor and the January data to disappoint, the dollar could recommence its January tumble. Cue Trump conspiracy theory?

The dollar index continues to make multi-year lows in direct conflict with the view of the President who wants a stronger dollar “eventually”. Benign neglect Donald! Say nothing and watch as reality kicks in. The FOMC even tried to comply with Trump’s demand this week making slightly more hawkish comments than were expected that kept the market’s three hike hopes intact.

Draghi faces different issue

Talking of standing in front of a freight train, Mario Draghi the ECB President continues to see growth in less strong Eurozone economies as insufficiently strong to grow without additional stimulus. Following yesterday’s manufacturing data release, avoiding the subject may not be an option much longer. Admittedly the data for Germany, France and Italy led the way but with Eurozone-wide manufacturing output reaching the “magical” 60 level, notice is going to have to be given to how well the entire region is performing.

Jerome Powell won’t say that he is concerned, for example that manufacturing in Nebraska is not as strong as elsewhere. As the Eurozone moves towards a more “Federal” configuration, individual data will be less and less relevant unless it is used to provide aid to less prosperous areas.

The Euro rally continues but since the market is hung up on the achievement of the medium-term target of 1.2520 it has run out of a little steam. That really is likely to continue as pressure builds for the removal of the Asset Purchase Scheme. The withdrawal of cheap money could see a minor slowdown in the major economies like Germany but that would be only temporary as the region continues to perform at above trend.

UK rate hike hopes resurface despite economy and Brexit

It is almost as spurious as the dollar’s reaction to employment data to consider that the MPC may contemplate hiking rates again as soon as May following an insignificant improvement in wage inflation.

Dovish hike was the term given to the unfounded hike in rates that took place in November and the term for a further hike in May would be even less complimentary. Manufacturing data illustrated a further slowdown yesterday in direct contrast to the Eurozone. The pound’s recent rally, in particular versus the dollar, has led to irrational optimism despite Brexit becoming more of a drag almost daily.

The brewing row over the treatment of EU citizens arriving in the UK during the transition period coupled with the Governments own dire report on potential growth scenarios following Brexit should engender anything but optimism.

Theresa May, in China demonstrating just how far the UK has fallen as a global power, is facing a significant set of headwinds as she battles against growing discontent with her own ranks. The prospect of a General Election would certainly bring a major fall for Sterling as a less business friendly, tax raising, free spending Labour Party victory would be entirely possible if not probable.


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