1. Non-Farm Payroll Report for November to Provide Some Positive Sentiment?


Global equities are coming off two weeks of consistent losses. This week's key fundamental report - the November non-farm payroll report for the US - could help lift markets out of their malaise  as the US is expected to show an increase of between 100,000 and 125,000 jobs for the month.

While that may not be enough new jobs to significantly dent the unemployment rate, it is still a positive sign that the US economy maintains some momentum in the fourth quarter and is able to add jobs.

In fact economic situation the US has been better of late though with the euro zone sovereign debt crisis deteriorating and the possibility of that spilling over into weaker global trade and growth, there is concern that the progress of the US economy will reverse.

2. US ISM Manufacturing Data Shows Expanding Sector, Not So Much for Europe, UK, and China

The second important release in the US this week will be the manufacturing sector activity reading for November. Here the expectation is that the manufacturing sector increased its pace of expansion, with the ISM index forecast to rise to 51.6 from Octobers 50.8. Any level above 50 implies expansion in the sector while a reading below signifies contraction.

Here's a breakdown of the ISM manufacturing and non-manufacturing from October (with the employment sub-gauge highlighted):


In comparison we have seen manufacturing in the euro zone show a third month of contraction (flash reading showed a 47.2 headline print) and China's preliminary HSBC manufacturing reading also showed the sector shrinking in November (flash reading of 48.0) as well. The UK is expected to show another month of shrinking activity (forecast of 47.2 from October's 47.4).

The weak manufacturing from Europe, China and the UK shows the strain that global manufacturers will come under as the euro zone sovereign debt crisis seeps further into the real global economy.

A positive reading from the US however will help to mitigate some of that concern - faltering manufacturing activity - for the US economy, at least in the short term.

3. More FOMC Easing on the Way? Primary Dealers see Near $500 MBS Buying Program as QE3

width=400Despite some generally upbeat data from the US, and the possibility of a relatively good nonfarm payroll report figure and an increase in manufacturing, we still see the expectation building for the FOMC to consider another round of monetary easing.

That is because of the concern that the euro zone sovereign debt crisis, and the deterioration in that crisis, could undermine demand and confidence in the US recovery as we move into 2012.

A Bloomberg piece, in which primary dealers were interviewed about the fed's intentions, saw a majority of those dealers addicting further QE, though with a focus on housing debt rather than government that. The median estimate was for the FOMC to undertake around $445 billion in mortgage-backed security purchases.

4. UK Economic Review to Point to Euro-zone Impact on Meeting Fiscal Goals

In the UK the key release will be the progress report on the UK economy from Chancellor of the Exchequer George Osborne.

width=400The path to bringing the UK finances back into sustainable levels has been harder than anticipated, the Prime Minister acknowledged last week.

This week we will get details from Mr. Osborne, who is likely to present downward revisions to growth forecasts.

Slower growth and the prospects of the euro zone sovereign debt crisis weakening growth further, will mean that the UK is unlikely to meet its ambitious targets when it first laid out its austerity program.

For instance, the plan to eliminate the UK structural deficit will be pushed back to 2016-2017,  2 years later than first announced. The debt burden of the UK will start falling in 2015-2016, also later than planned. The review will also feature some new initiatives to try and stimulate growth including infrastructure spending and programs to help small business lending.

Earlier today we got economic growth figures for the UK from the OECD and it wasn't pretty.

From the Telegraph: The economic think-tank said the UK's GDP will shrink in the final quarter of 2011 and the first quarter of 2012 - the first time it has predicted a double-dip recession for the UK.

It believes the UK's faltering economy will grow by just 0.5% in 2012, down from its previous estimate of 1.8% in May, as it is hit by weak demand for exports, the Government's austerity measures and the squeeze in consumer spending.

The OECD also said unemployment, which currently stands at 8.3% - its highest since 1996 - will rise to 9% in 2013 as jobs figures take a worse hit than in the recession following the banking crisis.


5. Euro-zone Banks Credit Crunch Looming?

width=400Another key theme to look out for this week includes continued press coverage of the difficulty that European banks are having in terms of bridging a funding gap in 2011 as well as steps that banks meets take in order to meet new regulation requirements on capital buffers.

From Financial Times: But so far banks are conspicuously eschewing the most obvious way to raise capital levels: by tapping existing and new shareholders for more funds. This is the first mass bank recapitalisation exercise where basically no money is going to be raised, says one banking analyst.

The result is that the capital flowing into the banking system is likely to be only a fraction of the €106bn the EBA estimated was required last month - itself a low figure compared with the €200bn put forward in September by the International Monetary Fund.

Investors say they have been deterred from buying bank bonds because of uncertainty over the financial health of some banks, the fate of the eurozone and the impact of new financial regulation. The funding freeze has raised fears about the knock-on effects for companies reliant on bank funding and the broader economy.

With banks currently unable to replace their maturing debt with new bonds, they have moved to get to the 9% tier 1 capital figure by dumping riskier assets and selling stakes in overseas units, but the main assets for banks are there loans made to customers that have yet to be repaid. So the easiest way to reduce assets is to scale down lending, which leads to a drying up of credit for businesses. This could help to undermine the European economy further and therefore is being watched closely by the European central bank.

Nick Nasad
Chief Market Analyst