Friday December 4

US equities rise as another non farm payrolls report provides optimism. The S&P500 gained 2% to 2,091 while the Dow Jones added 2.1% to 17,847. Stocks rose fractionally on the week as the strength of today’s report provided investors with confidence that the economy will be able to withstand a rate hike as soon as this month. At this point it is just short of a guarantee that the Fed funds rate will increase the week after next at the FOMC meeting. Data today showed that non-farm payrolls rose 211,000 in November which was more than forecast. The October figures were also revised upward to 298,000 which is very large for a monthly gain. The unemployment rate was flat at 5.0% and average hourly earnings rose 0.2% on the month. Due to the strength of these numbers it is difficult to imagine a situation in which rates will not rise, however the Fed will still proceed carefully with subsequent increases. In Europe Mario Draghi responds to criticisms that he misled markets ahead of his announcement yesterday, and as a result he continues to talk of the possibility for further easing today.The euro fell 0.6% to $1.0872 however was still up 2.7% on the week. The dollar index rose 0.8% to 98.37 as the gains in the euro this week seem to have provided some respite for the currency’s advances ahead of the FOMC meeting. The two year US yield initially rose towards 1% however settled 1 basis point lower on the day at 0.95%. The ten year yield touched 2.36% before ending 5 basis points lower on the day at 2.27%.

Payrolls increased in November by 211k compared to the estimate which called for a 200k increase. The November number, which was already very strong, was revised even higher. These numbers represent strong leading indicators for the health of the US consumer. Earlier this week Janet Yellen indicated that interest rates are likely to rise this month, and this data makes that possibility even more probable. Such improvement in the labor market hopefully will be followed by higher wages and inflation. The dollar rose to reflect the possibility of higher interest rates.

Mario Draghi tries to talk up the possibility for future stimulus in the aftermath of yesterday. Investors feel that Draghi misled and wrong footed markets by over promising on stimulus and then under delivering. Many hedge funds were caught on the wrong side of the headline, including those who were short the euro and long eurozone sovereign bonds. Markets responded to the stimulus announcement by sending the euro and bond yields higher in the region. Today Draghi said that there is “no particular limit” to the use of monetary policy tools, and he expressed that the ECB was willing to act further in the future. The head of the ECB may have damaged credibility now, and as a result markets will be less likely to respond to his forward guidance.

OPEC met today to discuss whether or not the organization will cut production, however the meeting yielded no significant results. The oil market is currently oversupplied however OPEC is still producing at near record levels in order to maintain market share. There is a possible incentive for some countries to cut production in order to boost oil prices out of the $40-50 range. Iran and Venezuela are very adamantly in favor of production cuts however they are unwilling or unable to do so themselves. Saudi Arabia and other Arab countries are able to cut production however will not do so unless all other OPEC countries and some non-OPEC countries follow suit. Within the organization there is the consensus that even a 5% cut to OPEC production will not do anything if non-OPEC nations maintain their current production levels.

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Friday December 4

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