Disappointing figures couldn't hold back the investors

Share Markets:

Although the US payrolls data was soft, with the creation of fewer jobs than expected, investor sentiment could not be held down for long.

Investors choose to focus on the bright spots in the payrolls report, including the lower unemployment rate.

The US stockmarket gained ground with the Dow up 1.1%, the S&P 500 gaining 1.3% and the Nasdaq rising 1.7% for the session.


US bonds rose sharply initially following the payrolls report, however that mostly reversed so that bonds were slightly higher (yields fell), on investor expectations that despite softness in the payrolls report, it was unlikely to be enough to change the Fed's tapering of QE.

Australian three-year government bond yields (implied by futures) were volatile due to the US payrolls release, but finished the session little changed at 3.03%.

Foreign Exchange: 

The Aussie dollar rose initially following the RBA's Statement on Monetary Policy on Friday, but fell back to 0.8923 US dollars amid volatility ahead of the payrolls.

On Friday night the Aussie spiked to 0.8999 US dollars following the payrolls, but retreated fairly quickly.

The US dollar index weakened following the payrolls data and although it gave back some of those losses, it finished the session weaker.

Sterling gained against the US and Australian dollars, boosted by a narrower UK trade deficit. The Euro weakened on news a German court was questioning the legality of the ECB's (unused) bond purchase program, but bounced following the US data.

Commodities: Commodity prices strengthened, with the copper price continuing to gain on hopes declining stockpiles in China will drive demand there.


Friday's RBA Statement on Monetary Policy spelled out a central bank more optimistic about the future outlook of the economy. 

This optimism was particularly evident in the upward revision of its inflation and GDP forecasts.  Indeed, the RBA forecasts for underlying inflation now have a three in front as soon as June 2014. Moreover, a three or higher is in the range of forecasts for inflation beyond June 2014.

The possibility of inflation brushing or breaching 3% over the medium term means the RBA is no longer entertaining any meaningful probability of another rate cut. 

Furthermore, the spectre of a rate hike in the future enters the playing field.

However, the variability attached to these inflation forecasts is likely to be higher than usual because of the apparent uncertainty surrounding the possible causes of the recent strong inflation outcome.

Our long-held view has been that the RBA will not cut rates again in this cycle. We remain comfortable with this view.

We continue to expect the Australian economy to recover gradually over the year ahead with low interest rates and a weaker currency providing support.

While the RBA's forecasts for inflation and GDP are slightly higher than our own forecasts, it is not inconsistent with our belief that the RBA could be on hold for an extended time before beginning the process of normalising policy later this year.

The AiG Performance of Construction Index fell 2.6 points to 48.2 in January, back to contractionary levels (below 50). 

However, strong growth in building approvals and low interest rates continue to point to favourable conditions for the construction industry, particularly in housing.


The HSBC-Markit Services PMI dropped 0.2 points to 50.7 in January, marking the third straight month of decline. 

This result lends weight to concerns that China's economy is slowing although the index remains in expansionary territory.


German industrial production was weaker than expected, falling 0.6% in December, disappointing consensus expectations for an increase.

United Kingdom: 

The trade deficit was narrowed than expected, falling to a deficit of £1026m in December from a deficit of £3582m in November.

UK industrial production rose 0.4% in December, slightly below expectations. For the year to December, UK industrial production rose 1.8%, down from 2.1% in the year to November.

United States:

US non-farm payrolls rose just 113k in January, after December's almost unrevised 75k (previously reported as 74k) and November's upwardly revised 274k (previously reported as 241k) rise.

This disappointed consensus expectations for a 180k increase in January. The revisions mean that Q4 payrolls averaged 195k per month, up from 172k in last month's report.

This compares favourably to Q3 (up an average 172k), but was slower than 201k and 192k in the previous two quarters.

The softness in the December payrolls suggests some renewed loss of momentum that cannot just be explained by bad weather.

In contrast, the other detail in the report was solid, with the unemployment rate (which is taken from the separate household survey falling to 6.6% in January, from 6.7% in December. In the household survey, employment rose 638k in January, which more than offset a rise in the workforce participation rate.

The Fed's 6.5% unemployment rate threshold has pretty much been reached (though it means little: "it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent").

Hours worked rose 0.1% and earnings were up 0.2%, not stellar but reversing the drag on income from hours/earnings in December.

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