Headline data masks true state of the market

All the talk from the weekend was about the back-to-back weak non-farm payroll figures.

113,000 jobs were added in January from 75,000 in December; the weakest back-to-back prints since October 2008 when the GFC was at its peak. However, the unemployment figure fell to its lowest read since the GFC at 6.6%.

Again the press talk on evaluating the unemployment figures was to the negative side as a historical comparison to the 15 years before the GFC shows the 6.6% read is still well above these figures – the resulting trade looked like a Richer scale.

Currency market reacted with an initial USD sell off – AUD/USD touched $0.90 reaching $0.8999 on the non-farm payrolls number before reversing to $0.8943 on the unemployment data.

What actually caused the pickup in the USD was the data inside the release. The household survey figures showed one of the strongest reads in the post-GFC era.  The participation rate moved to 63%, the amount of people not in the work force dropped significantly (suggesting more people are returning to the labour market) and the total people employed also rose.

What is also clear form the data in December and January is the rate of firing is slowing right down as more business are now looking to move away from ‘hyper-efficiency’ of 2008 to 2012 which was seen in the quarter-on-quarter productivity. Business optimism can be gauged through hiring and the fact that businesses are hiring for positions that were lost over the previous four years is a very positive thing.

The detailed data suggests the US is indeed moving towards a stronger economy and that the unwinding of monetary stimulus will be taken in stride. It also suggests the headline data, while disappointing on the surface, is actually moving towards the FOMC's ‘trigger’ points at a pace the board will be more than pleased with.

Chairperson Janet Yellen makes her maiden testimony as head of the Board on Tuesday night; the press have been asking how she will approach this meeting considering the start of tapering has come before the suggested mandated points.

However I think she will see every justification for the two unwinds and will be on the front foot for a third time at the next meeting. Nothing in the data from the first week in February suggests the Fed is going to repel the current timeline – if anything the new composition of the FOMC may see pressure to unwind it faster than its current pace.

What does this mean on a fundamental level?

Medium term USD strength will hold true, the central bank differentials are still very apparent. The BoJ has the most dovish view of all central banks, the ECB is neutral with a monetary easing mechanism in its arsenal if required, the RBA is now neutral and looking for long-term rate stability and the Fed is neutral with a hawkish bias on stimulus. The pairs will move in the banks desired direction over the next 12 months with USD the biggest winner of all.

Ahead of the Australian open

The next two weeks sees over 65% of ASX listed companies reporting to the market either first half FY14 numbers or full year CY13 numbers. The ones to watch this week are CBA, CSL, RIO and NCM.

The questions for CBA will be how big is their NPAT line and what payout ratio is Ian Narev likely to give its 800,000 retail clients? And has the housing pickup helped improve its net interest margins?

Has Rio’s pure play strategy under Sam Walsh paid dividends? There have been reports that dividends from Rio could actually be the biggest surprise of the report. And finally NCM; are they going to tap the market on the shoulder for a capital raise considering the state of the balance sheet?

Currently we are calling the market up 39 points on the 10am bell (AEDT) to 5205, +0.74%; which is based on the Saturday night close of the futures markets. On current glance of the calendar I can see no reason why Friday nights moves in the US wont flow through to trade today, and with reporting season now here, positioning is the most likely story for the day ahead.

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