Fed minutes surprise ahead of December jobs report
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Last night?s publication of the latest Fed minutes proved to be every bit as divisive as suspected with a number of members reluctant to extend the extra bond purchase measures much beyond 2013.
The language or tone seems to suggest that while most members agreed to the extra measures announced last month, the duration of those measures has created a possible three way split between those who want an early end, before year end, those who are reluctant to go beyond year end, and those who want to go as long as possible. This split caused US markets to slide back as investors grappled with the prospect of an end to QE as early as the end of this year.
The minutes stated that a pre-requisite for an end to QE would be a ?substantial improvement? in the jobs market.
When put in the context of the recent improvements seen in the ADP numbers in recent months, and yesterday?s strong numbers in particular, if today?s non-farm payrolls numbers prove to be similarly strong and the unemployment rate continues to fall then we could well see the Fed step back sooner rather than later. Expectations are for a December gain of 150k while the unemployment rate is set to remain at 7.7%.
In the UK yesterday?s Bank of England credit conditions report showed that mortgage availability in Q4 was at its best levels since 2007 largely as a result of the new FLS scheme. It remains to be seen if the latest November mortgage approvals and consumer credit data is able to bear this out this morning with a rise of 54k expected for approvals.
Yesterday?s disappointing construction PMI data points to a sector still very much under pressure having acted as a significant drag on GDP growth throughout 2012. The services sector on the other hand hasn?t spent a single month in 2012 in contraction.
Tomorrow?s December services PMI number could have the capacity to spoil that particular statistic; however expectations are for a reading of 50.1, down slightly from 50.2 in November. Even so early indications suggest it remains touch and go as to whether Q4 will show any growth at all, after Q3?s strong showing.
While concerns remain about the UK economy, things are no better in Europe where the latest December services PMI data for Spain, Italy, France, Germany and the Eurozone are expected to be even worse, with only Germany expected to show expansion.
Spain PMI is expected to come in at 42.7, Italy 45.1, France 46 and Eurozone 47.8, all firmly in contraction territory and rounding off a very negative quarter and year for this particular sector of Europe?s economy.
EURUSD ? yesterday?s break below 1.3160 has set the euro on course for the 1.3000 level and towards longer term trend line support from the 1.2045 lows at 1.2945. Pullbacks need to get back above 1.3170 to retarget the 1.3300 area.
A move below 1.2940 targets the 100 day MA at 1.2900 and below that the 200 day MA at 1.2780.
GBPUSD ? yesterday?s break below 1.6180 opens up a move back towards last weeks low at the 1.6060 level.
The key level remains at the 1.6310 area but it needs a break back above the 1.6180 level to achieve that.
Major trend line support comes in at 1.5935 from the 1.5270 lows, the 200 day MA at 1.5900 as well as 1.5660.
EURGBP ? the euro continues to sink back towards the long term trend line support at 0.8070 from the 0.7755 lows. A break of this key support could well signal further losses towards the November lows at 0.7960.
A recovery back above yesterday?s high at 0.8120 is needed to stabilise and retarget the 0.8170 level.
USDJPY ? the break above the 87.50 and 61.8% retracement of the down move from the 2010 highs at 95 to the lows at 75.30 could well be the catalyst for the next move to the 90.00 level. A close beyond 87.50 is needed to help increase the likelihood of this move.
Now that we have closed above the 200 week MA for the first time since December 2007 further gains remain the preferred scenario. Pullbacks should find support between 84.90 and 85.50 where we have the 200 week MA.
Equity market calls
FTSE100 is expected to open 5 points lower at 6,042
DAX is expected to open 7 points lower at 7,749
CAC40 is expected to open 11 points lower at 3,710