Euro Area Jobless Rate Lower Than Expected

The seasonally-adjusted unemployment rate for the 17-nation euro area in December 2013 was reported at 12 percent by Eurostat, the statistical office of the European Union, on Friday.

In the 28-member European Union, or EU, the unemployment rate was 10.7 percent in December 2013, down from the 10.8 percent rate seen in November, and also in December 2012.While the latest unemployment number is slightly higher than the 11.9 percent seen in December 2012, the data showed unemployment in the region has stabilized since October 2013. A Bloomberg poll had pegged the December 2013 unemployment rate at 12.1 percent.

According to Eurostat estimates, 26.2 million people in the EU, of which 19.01 million were in the euro area, were without a job in December. But, the month saw 162,000 fewer people in the EU and 129,000 fewer people in the euro area go without a job, compared to the previous month. Compared with December 2012, unemployment had decreased by 173,000 in the EU, but increased by 130,000 in the euro area, according to Eurostat.

The lowest unemployment rates were recorded in Austria (4.9 percent), Germany (5.1 percent) and Luxembourg (6.2 percent), while the highest rates were seen in Greece (27.8 percent in October 2013) and Spain (25.8 percent).

In comparison, the Eurostat statement noted, the unemployment rate in the U.S. in December 2013 stood at 6.7 percent, down from 7 percent in November 2013 and from 7.9 percent in December 2012.

Meanwhile, annual inflation in the euro area in January fell to 0.7 percent from 0.8 percent in the previous month, a flash estimate from Eurostat showed Friday. It was at 2 percent in January 2013.

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The Fed goes ahead with its tapering plan

Equity markets and asset classes correlated to positive risk appetite were in retreat mode yesterday, with interest rate hikes from the Central Bank of Turkey and the South African Reserve Bank leaving markets skeptical this would be enough to quell the outflows of capital in the respective economies, and left financial markets jittery on the growth outlook for emerging markets.  Adding fuel to the fire, theFederal Reserve decided to trudge ahead with their tapering schedule, choosing to lop off another $10bn of their monthly asset purchases.  While the markets had been expecting another decrease in the size of the Fed’s monthly buying spree, the verdict of continuing with the QE unwind has demonstrated that the escalating unrest in emerging markets and a single soft jobs report are not enough to cause the Fed to delay their tapering schedule, essentially setting a de-facto bar on what the Fed’s threshold for inaction is.

The FOMC also remained upbeat on the state of the US economy, not deviating too materially from the December statement, highlighting that while labour market indicators were mixed, on balance they showed improvement.  The Fed also decided not to tamper with its forward guidance, continuing to advise that interest rates would remain low until the jobless rate fell well past the 6.5% threshold.  After the dust settled, the S&P finished its session down by another 1.02% (essentially a 50/50 split between EM and Fed taper ramifications), while the DXY initially rose, but finished the day slightly lower in the mid-80s.  The Loonie, along with its commodity currency brethren, was dragged lower on emerging market woes, with the CAD selling picking up steam on the heels of the Fed’s taper continuation;USDCAD trotted higher throughout the afternoon, finishing the North American session within striking distance of the 1.12 handle.

The catalysts for yesterday’s sell-off had enough juice to send Asian equity indices lower during their session, with the Nikkei getting clipped for 2.45% while the Shanghai Comp fell by 0.82%.  Despite the sell-off in Asia, emerging market currencies are displaying a sense of stability this morning after the Russian central bank talked up the Rouble in hopes the verbal intervention would act as a tourniquet for the domestic currency’s bleeding.  Some of the upward pressure on USDRUB has abated as the pair trades in the low-35s, which had helped other EM currencies stabilize this morning.

Turning our attention to Europe, the EUR is trading with a decisive offer tone, falling against the USD after softer than expected inflation in Germany trumped a bright employment report for the region.  The number of people out of work in Germany over the month of January declined by 28k, more than the 5k analysts had originally expected, and marked the second consecutive positive employment report.  While the German Central Bank expects the region’s economy to expand at a strong pace in the coming months, prices still remain soft, and have yet to echo the firmness expected in the labour market and GDP – signaling there could be some excess slack that still needs to be absorbed.  The preliminary reading on CPI dropped by 0.6% in January, giving back more than the previous month’s gains, as well as coming in with a faster decline than the 0.4% decline that had been forecast.  The y/o/y inflation reading also fell more than expected, printing at 1.3% and leading to speculation tomorrow’s flash estimate of Eurozone CPI could come on the south side of analysts’ forecasts, which would then raise the prospects of further easing (or some form of non-conventional monetary policy) from the ECB down the road.  The EURUSD has fallen into the high-1.35s before the US GDP figures hit the wires, boosting the DXY to challenge the 81 handle.  The 1.35 level will be key support for the EURUSD pair over the next few sessions, with a break of this level opening up further weakness for a fall into the 1.33-134 region.  From the actions and commentary we’ve heard from Draghi recently, it is likely inflation will have to take another leg lower to prompt action from the European Central Bank, which therefore gives tomorrow’s CPI reading further prominence considering the heightened worries of disinflation in the zone.

