There’s a fire starting in our charts, and yields are gonna fall, rolling in the deep. The November non-farm payrolls number dropped this morning, showing that the United States created 178,000 new jobs, but there were clouds hidden under the silver lining – wage growth stalled, falling by 0.1 percent through the month. While the headline number met expectations and kept a December rate hike firmly on the table, rising salaries are widely seen as a key factor in determining whether the Federal Reserve launches additional tightening measures in early 2017. Ten-year Treasury yields fell after the announcement, sucking air out of the dollar, while providing some respite to those emerging market and commodity-linked currencies that have been hammered throughout the post-election period.
Here on the colder side of the border, the Canadian dollar is up sharply, supported by a surprise November employment gain. Statistics Canada reported that 10,700 positions were added through the month, smashing expectations that had been set around the negative 15,000 mark, while providing hope in an economy that has been badly damaged by a collapse in commodity prices and business investment. A rate cut from the country’s central bank next week can now be considered extremely unlikely – while Stephen Poloz can hardly be happy with the economy’s direction, there is little sign that growth has fallen off a cliff…yet. The status quo will prevail for now.
Meanwhile, those traders who can’t rely on Sunday prayers for salvation are preparing for what could be an abruptly truncated weekend. With Italians set to enter the confessional booth en masse for a constitutional referendum, markets are getting jittery.
Ostensibly designed to bring stability to Italy, which has had 63 governments since the Second World War, the vote has mutated into something resembling a vote of confidence in the current leadership, and threatens to topple Matteo Renzi himself. The Prime Minister swapped his Ferragamos for David Cameron’s John Lobbs a few months ago, offering to resign if the referendum failed – which now looks like a strong possibility.
According to the last polls published before the country went into purdah a few weeks ago, the “no” side is roughly five points ahead, with a significant number undecided. Should the measure’s opponents prevail, Beppe Grillo’s anti-establishment party has a clear shot at taking the brass gong in the ensuing election. The Five Star Movement has made several worrisome campaign promises, planning to launch a non-binding referendum on the euro, while threatening to repudiate the country’s sovereign debt.
On the face of it, the referendum’s failure should unleash negative consequences in the markets – but as with all things in foreign exchange, it may not be so simple. This isn’t Brexit or the Trumpocalypse – most participants have long expected the vote to turn against Renzi, and have acted accordingly, taking out political risk insurance over the past few weeks, driving domestic bond yields up and the euro down against its peers. This means that we could see a “sell on rumor, buy on news” reaction – the common currency and other risk assets could bounce higher once the vote has reached its conclusion and Mr. Renzi plays his final hand. If Matteo does not resign immediately or constructs a credible and centrist ‘caretaker’ government, investors could react favourably.
Regardless of the outcome, markets should be braced for volatility on Sunday night. Thankfully, the Italians have thoughtfully provided the world’s best espresso and red wine to help us manage the stress.
Passa un buon fine settimana!
Reading suggestions to accompany your grappa this weekend:
Bank of Canada: Our Changing Calculation Methodology for Foreign Exchange Rates
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