Global Daily – US jobs engine revs up

by: Nick Kounis , Aline Schuiling , Maritza Cabezas

140109-Global-Daily-Insight.pdf ()
  • Faster US ADP employment gains the latest sign economy is accelerating…
  • …which together with FOMC minutes pushed up Treasury yields and the dollar
  • German factory orders rise on strengthening foreign demand
  • China taking more balanced approach to shadow banking regulation

US ADP employment growth accelerates, while FOMC minutes confirmed tapering path

The ADP survey reported a 238K rise in private nonfarm employment in December, marking its strongest reading for 2013. The previous strongest reading was in November (229K) illustrating that the labour market gained momentum at the end of last year. The ADP report roughly tracks the official nonfarm payrolls numbers (see chart) and suggests we could see an upward surprise in Friday’s report. We currently forecast that total nonfarm payrolls rose by 210K, but it could be higher (consensus is 195K). Meanwhile, the December FOMC minutes later in the day confirmed that the Fed would continue to taper its asset purchases given the materialisation of its scenario, but also that it would be a gradual process. A key factor behind the decision to taper was the idea that the extra impulse from purchases would likely decline. The combination of the upbeat jobs data and the FOMC minutes (that were interpreted as having a hawkish tint) pushed up US Treasury yields and the dollar. Today’s potential market mover is the ECB. As discussed here previously, we do not expect policy action today, but very low inflation means that further easing is a distinct possibility going forward.

Jump in German orders reflects strong external demand

More positive economic news came in the shape of Germany’s industrial orders, which jumped by 2.1% mom in November, exactly reversing October’s decline. The less volatile 3month-over-3month growth rate rose from 1.3% in October to 1.6% in November, boding well for production growth in Q4. Foreign orders rose by 2.9% 3m-o-3m in November, while domestic orders shrank by 0.3%, signalling that most of the boost came from abroad and that Germany is benefiting from a pick-up in global growth and world trade. This picture was also painted by the fourth successive monthly rise in exports in November (+ 0.3% mom), which lifted the 3m-o-3m growth rate to 2.3%. As imports fell by 0.1% 3m-o-3m that month, net exports probably contributed positively to GDP growth in the final quarter of last year. This is in line with our scenario for Germany, which projects a pick-up in GDP growth to 0.5% qoq in Q4 from 0.3% qoq in Q3 on the back of a stronger contribution from net exports. The pace of expansion for the eurozone as a whole is likely to have been weaker though.



China steps up regulation for shadow banking, while prospects of CNY band widening increase

Meanwhile, China has come up with new rules to address shadow banking activities. The role of shadow banking expanded in China in the past few years in response to a restricted banking environment that forced liquidity to find its way to the economy through unregulated or lightly regulated channels. In 2013, there were measures taken to reduce the rapid growth and risks surrounding shadow banking, which included putting caps on the less regulated banking activities. These contributed to a slowdown in the surging growth of shadow banking in the past few months. The new rules released in recent days appear to be more balanced and not only risk focused. The document now focuses on enhancing the benefits, while minimizing the risks of shadow banking. It provides more clarity on the responsibilities of the different institutions in regulating the wealth management business. The recent shadow banking reforms are in line with the broader reform agenda that gives markets a larger role, while reaching more sustainable growth. Our forecast of 8% GDP growth in 2014 is consistent with the tone of these reforms and the firm economic data released so far. As China’s financial reforms continue to roll out, an adjustment of the CNY trading band in the course of this year seems likely. A widening of the band will allow the CNY to fluctuate in a more orderly way. Our 2014 year end USD/CNY forecast is 6.0.