As we get set for the North American open, the first reading on Q4 GDP for the American economy was just released.  Expectations had been to see a slight slowing in real economic growth from the third quarter, as the build in inventories that lead to a stronger than anticipated Q3 were drawn down and acted as a drag heading into the end of 2013; the median analyst estimate was for 3.2% growth on an annualized basis, down from the 4.1% that was registered in Q4.  The first estimate of fourth quarter GDP came out right in-line with estimates at 3.2%, with a strong showing from consumers as personal consumption increased 3.3% over the quarter, up from the 2.0% seen in Q3.  Government outlays acted as a drag on the initial GDP estimate, down 12.6% from the previous quarter, while exports increased by a large margin to help offset some of the decreased economic activity on the part of the government.

S&P futures are mildly higher heading into the opening bell, taking some solace in the fact US GDP came out in-line with estimates.  The Loonie was little changed after the release, with USDCAD remaining just south of the 1.12 region.  The commodity complex is mixed before the North American open, with Gold shedding 1.28% to trade south of $1,250/ounce, while WTI closes in on $98/barrel by adding 0.48% this morning.

Looking ahead to tomorrow, there are a few interesting data points on the North American docket to be mindful of for Loonie traders.  First, Canadian GDP for the month of November is due to be released, with expectations we see a 0.2% increase from October, slightly slower than the 0.3% witnessed previously.  Anything coming in around market consensus is unlikely to change the overall bearish sentiment towards the Canadian dollar, as it will likely take a material deviation to the upside from analysts estimates to shake the rising tide in USDCAD, as the market continues to remain focused on the normalization of rates in the US in response to the Fed taper and the impact the compression of yield spreads has on the Loonie.  A slightly stronger than forecast print could cause a knee-jerk reaction lower in USDCAD, but again we would recommend buying the dip on any CAD strength.

South of the 49th parallel, the Personal Consumption Expenditure index will also be released; which is notable considering it is the Fed’s preferred method of measuring inflation in the economy.  With continued assurances from the Fed that interest rates will stay low well past the time unemployment hits 6.5%, the inflation aspect of the Fed’s forward guidance gets more and more important in terms of gauging when the Fed will first start to look at tightening overnight rates.  While inflation in terms of CPI and PCE have both remained sluggish, watch for any meaningful upticks to really stoke the long-USD trade, as the current expectation is for QE to be wound up by the end of 2014 even if inflation remains close to the lower-bound of the Fed’s target.

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Japan Inflation Quickens As Abe Seeks Wage Hikes

Inflation in Japan picked up speed in December, placing pressure on Prime Minister Shinzo Abe's government to encourage wage gains as he attempts to free the nation from the deflationary debility that has lasted 15 years.

According to other data, 103 jobs were available for every 100 person hunting for employment, thus revealing a tightening in the labor market that might put pressure on companies to raise salaries.Prices excluding those of fresh food climbed 1.3 percent from a year before, said Japan's statistics bureau.

Tokyo Metro Co., Coca-Cola (Japan) Co. and other companies have announced price increases, so the challenge for Japanese policymakers is to encourage wage increases while maintaining an exit from deflation after an April rise in the country's sales tax that's predicted to spur contraction.

Many economists believe the Bank of Japan will expand presently prominent easing in the first half of 2014, Bloomberg reported.

“Consumers will be hit in the pocket from rising prices and the upcoming sales-tax hike,” Masamichi Adachi, a senior economist at JPMorgan Chase & Co. in Tokyo, said. “The onus is now on companies to convert their profits into wage increases and capital spending.”

As for Japanese manufacturing activity, the Markit/JMMA Japan Manufacturing Purchasing Managers Index (PMI) rose to a seasonally adjusted 56.6 in January, from 55.2 in the previous month.

It was the fastest pace that Japanese manufacturing activity has grown in almost eight years, as new orders expanded at a record rate -- and it was a sign of muscular domestic demand prior to an increase in the sales tax in April.

For the 11th consecutive month, the index stayed higher than the 50 threshold separating expansion from contraction, and it reached the loftiest level since February 2006.

"Evidence from panelists suggested that the upcoming rise in the sales tax was a key factor driving the recent expansion, as customers order early to avoid the higher tariff," Claudia Tillbrooke, economist at Markit, noted.

"However, the continued expansion of employment, suggests a degree of confidence in the longevity of the current upturn."

The PMI index's output component climbed to 61.1 from 58.3 in the prior month to reach the highest spot since it was created back in October 2001.

The index for new export orders fell to 52.8 in January from 55.7 in the previous month.

In April, Prime Minister Shinzo Abe's government will raise the 5 percent sales tax to 8 percent in order to pay for climbing welfare costs, according to Reuters.

Sales of apartments, houses, cars and durable goods have been increasing since mid-2013 as the Japanese pubilc eyes relatively expensive items before the tax increase.

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