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I. Market focus:
Despite Friday's weaker-than-expected data on the labor market, the U.S. dollar continued to strengthen at the beginning of the new week, recovering from the lows reached last week. The dollar index weakened by more than 10% in 2017, despite the monetary policy tightening by the Fed. In such conditions, the depreciation of the American currency looks excessive, so its current growth is quite reasonable.
But the main theme in the markets at the beginning of the Monday session was the market participants’ reassessment of their expectations about further actions of the Bank of Canada (BoC), which was triggered by Friday’s release of a very strong employment report. It is expected that this topic will continue to dominate the markets today, as investors are awaiting the publication of the quarterly business outlook survey by the BoC (15:30 GMT). The next meeting of the Canadian regulator will be held on January 17.
Other important events of the first day of the week will be the comments of two voting members of the Federal Open Market Committee (FOMC) - Federal Reserve Bank of Atlanta President Raphael Bostic at 17:40 GMT and Federal Reserve Bank of San Francisco President John Williams at 18:35 GMT. The former will speak about economic prospects and monetary policy, and the latter will discuss whether the Fed should revise its inflation target.
II. The market highlights are:
The Labor Department announced Friday that nonfarm payrolls increased by 148,000 in December after an upwardly revised 252,000 gain in the prior month (originally an increase of 228,000). According to the report, gains occurred in health care, construction and manufacturing. At the same time, the unemployment rate stood unchanged at 4.1 percent last month. That was the lowest jobless rate since December 2000. Economists had forecast 190,000 new jobs and the jobless rate to be unchanged at 4.1 percent. The labor force participation rate remained at 62.7 percent in December, while hourly earnings for private-sector workers rose by 0.3 percent m-o-m (9 cents) to $26.63, after increasing 0.1 percent m-o-m in November (revised from originally reported a 0.2 percent m-o-m gain). Economists had forecast labor force participation rate to stay at 62.7 percent and a 0.3 percent advance in the average hourly earnings. The average workweek held steady at 34.5 hours in December, in-line with economists forecast.
Statistics Canada revealed Friday that the number of employed people rose by 76,800 m-o-m (+0.4 percent m-o-m) in December, beating economists’ forecast for a 1,000 increase and after an unrevised gain of 79,500 in the previous month. Meanwhile, Canada's unemployment rate fell to 5.7 percent last month from 5.9 percent in November, while economists had expected the rate would edge up to 6.0 percent. That was the lowest rate since comparable data became available in January 1976. According to the report, full-time employment rose by 23,700 (+0.2 percent m-o-m) in December, while part-time jobs surged 54,900 (+1.6 percent m-o-m). In December, the number of private sector employees increased by 28,300 (+0.2 percent m-o-m), while the number of public sector employees grew by 22,100 (+0.6 percent m-o-m). At the same time, the number of self-employed rose by 28,200 m-o-m (+1.0 percent m-o-m) last month. Sector-wise, there were more people working in the services-producing sector, led by finance, insurance, real estate, rental and leasing (+2.1 percent m-o-m). Employment also increased in "other services" (+1.6 percent m-o-m), transportation and warehousing (+1.0 percent m-o-m), and educational services (+0.9 percent m-o-m). At the same time, employment dropped in agriculture (-1.0 percent m-o-m), health care and social assistance (-0.3 percent m-o-m), manufacturing (-0.2 percent m-o-m) and public administration (-0.2 percent m-o-m).
The Department of Commerce reported Friday the U.S. the goods and services trade deficit widened by 3.2 percent m-o-m (or $1.58 billion) to $50.50 billion in November from a revised $48.91 billion in October (originally a gap of $48.73 billion). That was the biggest trade gap since January of 2012. Economists had expected a deficit of $49.50 billion. According to the report, the November increase in the goods and services deficit reflected an advance in the goods deficit of 2.4 percent m-o-m (or $1.66 billion) to $70.89 billion and a gain in the services surplus of 0.4 percent m-o-m (or $0.08 billion) to $20.40 billion. November exports were $200.22 billion, up 2.3 percent m-o-m, while November imports stood at $250.72 billion, up 2.5 percent m-o-m. Year-to-date, the goods and services deficit rose 11.6 percent y-o-y (or $53.39 billion). Exports increased 5.6 percent y-o-y, while imports grew 6.7 percent y-o-y.
