German Output, US Payrolls & Debt Ceiling
Saxo Bank | Feb 07, 2014 06:26AM ET
In Europe, Moody’s credit rating of Finland will be published after markets close. The current rating is AAA, with a stable outlook. After Netherlands lost its AAA in November and the European Union lots its in December, only Germany, Luxembourg and Finland still hold the coveted triple A. Finland’s ministry of finance blundered and announced on January 22 that Moody’s confirmed the AAA with stable outlook, which Moody’s immediately denied. It is possible that the outlook will be changed to negative, and while that would not have any notable impact on credit markets, it could create some media attention on how Finland’s position has deteriorated and Germany is in practice the sole AAA in the Eurozone. That could have political implications outside Finland, too, as the European Parliament elections and the third Greek bailout are right around the corner.
Germany December Industrial Production (11:00 GMT): After an unusually strong increase of 1.9 percent in November, the monthly increase is expected to be 0.4 percent in December. As the chart below shows, the monthly change is notoriously volatile, but remains on a steady growth path. December factory orders fell 0.5 percent from the previous month, but were up a respectable six percent from year ago, suggesting that the German industrial sector will be kept busy in the coming months. With inventory levels low, we will probably see real activity catching up to the sentiment survey indicators during the first half of the year.
US January Employment Report (13:30 GMT): Non-farm payrolls are expected to have increased by 189,000 after December’s surprisingly low 74,000. The previous very poor jobs report was blamed on the weather, which has since improved somewhat in January — see the FT’s blog Alphaville for a thorough discussion of the weather effects.
Survey data on the service sector, both Markit and ISM, have been positive, and the weekly jobless claims are back on trend. If the December report was a fluke, there is a strong chance of an upward revision of the data, or a one-off boost from the bounce back to trend in January’s payroll number. Note that manufacturing surveys in January were somewhat negative, so the trend of manufacturing sector losing jobs and service sector gaining them looks set to continue. The blog Calculated Risk writes that based on historical patterns, the combined surveys suggest payrolls increasing by 236,000. Unfortunately, many of the service sector jobs created are part-time and low-wage jobs rather than well-paid and full time.
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The January release also comes with revisions to the whole 2013-data. The Wall Street Journal notes that last year the revisions to 2012 data added almost 30,000 jobs to every month of the year, so the revisions can be substantial. December was the last month of extended unemployment benefits, and roughly one million unemployed people now have to find any job, or eventually drop out of the labour force. This could distort numbers even further.
The Federal Reserve will probably not slow down its tapering, even if the labour market outlook deteriorates considerably. But the markets could still bet on that possibility, so a negative release could weaken the dollar. That would probably suit the Fed well, as a weaker dollar and lower interest rates help to alleviate the effects of tapering. All in all, there will be plenty of opportunities for the jobs report to surprise and confuse analysts.
US debt limit deadline: Remember the government shutdown last year? Last October the Congress agreed to suspend the debt limit until February 7, which is today. From now on, the limit will be reset to the current level. That means that the US Treasury would again be unable to borrow funds normally, and would have to resort to extraordinary measures. It is estimated that the Treasury will not run out of borrowing authority until the end of February.
Credit rating agencies have mixed views on the matter: Moody’s believes that the matter will be resolved in time and default is out of the question, but Fitch has a more somber view and regards the issue as essential to its "negative watch" rating of the US.
Markets have not been paying much attention to the current round of the debt limit fiasco, as the Republicans already support the next fiscal year’s budget, and denying it funding would hurt their political support ahead of elections in November. At some point between now and the end of the February we can expect a deal that extends the debt limit by one year. T-bills and credit default swaps have reacted by pricing in some possibility of prolonged problems.
As with the job report, some nervousness could make USD less attractive currency to own, which could keep the dollar from appreciating too much due to tapering and safe-haven flows from the emerging markets. For more on the debt limit, see The Washington Post, The Telegraph and The Wall Street Journal.
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