Weekly Review

CURRENCY: A much weaker than expected US November non-farm payrolls delivered the expected upside moves for the Australasian currencies. The NZD closed around the highs as commodity prices lifted further.
GLOBAL MARKETS: US equities fell on disappointing payrolls data but then recovered on the prospect of more helicopter cash from the Fed. European equities weakened a little in tandem, but still had their best week in a month. A broad range of commodities were higher on USD weakness, with oil hitting a 25 month high of near $89/barrel (helped by cold weather in Europe). US 10-year bond yields rallied on the weak payrolls number, but subsequently sold off, with yields closing at 3.00 percent.
KEY THEMES AND VIEWS
HAPPIER US DATA RUN TRIPS UP ON LABOUR MARKET. US Non-farm payrolls data was a shocker. 39,000 new jobs were created in November versus market expectations of 145k, and the unemployment rate rose from 9.6 to 9.8 percent. The data flew in the face of recent more upbeat messages coming from the likes of the manufacturing sector and improved holiday sales, and was seen as confirming that QE2 would sail on for the foreseeable future. While stocks fell on the news, the resulting USD weakness drove up commodity prices, and commodity-related firms’ stock prices drove up US stock indices. Stocks were also helped along by a report that Ben Bernanke had stated he has not ruled out extending quantitative easing beyond the mooted $600bn. Are we returning to the "good news is good, bad news is better" days? Seems highly unlikely. Markets have surely realised by now that central banks are not omnipotent. It probably more reflects the fact that labour market data always lags the rest of the economy, and a broad range of other US data has been looking a little less bleak lately (including the ISM non-manufacturing index that was also out on Friday). Meanwhile, President Obama's Debt Panel scuttled his $3.8 trillion plan for budget cuts, in protest against higher taxes (Republicans) and cuts in benefits (Democrats). Good luck negotiating that one through the tortuous maze that is US politics.
CONTINUING STRESS IN EUROPE. The ECB on Friday directly bought “modest” quantities of Portuguese and Irish government bonds, which caused a narrowing in spreads to German bunds. Time will tell how long the effect lasts. Disagreement is rife regarding a longer-term solution to contain the crisis. Meanwhile the Spanish government unveiled new austerity measures just a week after stating that they wouldn't be needed, after their 10 year bonds suffered in the aftermath of the Irish bail-out. The measures will hit smokers and the elderly in the pocket. Fortunately the two groups tend to have little crossover.