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The October payrolls report surprised to the upside rising 171k vs. 125k expected. In the current environment of fairly sluggish growth a figure of 150k or above is deemed a strong number. The dollar surged after the report and stocks in the US have also opened higher. This is a particularly important payrolls report as it is the last one before next week’s Presidential election. The continued improvement in the unemployment rate may be good news for Obama as labour market conditions have improved this year under his watch.

Digesting a good NFP number and a rising unemployment rate

The two seem to cancel each other out, however it is worth digging a bit deeper to see what the data is actually telling us. One of the reasons for the 0.1% rise in the unemployment rate was the jump in the participation rate in the economy from 63.5% to 64.1%. In September there was a surge in people who left the workforce altogether and didn’t even look for a job because they were disenchanted etc. However, the sharp pick up in the participation rate suggests that some of those people are now more hopeful of finding a job so they have resumed their search and technically “re-joined” the labour force. Thus, on this occasion a rise in the unemployment rate is a positive development as it suggests people were more hopeful last month that the economy could create a job for them.

The drop in the underemployment rate was also a positive development. It fell to 14.6% from 14.7%, the lowest level since April.  The payrolls data was also solid with strong employment gains in the service sector, finance and retail sectors. This made up for declines in government employment and the mining industry.  Not only were payrolls at their highest level since August, but the September data was revised to 148k from 114k. This suggests solid job creation in the US at the start of the fourth quarter. Combined with the rise in consumer confidence for October reported yesterday, which was at its highest level for 4.5 years, it doesn’t suggest that US consumers or businesses are concerned about the fiscal cliff or next week’s election.

Impact of Sandy:

The fiscal cliff was thought to be the biggest near-term threat to business in the US, however super-storm Sandy is likely to cause more disruption (especially if Congress can agree on a swift solution to the Fiscal issues in the coming weeks, look at our Week Ahead report to find out more). Last week’s initial jobless claims data had to be estimated for Washington DC and New Jersey, so there is always the prospect of revisions to this data going forward. However, the continued disruption in the East Coast caused by Sandy may have a large impact on the November payrolls report and the unemployment rate as people can’t go to work because of flood damage, gas shortages and transportation troubles. At this stage the exact impact of Sandy on the economy is not known, going forward the re-build from Sandy could cause a spike in construction jobs as homes and other buildings are re-built or repaired, so expect some volatility in the jobs reports in the coming months.

Market reaction:

The strength of this data has fuelled dollar gains as it threatens to cut short QE3’s lifespan. The dollar and CAD are the clear out-performers today. Stocks markets are also doing well, although commodity gains have been thwarted due to the bout of dollar strength. 

The main crosses we are looking at include: 1, EURUSD, for a weekly close below 1.2850, well within the daily Ichimoku cloud that would confirm the end of the technical uptrend in this pair and open the way for sharper declines next week ro 1.2830 – the 200-day sma and then to 1.2750. 2, USDJPY and 3, gold, which dipped below the key $1,700 level after the NFP release.

Ones to watch: USDJPY and Gold

Gold: a weekly close below $1,690 – the 100-day sma- would open the way for a move back towards $1,665 - $1,6650 in the near term. This cross is starting to look oversold on a short term basis, but we think that gold remains a sell on rallies back to $1,700-$1,710 as it may face further declines if the dollar rallies into the US Presidential election on Tuesday, and risk sentiment starts to fade.


Chart 1: Gold: daily chart


USDJPY: This cross is very sensitive to payrolls data that impacts US Treasury yields. The October report helped Treasury yields to jump, which has widened the spread between US and Japanese bond yields. This is USDJPY positive. A weekly close above 80.50 would be very constructive for this pair, although bulls may be thwarted towards 80.90 – the top of the weekly Icimoku cloud. This level could attract some selling pressure, added to that if the markets get spooked by the US election results and the impact on the fiscal cliff it may also hurt USDJPY.  Thus, there are a few hurdles this pair needs to get over in the coming days and we would not look to establish a long position until 1, we pull back towards 80.10 or 2, we break above 80.90, which would signal another leg higher for this pair.

Chart 2: USDJPY (blue) and us-Japan 10-year yield (red)

Source: Bloomberg and

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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