Statistics Canada said Friday that Canada’s merchandise trade deficit stood at CAD2.54 billion in November, widening from a revised $1.55 billion gap in October (originally a CAD1.47-billion deficit). Economists had expected a deficit of CAD1.20 billion. According to the report, the country’s exports rose 3.7 percent m-o-m to CAD46.21 billion in November, supported by higher exports in 8 of 11 sections, led by motor vehicles and parts (+14.6 percent m-o-m) and consumer goods (+7.4 percent m-o-m). Meanwhile, imports boosted 5.8 percent m-o-m CAD48.75 billion in November (the strongest increase since July 2009), mainly due to a surge in electronic and electrical equipment and parts (+10.9 percent m-o-m), motor vehicles and parts (+5.4 percent m-o-m), as well as aircraft and other transportation equipment and parts (+18.7 percent m-o-m).
The Ivey Business School Purchasing Managers Index (PMI), measuring Canada’s economic activity, dropped to 60.4 in December from 63.0 in November. Economists had expected the gauge to hit 62.2. A figure above 50 shows an increase while below 50 shows a decrease. Within sub-indexes, prices measure fell to 62.5 last month (from 67.7 in November), while inventories indicator tumbled to 49.1 (from 60.1 in November). At the same time, employment gauge rose to 56.7 (from 53.9 in November), and deliveries index went up to 48.2 (from 45.8 in November).
The Institute for Supply Management (ISM) announced Friday its non-manufacturing index came in at 55.9 in December, which was 1.5 percentage points lower than unrevised November figure of 57.4. That represented continued growth in the non-manufacturing sector at a slower rate. Economists forecast the index to increase to 57.6 last month. A reading above 50 signals expansion, while a reading below 50 indicates contraction. 14 of the non-manufacturing industries reported growth in December, while three recorded decline, the ISM said. According to the report, the ISM’s non-manufacturing business activity measure decreased to 57.3 percent, 4.1 percentage points lower than the November reading of 61.4 percent. That reflected growth for the 101st consecutive month, at a slightly slower rate in December. The ISM’s new orders gauge fell 4.4 percentage points to 54.3 percent last month, while the employment index increased 1.0 percentage point to 56.3 percent. The price gauge edged up 0.1 percentage point to 60.8 percent, indicating prices increased in December for the seventh consecutive month.
The weekly report from Baker Hughes, which was released Friday, showed that the number of active U.S. rigs drilling for oil fell by five to 742 during the week ended January 5. In the prior two weeks, the oil-rig count recorded no changes. Meanwhile, the total active U.S. rig count, which includes oil and natural-gas rigs, also reduced by five to 924, as the gas rig count held steady at 182 last week. The U.S. rig count is up 259 rigs from this time last year when it stood at 665.
III. Market Situation
The currency pair EUR/USD fell moderately, updating Friday's low. The U.S. dollar strengthened as investors did not think that Friday’s weaker-than-forecast U.S. nonfarm payrolls report would be an obstacle for the Federal Reserve to continue gradual rate hikes this year. Analysts noted that one of the report’s highlights was the acceleration of earnings growth. Recall, the average hourly earnings for private-sector workers rose by 0.3 percent m-o-m after increasing 0.1 percent m-o-m in November. Over the last 12 months, average hourly earnings have risen 2.5 percent, up from 2.4 percent for the 12 months ending in November. During today's session, investors will focus on the data on investor confidence, consumer confidence as well as industrial confidence in the Eurozone for December. Economists forecast an increase in confidence in the industrial sector and among consumers. In addition, the Eurozone will post its November retail sales report. According to the estimates, sales rose by 1.3 percent m-o-m and 2.2 percent y-o-y. Other important events will be the comments of two voting members of the Federal Open Market Committee (FOMC) - Federal Reserve Bank of Atlanta President Raphael Bostic and Federal Reserve Bank of San Francisco President John Williams. Resistance level - $1.2088 (high of January 4). Support level - $1.1936 (low of December 29, 2017).
The currency pair GBP/USD traded lower, as the U.S. dollar strengthened. With an almost empty economic calendar ahead, investors will focus on the news on the Brexit negotiations, the dynamics of the U.S. currency and the general market sentiment toward risky assets as well. Later this week, namely on Wednesday, the official data on the UK industrial production for November will come out, which will help to clarify how the sharp drop in the pound, triggered by the Brexit vote, and strong global demand are reflected in the manufacturing sector’s growth. According to economists’ forecasts, industrial production rose by 0.4 percent m-o-m in November after a flat m-o-m performance in October. Meanwhile, manufacturing production is projected to show an acceleration to 0.3 percent m-o-m for November from 0.1 percent m-o-m in October. Resistance level - $1.3611 (high of January 3). Support level - $1.3493 (low of January 3).
