A weekend of surprises

A few surprises in data and the political world over the weekend have seen futures and currencies falling this morning.

Scottish independence
Source: Bloomberg

The most notable is the reaction in the GBP, which has fallen almost 1%, or 1.4 cents, this morning on the latest poll for Scottish independence. For the first time in the debate the YES vote now has the majority as the latest YouGov poll put the independence vote at 51% to 49%.

With ten days left before the vote, there’ll be plenty in the City scrambling to work out ‘what if’ scenarios as the prospect of the YES camp winning was initially considered a pipe dream. The GBP is only likely to increase in volatility as the vote edges closer.

Also catching most off guard was the non-farm payroll read – 142,000 versus an estimated 225,000 – as well as last month’s read of 212,000, which was so poor it’s being treated as rouge. The figures saw a complete collapse in momentum across the board and was the softest read since last December. It also saw the three month average – a measure the Federal Reserve prefers to use as it irons out imperfection – fall from 213,000 to 207,000.

What also underscored the softness was the fact the average work week remains flat at 34.5 hours, while average hourly earnings remain rooted to the floor at 0.2%. Wage inflation continues to underpin Janet Yellen’s assumptions that there is significant slack in the market.

However, last Thursday the Fed released a very interesting report into structural changes in the employment market. It compared these to the cyclical changes in the employment environment and found that the fall in the participation rate now appears to be structural rather than cyclical. The increase in baby boomer retirements is now impacting the figure – a structural change that will not be reversed by market factors or public policy.

This is the first major change in employment theory from the Fed for several years. With the chief economist at the Fed now suggesting the slack in the market is structural, this could be the first sign Janet Yellen can begin to change her tone around employment – preparing the market for a rise in the Fed funds rate. Despite Friday’s figure, August’s summer holidays are likely to have impacted the read. We now await Fed language around the employment market and possible rate increases.

Ahead of the Asian open

Japan remains front and centre on the macro data front this week. Today sees the release of its second-quarter GDP and trade balance data. The country remains caught in benign growth that’s likely to translate into a violent reversal of fortunes. We haven’t seen a mass expansion in Q1 as consumers jumped in before the sales tax increase. The subsequent fall in consumption activity will probably mean a large fall in Q2.

Based on the close of the futures markets on Saturday, we’re currently calling the ASX 200 down four points to 5594. The most likely falls will come in the materials space as the price fell to $83.60 and made another six-year low. On current data and momentum, there isn’t an end in sight to this drop.

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