The currency pair AUD/USD dropped slightly, approaching Friday’s low, due to the broad strengthening of the U.S. dollar and statistical data from Australia. The latest survey from the Australian Industry Group (AIG) revealed the construction sector in Australia continued to expand in December, although at a slower pace. The AIG’s Australian performance of construction index came in at 52.8 last month, down from 57.5 in November. The reading pointed to the slowest expansion in construction activity in eight months. According to report, engineering construction and house building remained the strongest performing areas of construction activity in December. However, the pace of activity growth in both sectors was well down on the solid increases recorded in November. The rate of expansion in commercial construction was also slower in the month, although December marked the sector’s eighth consecutive month of stable or expanding activity amid stronger property investor demand and improving business conditions more generally in 2017. Apartment building activity returned to positive territory after contracting for four consecutive months, although the overall rate of expansion in December was marginal. Resistance level - AUD0.7897 (high of October 13, 2017). Support level - AUD0.7804 (low of January 3).
The currency pair USD/JPY traded slightly higher, holding near its Friday's high. The pair was supported by the broad strengthening of the U.S. currency, as well as reduced trading activity due to the official holiday in Japan. At the same time, it was pressured by the statements of the Japanese Prime Minister Shinzo Abe, who said he was undecided on whether to reappoint Bank of Japan’s (BoJ) current governor Haruhiko Kuroda to another five-year term. Experts expect that during today's session investors will focus the dynamics of the U.S. currency and the general market sentiment toward risky assets. Resistance level - Y113.74 (high of December 12, 2017). Support level - Y111.98 (low of December 6).
U.S. stock indexes closed higher on Friday, notching new all-time highs again, supported by gains in the top-weighted technology sector. The focus also was on the U.S. employment situation report for December., which showed that nonfarm payrolls increased by 148,000 last month after an upwardly revised 252,000 gain in the prior month. According to the report, gains occurred in health care, construction and manufacturing. At the same time, the unemployment rate stood unchanged at 4.1 percent last month. That was the lowest jobless rate since December 2000. Economists had forecast 190,000 new jobs and the jobless rate to be unchanged at 4.1 percent. The labor force participation rate remained at 62.7 percent in December, while hourly earnings for private-sector workers rose by 0.3 percent m-o-m after increasing 0.1 percent m-o-m in November. Economists had forecast labor force participation rate to stay at 62.7 percent and a 0.3 percent advance in the average hourly earnings. The average workweek held steady at 34.5 hours in December, in-line with economists forecast.
Asian stock indexes closed higher on Monday, following the strong lead from Wall Street in the last session. With few data releases expected during the session, many investors awaited earnings releases from regional corporates later in the week. The Japanese equity market was closed for a holiday.
European stock indexes are expected to trade higher in the morning trading session.
Yields of US 10-year notes hold at 2.48% (+3 basis points)
Yields of German 10-year bonds hold at 0.44% (0 basis points)
Yields of UK 10-year gilts hold at 1.25% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded higher. Crude oil for delivery in February settled at $61.58 (+0.23%). The crude oil prices rose slightly, correcting after Friday’s drop. Investors’ focus remained on the latest report from Baker Hughes, which showed that the number of active U.S. rigs drilling for oil fell by five to 742 during the week ended January 5. In the prior two weeks, the oil-rig count recorded no changes. Meanwhile, the total active U.S. rig count, which includes oil and natural-gas rigs, also reduced by five to 924, as the gas rig count held steady at 182 last week. The U.S. rig count is up 259 rigs from this time last year when it stood at 665.
Gold traded at $1,318.20 (-0.11%). Gold prices fell moderately, as the U.S. currency demonstrated positive dynamics. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, rose 0.19 percent to 92.13. Since gold prices are tied to the dollar, a stronger dollar makes the precious metal more expensive for holders of foreign currencies.
IV. The most important news that are expected (time GMT0)
Consumer Price Index
Halifax house price index
Sentix Investor Confidence
Economic sentiment index
Business climate indicator
Bank of Canada Business Outlook Survey
FOMC Member Bostic Speaks
FOMC Member Williams Speaks
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